Category Archives: FINRA News

On December 16, 2014, FINRA fined Merrill Lynch, Pierce, Fenner & Smith Incorporated $1.9 million for fair pricing and supervisory violations in connection with more than 700 retail customer transactions in distressed Motors Liquidation Company Senior Notes (MLC Notes). In addition, Merrill Lynch was ordered to pay $540,000, plus interest, in restitution to affected customers.

Through its investigation, FINRA found that Merrill Lynch’s Global Credit Trading Desk purchased MLC Notes issued by General Motors Corporation, prior to its bankruptcy, from its retail customers at prices below the prevailing market price. The Credit Desk, after accumulating small lots of discounted MLC Notes, sold these Notes to other broker-dealers at a higher price, within the prevailing market price. Accordingly, in 716 instances, Merrill Lynch purchased MLC Notes at prices that were not fair to its customers. In fact, out of the 716 customer transactions 510 of them had markdowns in excess of 10 percent.

In addition, FINRA found that Merrill Lynch did not have in place an adequate supervisory system to detect whether the firm’s Credit Desk executed customer transactions at a fair price. Specifically, the firm lacked post-trade best execution or fair pricing reviews or failed to conduct fair pricing or best execution post-trade reviews. As part of the sanctions, Merrill Lynch is also ordered to submit three reports over the next 18 months regarding the effectiveness of the firm’s supervisory system with respect to the pricing of retail customer transactions executed by the Credit Desk.

In a statement, FINRA said “…We expect firms to adhere to their fair pricing obligations to customers when transacting in lower-price or distressed securities. Even after factoring in the nature of the market for these types of instruments, the markdowns charged were simply unacceptable, as was Merrill Lynch’s failure to conduct post-trade fair pricing or best execution reviews for customer transactions executed on the Credit Desk.” On the other hand, Merrill Lynch neither admitted nor denied the allegations, but consented to the entry of FINRA’s findings.

In November 2014, FINRA announced that it had submitted an Offer of Settlement in which NSM Securities, Inc. was expelled from FINRA membership, and Niyukt Raghu Bhasin was barred from association with any FINRA member in any capacity. Without admitting or denying the allegations, the firm and Bhasin consented to the sanctions and to the entry of findings that the firm, acting through and at the direction of its founder, owner, President and Chief Executive Officer (CEO) Bhasin, derived most of its revenue from actively and aggressively trading stocks in the commission-based accounts of its retail customers.

The findings stated that Bhasin prioritized his firm’s profits over the duties owed to its customers and chose not to establish, maintain and enforce a supervisory system tailored to the firm’s business. Instead, Bhasin fostered a culture of non-compliance that resulted in widespread sales practice violations, numerous customer complaints, related reporting violations and cold-calling abuses. The firm, through Bhasin, failed to establish, maintain and enforce a system, including written supervisory procedures (WSPs), to supervise its core activity, an active and aggressive investment strategy. The firm, through Bhasin, failed to monitor for, detect and prevent churning, excessive trading, related violations of Regulation T, and unsuitable investment recommendations, and failed to adequately review electronic correspondence, adequately handle customer complaints, and place certain brokers who were the subjects of multiple customer complaints and arbitrations on heightened supervision. The firm’s culture of non-compliance that Bhasin fostered harmed the firm’s customers, as the lax to non-existent oversight of its brokers resulted in significant sales practice abuses. As a result, the firm willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

The findings also stated that in implementing Bhasin’s active and aggressive trading strategy, and in order to generate commissions, the firm committed multiple violations of Regulation T and the related NASD®/FINRA rules governing the extension of credit. Specifically, the firm, acting through its brokers, made a practice of allowing customers to buy securities in cash accounts where the cost to buy the securities was met by the sale of the same securities, known as free-riding. The findings also included that the firm’s active and aggressive trading strategy, as developed and instituted by Bhasin, led to numerous customer complaints. The firm, through Bhasin, failed to report and failed to timely report customer complaints to FINRA, and failed to disclose and/or timely disclose material facts on its brokers’ Uniform Applications for Securities Industry Registration or Transfer (Forms U4) or Uniform Termination Notices for Securities Industry Registration (Forms U5).

FINRA found that Bhasin willfully failed to disclose material facts or information on his own Form U4, and willfully filed false and misleading amendments to his Form U4. The firm, through Bhasin, also filed an untimely and inaccurate Form U5 for its former chief compliance officer (CCO). FINRA also found that the firm, through Bhasin, failed to institute adequate procedures for cold-calling prospective customers. As a result, the firm, through its brokers and other representatives, initiated telephone solicitations to persons whose numbers were on the firm’s do-not-call list and/or the national do-not-call list.

On October 27, 2014, FINRA announced that it had censured and fined Merrill Lynch Professional Clearing Corp. (Merrill Lynch PRO) $3.5 million for violating Regulation SHO, an SEC rule that established a regulatory framework to govern short sales and prevent abusive naked short selling. FINRA also censured and fined its affiliated broker-dealer, Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), $2.5 million for failing to establish, maintain and enforce supervisory systems and procedures related to Regulation SHO and other areas.

In addition to curtailing naked short selling, among other things, Regulation SHO also aims to reduce the number of instances in which sellers fail to timely deliver securities. Regulation SHO requires a firm to timely “close out” any fail-to-deliver positions by borrowing or purchasing securities of like kind and quantity. Additionally, Regulation SHO permits firms to reasonably allocate fail-to-deliver positions to its broker-dealer clients that caused or contributed to the firm’s fail-to-deliver position.

FINRA found that from September 2008 through July 2012, Merrill Lynch PRO did not take any action to close out certain fail-to-deliver positions, and did not have systems and procedures in place to address the close-out requirements of Regulation SHO for the majority of that period. FINRA also found that from September 2008 through March 2011, Merrill Lynch’s supervisory systems and procedures were inadequate and improperly permitted the firm to allocate fail-to-deliver positions to the firm’s broker-dealer clients based solely on each client’s short position without regard to which clients caused or contributed to Merrill Lynch’s fail-to-deliver position.

On August 26, 2014, FINRA announced that it had fined Citigroup Global Markets Inc. $1.85 million for failing to provide best execution in approximately 22,000 customer transactions involving non-convertible preferred securities, and for related supervisory deficiencies for more than three years. FINRA also ordered Citigroup to pay more than $638,000 in restitution, plus interest, to affected customers.

In any customer transaction, a firm or its registered persons must use reasonable diligence to ensure that the purchase or sale price to the customer is as favorable as possible under current market conditions. FINRA found that one of Citigroup’s trading desks employed a manual pricing methodology for non-convertible preferred securities that did not appropriately incorporate the National Best Bid and Offer (NBBO) for those securities. As a result, Citigroup priced more than 14,800 customer transactions inferior to the NBBO. In addition, Citigroup priced more than 7,200 customer transactions inferior to the NBBO because the firm’s proprietary BondsDirect order execution system (BondsDirect) used a faulty pricing logic that only incorporated the primary listing exchange’s quotation for each non-convertible preferred security. As securities trade on multiple exchanges, Citigroup missed the prospect of a better price for that security on an exchange other than its primary listing exchange.

FINRA also found that Citigroup’s supervisory system and written supervisory procedures for best execution in non-convertible preferred securities were deficient. Citigroup failed to perform any review of customer transactions in non-convertible preferred securities executed on BondsDirect or manually by the trading desk to ensure compliance with the firm’s best execution obligations. The firm failed to conduct these supervisory reviews even though it had received several inquiry letters from FINRA staff. Moreover, while many of the transactions in question were identified on FINRA’s best execution report cards, the firm only attempted to access its best execution report cards once during the relevant period.

In concluding this settlement, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

In July 2014, FINRA announced that J.P. Turner & Company, L.L.C. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $35,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it sold (bought) corporate bonds to (from) customers and failed to sell (buy) such bonds at a price that was fair, taking into consideration all relevant circumstances, including market conditions with respect to each bond at the time of the transaction, the expense involved and that the firm was entitled to a profit.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  If you believe that you have suffered losses as a result of J.P. Turner & Company, L.L.C.’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

In July 2014, FINRA announced that Great American Advisors, Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $100,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to have an adequate supervisory system for the sale of variable annuities.

The findings stated that as a result, two of its independent contractor registered representatives recommended and effected unsuitable variable annuity transactions involving firm customers. The independent contractor registered representatives and the firm improperly earned commissions and caused customers to pay $363,173 in unnecessary surrender fees and incur longer surrender periods. The firm noted a high number of variable annuities replacement transactions by one of these representatives in which the customers had held the prior annuity for only two to three years. The firm began an internal review of the replacements and required the representatives to provide information about the annuity replacements, including details about the high volume of replacement transactions, records of the transactions and copies of sales materials used. The firm suspended all variable annuities replacement transactions by the two representatives during its compliance department’s internal investigation.

According to the findings, the firm’s written procedures generally addressed suitability considerations related to variable annuities sales. However, the firm did not have an adequate supervisory system to ensure that the procedures were properly implemented. The firm failed to ensure that the sales of the variable annuities by these representatives adhered to its written procedures. The supervisors approved variable annuities replacements based on limited firm systems and with inadequate written guidance, computer systems and surveillance tools. One of the representatives underreported surrender fees on replacement transactions, and the firm did not check or verify the correct surrender fees. The firm also did not have a system or Web-based access to a database that allowed it to adequately compare the annuity to be replaced with the other variable annuities.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  If you believe that you have suffered losses as a result of Great American Advisors, Inc.’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

In July 2014, FINRA announced that CP Capital Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $5,000 and ordered to pay $1,676.92, plus interest, in restitution to customers. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it bought corporate bonds from customers and failed to buy such bonds at prices that were fair, taking into consideration all relevant circumstances, including market conditions with respect to each bond at the time of the transaction, the expense involved and that the firm was entitled to a profit.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  If you believe that you have suffered losses as a result of CP Capital Securities, Inc.’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

On July 23, 2014, FINRA announced that the SEC had approved a new rule prohibiting firms and registered representatives from conditioning settlement of a customer dispute on—or otherwise compensating a customer for—the customer’s agreement to consent to, or not to oppose, the firm’s or representative’s request to expunge such information from the Central Registration Depository (CRD™) system.

FINRA operates the CRD system, which is an online registration and licensing system for the securities industry. The CRD system contains information regarding members and registered representatives, such as personal, registration and employment history, as well as disclosure information including criminal matters, regulatory and disciplinary actions, civil judicial actions, and information relating to customer complaints and disputes. The information FINRA makes public through BrokerCheck is derived from CRD. Brokers who wish to have a customer dispute removed from the CRD system and, thereby, from BrokerCheck, must obtain a court order confirming an arbitration award recommending expungement relief.

In July 2014, FINRA announced that Gary B. Lesnik, employed by Lightspeed Trading, LLC, submitted a Letter of Acceptance, Waiver and Consent in which he was assessed a deferred fine of $60,000, suspended from association with any FINRA member in any capacity for eight months and required to cooperate with FINRA in its continuing investigation. Without admitting or denying the findings, Lesnik consented to the sanctions and to the entry of findings that he operated an unregistered broker-dealer in willful violation of Section 15(a)(1) of the Securities Exchange Act of 1934.

The findings stated that after opening an account with Lesnik’s member firm, the unregistered broker-dealer operated as a day-trading company. The unregistered broker-dealer and Lesnik recruited retail customers to open accounts with his firm to day-trade securities using the unregistered broker-dealer’s offices and equipment. Lesnik was the registered representative of record on each of the unregistered broker-dealer’s customer accounts at his firm. The commissions that the unregistered broker-dealer earned, through Lesnik’s receipt and transfer of commission payments from his firm, constituted transaction-based compensation and effecting transactions in securities.

In addition, the findings stated that Lesnik shared commissions with unregistered persons. Lesnik’s firm paid him a total of $131,450 in commissions that were generated from trading activity by retail customers that the unregistered broker-dealer referred to his firm. Lesnik endorsed the monthly commission checks that he received to the unregistered broker-dealer, which in turn distributed the commissions to the owners and members, including Lesnik. The unregistered broker-dealer’s other owners and members were not registered with a FINRA member firm.

In July 2014, FINRA announced that Jaime Andres Diaz, previously employed by National Securities Corporation, was barred from association with any FINRA member in any capacity and ordered to pay a total of $600,000, plus interest, in restitution to customers. The sanctions were based on findings that Diaz willfully misrepresented and omitted material facts in connection with the purchase and sales of securities.

The findings stated that Diaz misrepresented to customers and a co-worker that he would purchase securities with their funds when he never intended to do so. Diaz fraudulently solicited and received $900,000 from customers and the co-worker, and kept the vast majority for his own use. Diaz converted the funds to his own use and benefit, made monetary payments to friends and covered office expenses. Diaz also concealed from investors negative financial information, the risk of loss of principal, known delays in ventures’ business plans, his own failures to conduct due diligence, and his lack of authority to sell some of the products involved. Diaz convinced customers to sell securities or borrow against securities held in their accounts.

In addition, the findings stated that Diaz engaged in private securities transactions in the form of promissory notes without providing his member firm with prior written notification of these sales, including describing the proposed transactions to the firm and his proposed role in the sales, and he failed to obtain prior authorization from the firm before making the sales. Diaz also misrepresented on an outside business disclosure form maintained in CRD that he was involved in outside businesses, but did not identify the sale of promissory notes as outside business activities, and inaccurately identified an entity as non-investment related, even though he solicited customer’s investments in that entity. Diaz falsely represented on his firm’s compliance questionnaire that his outside business disclosure form in CRD was correct and provided false answers on the questionnaire. The findings also included that Diaz provided untimely and incomplete responses to repeated FINRA requests for information and failed to respond in any manner to a FINRA request for information.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations. If you believe that you have suffered losses as a result of Jaime Andres Diaz’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.