Category Archives: FINRA News

On January 9, 2014, FINRA announced that it had ordered two St. Louis-based broker-dealers – Stifel, Nicolaus & Company, Incorporated and Century Securities Associates, Inc. – to pay combined fines of $550,000 and a total of nearly $475,000 in restitution to 65 customers in connection with sales of leveraged and inverse exchange-traded funds (ETFs). Stifel and Century are affiliates and are both owned by Stifel Financial Corporation.

Leveraged and inverse ETFs “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis so their performance can quickly diverge from the performance of the underlying index or benchmark. It is possible that investors could suffer significant losses even if the long-term performance of the index showed a gain. This effect can be magnified in volatile markets.

FINRA found that between January 2009 and June 2013, Stifel and Century made unsuitable recommendations of non-traditional ETFs to certain customers because some representatives did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs; nonetheless, Stifel and Century allowed the representatives to recommend them to retail customers. Customers with conservative investment objectives who bought one or more non-traditional ETFs based on recommendations made by the firms’ representatives, and who held those investments for longer periods of time, experienced net losses.

FINRA also found that Stifel and Century did not have reasonable supervisory systems in place, including written procedures, for sales of leveraged and inverse ETFs. Stifel and Century generally supervised transactions in leveraged and inverse ETFs in the same manner that they supervised traditional ETFs, and neither firm created a procedure to address the risk associated with longer-term holding periods in the products. Further, both firms failed to ensure that their registered representatives and supervisory personnel obtained adequate formal training on the products before recommending them to customers.

Stifel agreed to pay a fine of $450,000 and to make restitution of nearly $340,000 to 59 customers. Century agreed to pay a fine of $100,000 and to make restitution of more than $136,000 to six customers.

In settling this matter, Stifel and Century neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations. Any customer who believes they have been a victim can contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.

On December 26, 2013, FINRA announced that it fined Barclays Capital Inc. $3.75 million for systemic failures to preserve electronic records and certain emails and instant messages in the manner required for a period of at least 10 years.

Federal securities laws and FINRA rules require that business-related electronic records be kept in non-rewritable, non-erasable format (also referred to as “Write-Once, Read-Many” or “WORM” format) to prevent alteration. The Securities and Exchange Commission has stated that these requirements are an essential part of the investor protection function because a firm’s books and records are the primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards.

FINRA found that from at least 2002 to 2012, Barclays failed to preserve many of its required electronic books and records—including order and trade ticket data, trade confirmations, blotters, account records and other similar records—in WORM format. The issues were widespread and included all of the firm’s business areas. Barclays was unable to determine whether all of its electronic books and records were maintained in an unaltered condition.

FINRA also found that from May 2007 to May 2010, Barclays failed to properly retain certain attachments to Bloomberg emails, and additionally failed to properly retain approximately 3.3 million Bloomberg instant messages from October 2008 to May 2010. In addition to violating FINRA, SEC and NASD rules and regulations, this adversely impacted Barclay’s ability to respond to requests for electronic communications in regulatory and civil matters.

Finally, Barclays failed to establish and maintain an adequate system and written procedures reasonably designed to achieve compliance with SEC, NASD, and FINRA rules and regulations, as well as to timely detect and remedy deficiencies related to those requirements.

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

On December 19, 2013, FINRA announced that it had fined Deutsche Bank Securities, Inc. (DBSI) $6.5 million and censured the firm for serious financial and operational deficiencies primarily related to its enhanced lending program. The violations, which were originally identified during a 2009 examination, included lack of transparency in the firm’s financial records and inaccurate calculations resulting in overstated capitalization and inadequate customer reserves.

Under DBSI’s enhanced lending program, which involves mostly hedge fund customers, the firm arranges for its London affiliate, Deutsche Bank AG London (DBL), to lend cash and securities to DBSI’s customers. FINRA’s 2009 examination of the firm uncovered a number of serious problems in connection with this program. For example, the firm’s books reflected that it owed $9.4 billion to its affiliate, but neither the firm nor FINRA examiners could readily determine which portions of that debt were attributable to the customers’ enhanced lending activity, and which were attributable to DBL’s own proprietary trading. The lack of transparency in DBSI’s books and records meant the firm was unable to readily monitor the accounts originating out of the enhanced lending business.

FINRA also found that there were instances where DBSI made inaccurate calculations that resulted in the firm overstating its capital or failing to set aside enough funds in its customer reserve account to appropriately protect customer securities. For example, DBSI incorrectly classified certain enhanced lending stock loans; when it reclassified them in April 2010, DBL was obligated to pay a margin call of $3.1 billion. DBSI improperly computed its payable balance, thus reducing the firm’s reported liabilities and inaccurately overstating the firm’s net capital. Separately, in March 2010, the firm incorrectly computed its customer reserve formula. As a result, the firm’s customer reserve fund was deficient by $700 million to $1.6 billion during March 2010.

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

On December 9, 2013, FINRA announced that it had fined Oppenheimer & Co., Inc. $675,000 for charging unfair prices in municipal securities transactions and for failing to have an adequate supervisory system. FINRA also ordered Oppenheimer to pay more than $246,000 in restitution, plus interest, to customers who were charged unfair prices. In addition, FINRA fined Oppenheimer’s head municipal securities trader, David Sirianni, $100,000, and suspended him for 60 days.

 FINRA found that from July 1, 2008, through June 30, 2009, Oppenheimer, through Sirianni, priced 89 customer transactions from 5.01 percent to 15.57 percent above the firm’s contemporaneous cost. In 54 of those transactions, the markups exceeded 9.4 percent. Sirianni purchased municipal securities from a broker-dealer on Oppenheimer’s behalf, held the bonds in inventory for at least overnight, and then made the bonds available for resale at unfair prices to the firm’s customers. Sirianni was responsible for determining the prices paid by customers in the 89 transactions.

Oppenheimer failed to detect the unfair prices charged. Oppenheimer’s supervisory system was deficient because supervisory personnel relied solely on a surveillance report that only captured intra-day transactions to review the fairness of markups/markdowns in municipal securities transactions. From at least 2005 through June 30, 2009, if an Oppenheimer trader purchased municipal securities and held those securities in inventory for a day or longer, the subsequent sales to customers would not populate the firm’s surveillance report or be subjected to a fair pricing review.

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

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  Any customer who believes they have been a victim of excessive municipal markups, markdowns, or securities fraud can contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

On December 3, 2013, FINRA announced that it had barred brokers Fernando L. Arevalo and Jimmy E. Caballero from the securities industry for wrongfully converting approximately $300,000 from an elderly widow with diminished mental capacity, and for failing to fully cooperate with FINRA’s investigation. Arevalo and Caballero’s misconduct occurred while employed as brokers with JPMorgan Chase Securities, LLC. Although JPMorgan was not a party to this action, it reimbursed the elderly customer for the money Caballero and Arevalo converted.

FINRA’s investigation found that the elderly customer maintained accounts at JPMorgan and a related bank affiliate. Between April and July 2013, the customer deposited approximately $300,000 in proceeds from the sale of two annuities into a bank account Arevalo had opened for her. The funds were then withdrawn from the account via two cashier’s checks, and on the same day, Caballero deposited the money into a joint account he opened in his name and the customer’s name at a different bank. When the bank questioned the deposits and required further confirmation before clearing the deposits, Arevalo picked up and drove the customer to the bank to confirm the source of the funds. Funds from the account were then depleted through numerous checks payable to Arevalo, and Caballero and Arevalo used the account debit card for personal expenses including payments on a real estate loan, car loan and various retail purchases. The customer was unaware of any withdrawals or purchases against the joint account by Arevalo or Caballero, and did not authorize the transactions.

In addition, Arevalo failed to provide testimony to FINRA. Although Caballero initially provided testimony to FINRA, he subsequently refused to provide additional information that was relevant to the investigation.

In concluding these settlements, Caballero and Arevalo neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

On September 30, 2013, FINRA announced that it had filed for a Temporary Cease-and-Desist Order against John Carris Investments, LLC (JCI) and its CEO, George Carris, to immediately halt solicitations of its customers to purchase Fibrocell Science, Inc. stock without making proper disclosures. FINRA alleged that during May 2013, JCI fraudulently solicited its customers to buy Fibrocell stock, without disclosing that during the same time period, Carris and another firm principal were selling their shares.

FINRA also issued an amended complaint against JCI, Carris, and five other firm principals alleging additional fraudulent activity and securities violations. In the complaint, FINRA alleged that while JCI acted as a placement agent for Fibrocell, Carris and the firm artificially inflated the price of Fibrocell stock by engaging in pre-arranged trading and by making unauthorized purchases of Fibrocell stock in customers’ accounts.

According to FINRA’s announcement, Carris and JCI fraudulently sold stock and notes in its parent company, Invictus Capital, Inc., by not disclosing its poor financial condition. FINRA stated that JCI and Carris misled Invictus investors by paying dividends to Invictus’ early investors with funds that were, in fact, generated by new sales of Invictus securities. JCI and Carris did not have any reasonable grounds to expect economic gains for Invictus investors. As of March 2013, Invictus Capital had defaulted on $2 million of Invictus notes sold to earlier John Carris Investments customers, did not have funds to repay them, and has stated that it may be required to use proceeds from its ongoing offering to make repayments. JCI continues to solicit new investments in Invictus – an investment that FINRA alleged is wholly unsuitable.

In addition, JCI issued false documentation that failed to reflect the firm’s payments for Carris’ personal expenses, and failed to remit hundreds of thousands of dollars in employee payroll taxes to the United States Treasury.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  Any customer who believes they may have been a victim of securities fraud can contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422.

In August 2013,  FINRA announced that McAdams Wright Ragen, Inc. submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $30,000 and required to revise its Written Supervisory Procedures regarding the detection of excessive markups/markdowns, best execution violations and improper commissions charged. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it failed to show the correct execution time on brokerage order memoranda, failed to show the correct order receipt time on the memoranda and incorrectly marked some orders as solicited when they were in fact unsolicited.

The findings stated that the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules concerning the detection of excessive markups/markdowns, best execution violations and improper commissions charged.  It is unclear from the FINRA announcement whether customers have initiated FINRA arbitrations or any other securities arbitrations.  Any customer who believes that they may have paid excessive markups or markdowns can contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone: 954.693.7577 or 800.718.1422

In August 2013, FINRA announced that New York Registered Representative Michael Anthony Gigante submitted a Letter of Acceptance, Waiver and Consent in which he was fined $15,000 and suspended from association with any FINRA member in any capacity for 60 days. Without admitting or denying the findings, Gigante, who had been registered with MML Investor Services, LLC and MetLife Securities, consented to the described sanctions and to the entry of findings that he engaged in an undisclosed business activity by referring member firm customers to a mortgage broker associated with an entity that offered mortgage brokerage services and investment opportunities.

FINRA’s findings stated that Gigante’s firm’s written policies and procedures prohibited registered representatives from engaging in any new or previously undisclosed outside business activity with or without compensation, until the firm had formally approved the activity. Gigante did not receive any monetary compensation from referring customers to the mortgage broker. Gigante made the referrals hoping that the mortgage broker would reciprocate by referring clients to Gigante at his firm. Gigante did not report to his firm that he was referring potential investors to the mortgage broker, nor did he seek the firm’s permission to make these referrals. The findings also stated that on firm compliance questionnaires, for two years, Gigante failed to disclose that he was referring customers to the mortgage broker and represented that he was not engaging in any outside business activities. Unbeknownst to Gigante, the mortgage broker’s operation was a Ponzi scheme that eventually unraveled, causing the participants to lose all of their investments without seeing any return.

The findings reflected that after the firm conducted an internal investigation, it became aware of Gigante’s unapproved outside business activity and terminated his employment. It was unclear whether customers initiated FINRA arbitrations, or any other type of securities arbitration.  However, it appears from Gigante’s CRD that MetLife settled one customer complaint for $168,500.00.

In August 2013, FINRA announced that Hunter Scott Financial, LLC submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $25,000.  Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it charged its customers a handling fee, in addition to a commission, on securities transactions.

The findings stated that the handling fee was fixed at $50 per transaction and a substantial portion was not attributable to any specific cost or expense incurred by the firm in executing the trade, or determined by any formula applicable to all customers.  The handling fee was determined by the firm, not by the individual representative executing the order.  Although reflected on customer trade confirmations as a charge for handling, a substantial portion of the fee actually served as a source of additional transaction-based remuneration or revenue to the firm, in the same manner as a commission, and was not directly related to any specific handling services the firm performed, or handling-related expenses the firm incurred, in processing the transaction.  The firm’s characterization of the charge as being for handling was therefore improper.  The finding also stated that by designating the charge as a handling fee on customer trade confirmations, the firm understated the amount of the total the firm commissions charged and misstated the purpose of the handling fee.  It is unclear from the FINRA announcement whether customers have initiated FINRA arbitrations or any other securities arbitrations.

In August 2013, FINRA announced that Giancarlo Ciocca, who was a Registered Representative with Merrill Lynch, Pierce, Fenner & Smith in Coral Gables, Florida, 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, Ciocca consented to the described sanction and to the entry of findings that he impersonated one of his customers at his member firm during a telephone call with a firm call center employee.

FINRA’s findings stated that Ciocca impersonated one of his customers in order to obtain online access to the customer’s account. The customer was not on the call; instead Ciocca, impersonating the customer, was on the call with his sales assistant. After Ciocca obtained online access to the account, he used that access to change account preferences so his firm would no longer send hard-copy statements to the customer and to change the email address associated with the account to one Ciocca controlled. The findings also stated that the customer had sustained market losses in his account and Ciocca undertook these activities to prevent the customer from learning of those losses. Ciocca created and sent the customer inaccurate account performance reports, which listed transactions that had not occurred and did not reflect the actual losses that had been incurred in the account. Ciocca misrepresented to his firm that he was in compliance with firm policies prohibiting the creation of performance reports. The customer complained to Ciocca, who then attempted to settle the customer’s complaint. This firm did not authorize the settlement offer, which was made without the firm’s knowledge.

The findings also included that Ciocca failed to respond to a request for information and documents. FINRA also issued a request to Ciocca for an on-the-record interview. After being warned that a failure to appear would be a violation of FINRA Rule 8210, Ciocca’s counsel informed FINRA that Ciocca would not appear for the interview as requested or at any other time.  According to Mr. Ciocca’s CRD, Merrill Lynch has paid $7,977,000 in settlements to Mr. Ciocca’s former clients.