Category Archives: FINRA News

In July 2014, FINRA announced that Jun Rong Chen, previously employed by NYLife Securities LLC, submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Chen consented to the sanction and to the entry of findings that he failed to appear and provide testimony to FINRA.

The findings stated that FINRA requested that Chen appear and provide testimony pertaining to allegations that he provided incorrect phone numbers for insurance company customers on traditional life insurance applications, used an address in his control to receive certain insurance company customers’ mail, used checks from his approved outside business activity to pay the insurance premiums for insurance company customers’ policies without there being identifiable familial relationships, personally purchased money orders to fund insurance policies for insurance company customers, knowingly submitted inaccurate change of ownership and beneficiary forms that indicated that there was a relationship between the insured and the new policy owners and beneficiaries, and obtained applications for traditional life insurance policies during his suspension from the insurance company and instructed a colleague to sign the applications as the soliciting agent and witness, when in fact the colleague had not met the policy holders. Chen advised FINRA, through counsel, that he would not appear and provide testimony, provide any further documents and information, or otherwise participate in FINRA’s investigation.

In July 2014, FINRA announced that John Warren DeBrule, previously employed by Merrimac Corporate Securities, Inc., submitted an Offer of Settlement in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the allegations, DuBrule consented to the sanction and to the entry of findings that he willfully engaged in securities fraud by knowingly or recklessly causing the distribution of summary quarterly statements that contained false information about the valuation of a hedge fund.

The findings stated that DuBrule knowingly inflated the value of the fund’s assets on its quarterly statements by, among other things, including the face value and promised interest of defaulted promissory notes as assets of the fund, and he falsely inflated the value of investors’ interests in the fund. DuBrule made materially false and misleading statements and omissions to investors to entice them to re-invest additional funds. DuBrule’s member firm granted him permission to engage in this outside business activity. DuBrule failed to disclose that the valuation of the fund was based on defaulted promissory notes and promissory notes that had been cancelled. The summary quarterly statements contained false and misleading statements that claimed the fund utilized the services of an independent firm to prepare statements and tax reports, and that they were prepared in accordance with generally accepted accounting principles (GAAP).

In addition, the findings stated that DuBrule and his wife invested a total of $88,554 in the fund and withdrew a total of $92,405, relying on the inflated value of their investments in the fund. DuBrule misappropriated investor funds by withdrawing the funds despite knowing that the promissory notes had been cancelled and the value of the fund’s assets had decreased substantially. Investors deposited $3.8 million into the fund, based in part on the fraudulent misrepresentations and omissions in the summary quarterly statements. The findings also included that DuBrule and his colleague withdrew a quarterly management fee from the fund. DuBrule knew or was reckless in not knowing that they inflated the value of the fund’s assets. By using the unsupported and inflated value of the fund to calculate the management fees, DuBrule knew or was reckless in not knowing that they were withdrawing significantly more than the .5 percent maximum quarterly fee,

based upon the true and accurate value of assets in the fund. As a result, DuBrule and his colleague withdrew $141,632 of excess fees from the fund, which came directly from what remained of the capital accounts of the fund’s investors. FINRA found that despite knowing that a member of the firm’s staff had forged a significant but unknown number of Deposit Securities Request forms and caused numerous unregistered penny stocks to be deposited into firm customer accounts absent supervisory review, DuBrule failed to conduct any investigation to determine the scope of the forgeries and unsupervised penny stock trading.

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 John Warren DaBrule’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 INTL FCStone Securities Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $70,000, ordered to pay $62,297.13, plus interest, in restitution to customers, and required to revise its Written Supervisory Procedures. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to contemporaneously or partially execute customer limit orders in over the counter securities after it traded each subject security for its own market-making account at a price that would have satisfied each customer’s limit order. The findings stated that the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance with respect to the applicable securities laws and regulations, and FINRA rules, concerning customer limit order protection.

In July 2014, Blackrock Capital LLC submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $50,000 and required to comply with undertakings and revise the firm’s Written Supervisory Procedures. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it charged its customers $60.50 on separate purchase or sale transactions in addition to or in place of a designated commission charge.

The findings stated that the firm characterized the charge on customer trade confirmations as “miscellaneous” and/or as an “additional fee.” A substantial portion of the $60.50 charge was not attributable to any specific cost or expense the firm incurred or performed in executing each transaction, or determined by any formula applicable to all customers. A substantial portion of the charge represented a source of additional transaction-based remuneration or revenue to the firm, and was effectively a minimum commission charge. By designating the charge on trade confirmations as “miscellaneous” and/or as an “additional fee” in addition to or in place of a designated commission charge, the firm mischaracterized and understated the amount of the total commissions the firm charged.

In June 2014, FINRA announced that Dawson James Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $75,000, and required to revise its Written Supervisory Procedures.

Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that the firm’s Written Supervisory Procedures failed to provide for one or more of the four minimum requirements for adequate Written Supervisory Procedures in several subject areas, including registered representatives’ disclosure of potential conflicts of interests to clients; registered representatives’ trading in the opposite direction of solicited customer transactions; sales practice concerns, including unauthorized trading, suitability, excessive trading and free-riding; concentrations of securities in clients’ accounts; sharing of profits or losses in clients’ accounts; wash sales; coordinated trading; marking the open and marking the close; cancel-rebill transactions in clients’ accounts; and the review of registered representatives’ electronic communications.

The findings also stated that the firm failed to investigate numerous red flags relating to a registered representative’s activities. The firm failed to enforce its Written Supervisory Procedures, which specified that all electronic correspondence, whether incoming or outgoing, would be reviewed on a daily basis. The firm failed to ensure that its head trader was reasonably carrying out his delegated supervisory responsibilities relating to proprietary trading, trade reporting, clock synchronization, short sale compliance, compliance with the Manning Rule, mark ups and mark downs, and compliance with inventory guidelines.

On June 16, 2014, FINRA announced that it had fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $8 million for failing to waive mutual fund sales charges for certain charities and retirement accounts. FINRA also ordered Merrill Lynch to pay $24.4 million in restitution to affected customers, in addition to $64.8 million the firm has already repaid to disadvantaged investors.

Mutual funds offer several classes of shares, each with different sales charges and fees. Typically, Class A shares have lower fees than Class B and C shares, but charge customers an initial sales charge. Many mutual funds waive their upfront sales charges for retirement accounts and some waive these charges for charities.

Most of the mutual funds available on Merrill Lynch’s retail platform offered such waivers to retirement plan accounts and disclosed those waivers in their prospectuses. However, at various times since at least January 2006, Merrill Lynch did not waive the sales charges for affected customers when it offered Class A shares. As a result, approximately 41,000 small business retirement plan accounts, and approximately 6,800 charities and 403(b) retirement accounts available to ministers and employees of public schools, either paid sales charges when purchasing Class A shares, or purchased other share classes that unnecessarily subjected them to higher ongoing fees and expenses. Merrill Lynch learned in 2006 that its small business retirement plan customers were overpaying, but continued to sell them more costly shares and failed to report the issue to FINRA for more than five years.

Merrill Lynch’s written supervisory procedures provided little information or guidance on mutual fund sales charge waivers. Even after the firm learned that it was not providing sales charge waivers to eligible accounts, Merrill Lynch relied on its financial advisors to waive the charges, but failed to adequately supervise the sale of these products or properly train or notify its financial advisors about lower-cost alternatives.

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

On May 6, 2014, FINRA announced that it has fined Morgan Stanley Smith Barney LLC $5,000,000 for supervisory failures related to the solicitation of retail customers to invest in initial public offerings (IPOs). From February 16, 2012, to May 1, 2013, Morgan Stanley Smith Barney sold shares to retail customers in 83 IPOs, including Facebook and Yelp, without having adequate procedures and training to ensure that its sales staff distinguished between “indications of interest” and “conditional offers” in its solicitations of potential investors.

Firms may solicit non-binding indications of customer interest in an IPO prior to the effective date of the registration statement. An “indication of interest” will only result in the purchase of shares if it is reconfirmed by the investor after the registration statement is effective. Brokerage firms are also permitted to solicit “conditional offers to buy,” which may result in a binding transaction after effectiveness of the registration statement if the investor does not act to revoke the conditional offer before the firm accepts it.

On February 16, 2012, Morgan Stanley Smith Barney adopted a policy that used the terms “indications of interest” and “conditional offers” interchangeably, without proper regard for whether retail interest reconfirmation was required prior to execution. The firm did not offer any training or other materials to its financial advisers to clarify the policy and, as a result, sales staff and customers may not have properly understood what type of commitment was being solicited. FINRA also found that Morgan Stanley Smith Barney failed to adequately monitor compliance with its policy and did not have procedures in place to ensure that conditional offers were being properly solicited consistent with the requirements of the federal securities laws and FINRA rules.

In settling this matter, Morgan Stanley Smith Barney neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On March 24, 2014, FINRA announced that it had fined LPL Financial LLC $950,000 for supervisory deficiencies related to the sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures and other illiquid pass-through investments. As part of the sanction, LPL must also conduct a comprehensive review of its policies, systems, procedures and training, and remedy the failures.

Many alternative investments, such as REITs, set forth concentration limits for investors in their offering documents. In addition, certain states have imposed concentration limits for investors in alternative investments. LPL also established its own concentration guidelines for alternative investments. However, FINRA found that from January 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of alternative investments that violated these concentration limits. At first, LPL used a manual process to review whether an investment complied with suitability requirements, relying on information that was at times outdated and inaccurate. The firm later implemented an automated system for review, but that database contained flawed programming and was not updated in a timely manner to accurately reflect suitability standards. LPL also did not adequately train its supervisory staff to analyze state suitability standards as part of their suitability reviews of alternative investments.

In settling this matter, LPL Financial LLC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

In March 2014, FINRA announced that Banesto Securities, Inc. n/k/a Santander International Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $650,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that for seven years, it consistently failed to disclose to clients the purpose and nature of a custody fee.

The findings stated that at account opening, the firm notified clients of all fees charged through the use of a commission schedule that disclosed, among other things, that all clients were charged a custody fee. There was no description of the purpose or nature of the fee. Rather, clients were provided with the mathematical formula used to determine the amount of the fee. Clients were charged the fee at the beginning of each quarter, based on assets from the last day of the prior quarter. The client monthly account statements described the fee as an administrative fee or a fee-based brokerage charge, a term normally associated with accounts that collect all-inclusive wrap fees as compensation for transactions and investment advice. The use of two different terms for the same fee, neither of which accurately described the fee, created the potential for confusion as to the nature and purpose of the charge. All custody services were provided by the firm’s clearing firm, so the reference to the fee as a custody fee was misleading and inaccurate. The monies the firm collected from application of this fee were not for the purpose of paying custody expenses or compensation for investment advice and, as such, were inconsistent with NASD Rule 2430.

In addition, the findings also stated that the firm sent a letter to clients notifying them of an increase to the fee that only provided clients with 11 days of advance written notification prior to the change of the fee. As reflected in Notice to Members 92-11, such notice was inadequate in that customers should be provided with written notification at least 30 days prior to the implementation or change of any service charge. Certain customers were subjected to increased fees without being provided with current fee schedules that notified them of the change. The firm has since reimbursed those customers for the differential between the prior fee and the increased fee.

The findings also included that the firm has never had a supervisory system in place to review the reasonableness of fees and has never performed a reasonableness test concerning the fee charged on an individual account basis. The revenue generated from the custody fee regularly accounted for a significant percentage of the firm’s total revenue. In one year, the firm earned almost $2.5 million from the fee.

On March 12, 2014, FINRA announced that it had sanctioned and fined two firms — Triad Advisors and Securities America — $650,000 and $625,000, respectively, for failing to supervise the use of consolidated reporting systems resulting in statements with inaccurate valuations being sent to customers, and for failing to retain the consolidated reports in accordance with securities laws. In addition, Triad was ordered to pay $375,000 in restitution.

A consolidated report is a single document that combines information regarding most or all of a customer’s financial holdings, regardless of where those assets are held. Consolidated reports supplement, but do not replace, official customer account statements. Both Triad Advisors and Securities America had a consolidated report system that permitted their representatives to create consolidated reports, allowing them to enter customized asset values for accounts held away from the firm and to provide the reports to customers.

According to FINRA’s findings, for more than two years, Triad and Securities America failed to supervise hundreds of brokers, some of whom were creating and sending false and inaccurate consolidated reports to customers. Many of these consolidated reports contained inflated values for investments, some of which were in default or receivership. Moreover, at Triad, a number of consolidated reports sent to customers reflected fictitious promissory notes or other fictitious assets, which enabled two representatives to conceal their misconduct. Triad has paid restitution to some of the affected customers and FINRA has ordered Triad to pay restitution to the remaining affected customers.

In concluding these settlements, Triad Advisors and Securities America neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.