On December 27, 2011, the Financial Industry Regulatory Authority (FINRA) fined Credit Suisse Securities, LLC, $1.75 million for violating Regulation SHO and failing to properly supervise short sales of securities and marking of sale orders.
By definition, a short sale is the selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short. Regulation SHO requires a broker or dealer to have reasonable grounds to believe that the security could be borrowed and available for delivery before accepting or effecting a short sale order. Requiring firms to obtain and document this “locate” information before the short sale is entered reduces the number of potential failures to deliver in equity securities. In addition, Reg SHO requires a broker or dealer to mark sales of equity securities as long or short.
FINRA found that for at least the period from June 2006 through December 2010, Credit Suisse released millions of short sale orders to the market without reasonable grounds to believe that the securities could be borrowed and delivered. In addition, Credit Suisse mismarked tens of thousands of sale orders in its trading systems. The mismarked orders included short sales that were mismarked as “long,” resulting in additional violations of Reg SHO’s locate requirement.
FINRA found that Credit Suisse’s supervisory framework over its equities trading business was not reasonably designed to achieve compliance with the requirements of Reg SHO and other securities laws, rules and regulations. Due to the company’s supervisory failures, many violations were not detected or corrected until after FINRA’s investigation.
FINRA has taken disciplinary action against Brookstone Securities, Inc and five of its agents for making misrepresentations or omissions of material fact. Additionally, FINRA found that registered representatives recommended and effected the sale of securities without having a reasonable basis to believe that the transactions were suitable given the customers’ financial circumstances and conditions, and their investment objectives.
FINRA’s investigation found that Richard J. Buswell and Herbert S. Fouke, while registered with Brookstone, made misrepresentations and omissions of material fact in connection with the sale of investments in Advanced Blast Protection, Inc. The registered representatives guaranteed customers that they would receive back their principal investment plus returns. Additionally, they failed to inform investors of risks associated with the investments and did not discuss the risks outlined in the private placement memorandum (PPM). The PPM stated that the investment was speculative, involved a high degree of risk and was only suitable for investors who could risk losing their entire investment. In addition, Buswell exercised discretion in the accounts of customers without prior written authorization, made unsuitable recommendations to customers with conservative investment objectives, and made excessive use of margin.
FINRA found that Anthony L. Turbeville, acting as Chief Operating Officer (COO), and David W. Locy, as President, failed to reasonably supervise Buswell and failed to follow up on “red flags”. FINRA stated that Brookstone failed to establish, maintain and enforce reasonable supervisory procedures in four areas: (1) due diligence; (2) prevention and detention of unsuitable recommendations resulting from excessive trading, excessive use of margin and over concentration; (3) the new account application process; and (4) the reviews of customer accounts required by the procedures. Despite numerous violations and red flags, the firm took no steps to contact customers or place the representative on heightened supervision, although it later placed limits only on the representative’s use of margin.
FINRA stated that Mark Mercier was the Chief Compliance Officer and was responsible for ensuring that the offering of Advanced Blast Protection, Inc. complied with due diligence requirements, but performed only a superficial review and failed to complete the steps required by the firm’s Written Supervisory Manuals. The findings also stated that the firm failed to establish, maintain and enforce supervisory procedures reasonably designed to prevent violations of NASD Rule 2310 regarding suitability.
FINRA accepted an offer of settlement, in which the firm will pay a fine of $200,000.00. David W. Locy, Mark M. Mercier and Anthony L. Turbeville were sanctioned with suspensions and additional fines.
On December 15, 2011 the Financial Industry Regulatory Authority (FINRA) announced that it fined Wells Fargo Investments, LLC, $2 million for unsuitable sales of reverse convertible securities to elderly customers. In addition, the firm is required to pay restitution to customers who did not receive UIT sales charge discounts and to provide restitution to certain customers found to have unsuitable reverse convertible transactions.
Also known as “revertible notes” or “reverse exchangeable securities”, reverse convertibles are interest-bearing notes in which repayment of principal is tied to the performance of an underlying asset, such as a stock or a basket of stocks. Depending upon the reverse convertible’s specific terms, an investor risks sustaining a loss if the value of the underlying asset falls below a certain level at maturity, or during the term of the reverse convertible.
In addition to the reprimand, FINRA filed a complaint against Alfred Chi Chen, the former Wells Fargo registered representative responsible for recommending and selling the unsuitable reverse convertibles, and making unauthorized trades in several customer accounts, including accounts of deceased customers. Chen recommended hundreds of unsuitable reverse convertible investments to 21 clients, fifteen of whom were over 80 years old. These transactions exposed investors to risk inconsistent with their investment profiles, and resulted in overly concentrated reverse convertible positions in their accounts.
FINRA also found that Wells Fargo had insufficient systems and procedures to monitor for unsuitable reverse convertibles sales. As a result of these deficiencies, the firm failed to provide certain eligible customers with breakpoint and rollover and exchange discounts in their sales of UIT’s. UIT’s offer sales charge discounts on purchases that exceed certain thresholds (“breakpoints”) or involve redemption or termination proceeds from another UIT during the initial offering period. Between January 2006 and July 2008, Wells Fargo failed to provide certain eligible customers with these “breakpoint” and “rollover and exchange” discounts.
FINRA sanctioned a former Securities America representative, Frank A. Gutta, for failing to disclose that he owned and operated a Florida corporation, Business Investors, Inc. (BII). Mr. Gutta participated in numerous private securities transactions without notice or approval from Securities America, his employer at the time.
FINRA’s investigation found that during the period from September 2003 through at least January 2008 he operated Business Investors, Inc., without any notice to SAI. He offered and sold BII promissory notes to 19 individuals, nine of which were SAI customers, for proceeds of approximately $2.9 million. The proceeds were used to finance the creation and/or operation of various small businesses, including gas stations and a dollar store. The BII promissory notes were not sponsored or approved by SAI. Additionally, Mr. Gutta recommended BII Promissory notes to at least one of his SAI customer without having a reasonable basis to believe that the investment was suitable for her.
FINRA imposed a two-year suspension from association with any FINRA member in any capacity upon Mr. Gutta. Since Mr. Gutta was granted a discharge in bankruptcy on June 11, 2010, no monetary sanctioned was placed.