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FINRA Disciplinary Proceeding Against Global Financial Services LLC

Posted byDavid Weintraub

On April 25, 2013, FINRA announced that it had had fined Global Financial Services LLC $42,500.00, and that they were required to pay $16,931.30, plus interest, in restitution to customers.

In 16 transactions from October 20, 2008, through December 19, 2008, Global Financial Services failed to sell corporate bonds to customers at prices that were fair, taking into consideration all the relevant circumstances, including market conditions with respect to each bond at the time of the transaction, the expense involved, and the firm’s entitlement to a profit.  As a result, the Firm violated NASD Rule 2110, 2440, IM-2440-1 and IM-2440-2, and FINRA Rule 2010.

According to FINRA’s findings the Firm also failed to provide adequate supervision reasonably designed to achieve compliance with respect to applicable FINRA rules concerning corporate bond pricing in that the firm failed to detect the transactions referenced above.

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

SEC Seeks to Halt Scheme Raising Investor Funds Under Guise of JOBS Act

Posted byDavid Weintraub

On April 25, 2013, the SEC announced fraud charges against a Spokane Valley, Washington, company and its owner for misleading investors with claims to raise billions of investment capital under the Jumpstart Our Business Startups (JOBS) Act and invest it exclusively in American businesses.

The SEC alleges that Daniel F. Peterson and his company USA Real Estate Fund 1 promised investors that they could reap spectacular returns from an upcoming offering in a “secured” product backed by prominent financial firms. Peterson repeatedly told investors that the 2012 JOBS Act would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors. He preyed upon investors’ sense of patriotism by promising to invest the proceeds of the offering in exclusively American businesses, and help assist in Washington State’s economic recovery. The SEC alleges that Peterson used investors’ money for personal expenses, and is continuing to solicit investors and may be preparing to tout the offering through investor seminars and public advertising.

According to the SEC’s complaint filed in federal court in Spokane, Peterson sold common stock in USA Real Estate Fund from November 2010 to June 2012 to more than 20 investors in Washington and at least five other states. In e-mails and in periodic e-newsletters that he used to solicit USA Real Estate Fund investors, Peterson said that he was preparing to raise billions of dollars in a second offering of additional “preferred” securities, which he claimed would be “secured” and have 10-year returns of up to 1,300 percent. Peterson claimed that two prominent Wall Street financial firms had partnered with him to bring his offering to market, and that the firms had conducted due diligence on USA Real Estate Fund and were structuring sales agreements and pricing. Peterson promised the early investors they would profit massively once the purported future offering was underway.

Peterson’s claims were false. He has no guaranteed investment product to offer, the projected returns were either fictitious or based on implausible and unsupported analyses, and he has no affiliation with any financial firm to underwrite his purported future offering, the SEC alleges.

The SEC alleges that Peterson used investor money to pay for his rent, food, entertainment, vacations, and a rented Mercedes Benz SUV. He also used investor funds on clothing for friends, luggage for his wife, and expenses at a Las Vegas casino.

The SEC’s complaint charged USA Real Estate Fund and Peterson with violating the anti-fraud provisions of the federal securities laws. The SEC is seeking a court order requiring USA Real Estate Fund and Peterson to return their allegedly ill-gotten gains, with interest, and pay financial penalties. It is also seeking a preliminary injunction restraining USA Real Estate Fund and Peterson from engaging in conduct that would allow them to continue their scheme and restraining them from further violations of the securities laws.

FINRA Disciplinary Action Against Bryan R. Mackey

Posted byDavid Weintraub

On April 25, 2013, FINRA announced that it had fined and suspended New York Registered Representative Bryan R. Mackey.  The suspension effective dates were from May 20, 2013 until June 10, 2013.

During his association with Merrill Lynch, Pierce, Fenner & Smith, on September 28, 2012 Mr. Mackey exercised discretion in connection with 17 transactions he effected in the account of one customer.  He did not have written authorization from the customer to place discretionary trades.  Moreover, he failed to obtain written acceptance of the account as a discretionary account from Merrill Lynch, Pierce, Fenner & Smith.  This conduct is in direction violation of NASD Rule 2510(b).

In settling this matter Bryan R. Mackey neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.  It was unclear whether the customer initiated a FINRA arbitration, or any other type of securities arbitration.

FINRA Disciplinary Proceeding Against Knight Capital Americas, L.P.

Posted byDavid Weintraub

On April 25, 2013, FINRA announced that it had fined Knight Capital Americas, L.P. $20,000.00, and that they were required to pay $890.14, plus interest, in restitution to customers.

FINRA’s findings state that during the period of January 1, 2009 through March 31, 2009 there were 21 instances when the Firm failed to contemporaneously or partially execute a customer limit order in seven NASDAQ 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 conduct described in this paragraph violates FINRA Rule 2010 and NASD IM-2110-2.

During the same time period outlined above there were also 31 instances where Knight Capital Americas, L.P. accepted customer market orders, traded for their own account at prices that would have satisfied the customer market orders, and failed to immediately thereafter execute the customer market orders up to the size and at the same price at which it traded for its own account or a at better price.  This is a distinct violation of FINRA Rule 2010 and NASD Rule 2111(b)

In settling this matter, Knight Capital Americas, L.P. neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA Disciplinary Proceeding Against RBC Capital Markets, LLC

Posted byDavid Weintraub

On April 24, 2013, FINRA announced that it had censured and fined RBC Capital Markets, LLC $97,500.00.

FINRA’s findings state that during a review period of July 1, 2009 through September 30, 2009, RBC failed to use due diligence with transactions in corporate bonds for or with customers to ascertain the best inter-dealer market, and failed to buy or sell in such market so that the resultant price to its customers was as favorable as possible under prevailing market conditions.   The conduct described in this paragraph constitutes distinct violations of FINRA Rule 2010 and NASD Rule 2320.

The Firm also purchased municipal securities for its own account from a customer and/or sold municipal securities for its own account to a customer at an aggregate price (including any markdown or markup) that was not fair and reasonable, taking into consideration all relevant factors, including the best judgment of the broker, dealer or municipal securities dealer as to the fair market value of the securities at the time of the transactions; the expense involved in effecting the transactions; the fact that the broker, dealer or municipal securities dealer is entitled to a profit; and the total dollar amount of the transactions.  This violates MSRB Rules G-17 and G-30(a).

In addition, FINRA found that RBC failed to provide written notification disclosing to its customers its correct capacity in transactions; failed to disclose details available upon request for compensation, which is stated in a  single amount of customer confirmations; and disclosed on customer confirmations that a commission was charged for order filled in a principal capacity.  As a result, the Firm was not in compliance with SEC Rule 10b-10.

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

FINRA Disciplinary Proceeding Against Caprock Securities, Inc.

Posted byDavid Weintraub

On April 19, 2013, FINRA announced that it had censured and fined Caprock Securities, Inc. $15,000.00.  The Firm consented to the entry of findings that it failed to establish, maintain, and enforce a supervisory system reasonably designed to review and retain its associated persons’ email communications with the public.

Between March 5, 2007 and December 23, 2011, Caprock failed to retain all of its business-related electronic communication in a non-rewritable, non-erasable format. By failing to establish a reasonable supervisory system for email review and retention, Caprock violated NASD Rules 3010(d) and 2110, FINRA Rule 2010, and SEC Rule 17-a-4(b)(4).  SEC Rule 17-a-4(b)(4) requires members to preserve, for a period of not less than three years, the first two years in an easily accessible place, electronic and other communications relating to their business as broker-dealers.

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

FINRA Disciplinary Proceeding Against HKC Securities, Inc., nka AGGM, Inc., and Harold K. Cohen

Posted byDavid Weintraub

On April 18, 2013, FINRA announced that it had fined HKC Securities, Inc., nka AGGM, Inc., and Harold K. Cohen collectively $60,000.00 in sanctions for materially failing to fairly present the risks and potential disadvantages of hedge fund investing.

Between January 2008 and June 2011, the Firm’s procedures for the review and approval of hedge fund institutional sales material were not reasonably designed or implemented to achieve compliance with FINRA’s contents standards for institutional sales material.  Cohen, as the Firm’s Chief Compliance Officer and the principal responsible for the review and approval of institutional sales material, did not engage in adequate supervision to achieve compliance with FINRA’s content standards for institutional sales material.  The Firm and Cohen violated NASD Rule 221(b)(1)(B), NASD Rule 3010, NASD Rule 2110, and FINRA Rule 2010.

The Firm failed to adequately supervise the use of institutional sales material by its registered representatives.  Cohen did not follow the Firm’s written procedures, which required post-hoc review of institutional sales material and a written notation of approval.  Cohen’s review was not focused on compliance with FINRA’s content standards.  Rather, he looked to see whether the Firm’s summary was consistent with his own understanding of the funds being marketed.  The failure to review documents prepared by the funds resulted in documents being sent to potential investors that were labeled “not to be distributed to clients,” among other things.

The findings also concluded that the Firm did not maintain a complete file of institutional sales material and did not notate the sales material with the name of the person who prepared the document and the date the document was first circulated.  Cohen was responsible for ensuring the Firm’s compliance with these recordkeeping requirements.

In settling this matter, HKC Securities, Inc., nka AGGM, Inc., and Harold K. Cohen neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA Fines Merrill Lynch $1 Million and Orders Restitution of More Than $320,000 for Failing to Provide Customers Best Execution in Non-Convertible Preferred Securities Transactions

Posted byDavid Weintraub

On April 16, 2013, FINRA announced that it fined Merrill Lynch, Pierce, Fenner & Smith Inc. $1.05 million for failing to provide best execution in certain customer transactions involving non-convertible preferred securities executed on one of its proprietary order management systems (ML BondMarket), and for failing to have an adequate supervisory system and written supervisory procedures in place. Merrill Lynch was also ordered to pay more than $323,000 in restitution, plus interest, to customers who did not receive best execution for their trades in non-convertible preferred securities. Additionally, FINRA has required Merrill Lynch to revise its written supervisory procedures regarding ML BondMarket best execution obligations within 30 business days.

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 Merrill Lynch had programmed a faulty pricing logic into ML BondMarket that only incorporated quotations published on the primary listing exchange for that non-convertible preferred security. As a result, in instances when there was a better quote on a market other than the primary listing exchange, that quote was not reflected on ML BondMarket. The firm instead executed 12,259 transactions in non-convertible preferred securities with its customers on ML BondMarket at prices that were inferior to the National Best Bid and Offer (NBBO).

FINRA also found that Merrill Lynch’s supervisory system relating to ML BondMarket was deficient in a number of respects. Merrill Lynch failed to perform any post-execution review of non-convertible preferred transactions executed on ML BondMarket to ensure compliance with its best execution obligations. The firm also failed to enhance its supervisory review of non-convertible preferred securities transactions executed on ML BondMarket despite the fact that several thousand of such transactions were identified on FINRA’s best execution report cards and it had received several inquiry letters from the staff.

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

Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.

SEC Charges Two Arizona-Based Brokers with Defrauding Investors in Tankless Water Heater Venture

Posted byDavid Weintraub

On April 16, 2013, the SEC alleged that Jeffrey Stebbins of Mesa, Arizona, and Corbin Jones of Gilbert, Arizona, diverted at least $1.8 million of investor money for their personal use and fraudulently obtained more than $6 million in stock for themselves to the detriment of investors. Typically used in residences, tankless water heaters are generally designed to instantly heat water as it passes through pipes rather than in large containers like traditional water heaters. Stebbins and Jones personally told investors that all of the money they raised would be used to develop the tankless water heater venture. Instead, they diverted nearly 30 percent of the funds they raised to pay unrelated business expenses and support their lavish lifestyles, including the lease of luxury automobiles.

According to the SEC’s complaint filed in U.S. District Court for the District of Arizona, Stebbins and Jones solicited investors for the tankless water heater project during a three-year period by offering securities through a variety of companies. Besides misappropriating $1.8 million for themselves, they fraudulently duped certain shareholders in one of the companies, Noble Systems, to swap their private shares for publicly-traded shares in another company, Noble Innovations. This turned out to be nothing more than a fraudulently orchestrated stock swap enabling Stebbins and Jones to reap more than $6 million worth of Noble Innovations stock at the expense of these shareholders who were left with almost nothing. Stebbins and Jones also deprived early investors in the water heater venture of more than $1 million of Noble Innovations stock that rightfully belonged to them. Throughout much of this time, Stebbins and Jones traded Noble Innovations stock by using 28 accounts in 18 different names with 14 separate brokers to ultimately profit by more than $557,000. Stebbins and Jones never reported their significant holdings in Noble Innovations as they were required to do under the securities laws.

The SEC’s complaint charges Stebbins and Jones with violating the antifraud, broker-dealer registration, and beneficial ownership reporting provisions of the federal securities laws. The SEC is seeking disgorgement of ill-gotten gains and prejudgment interest, financial penalties, injunctions, and penny stock bars.

SEC Charges Former Rochdale Securities Broker for Rogue Trades That Brought Down Firm

Posted byDavid Weintraub

On April 15, 2013, the SEC charged David Miller, a former employee at a Connecticut-based brokerage firm, with scheming to personally profit from placing unauthorized orders to buy Apple stock. When the scheme backfired, it ultimately caused the firm to cease operations. David Miller, an institutional sales trader who lives in Rockville Centre, New York, has agreed to a partial settlement of the SEC’s charges.

The SEC alleges that Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer’s profit if Apple’s stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

According to the SEC’s complaint, Apple’s stock price decreased after Apple’s earnings release was issued on October 25. The customer denied buying all but 1,625 Apple shares, and Rochdale was forced to take responsibility for the unauthorized purchase. Rochdale then sold the Apple stock at an approximately $5.3 million loss, causing the value of the firm’s available liquid assets to fall below regulatory limits required of broker-dealers. Rochdale had to cease operations shortly thereafter.

Miller is charged with violations of Section 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. To settle the SEC’s charges, Miller will be barred in separate SEC administrative proceedings from working in the securities industry or participating in any offering of penny stocks. In the partial settlement, Miller agreed to be enjoined from future violations of the antifraud provisions of the federal securities laws. A financial penalty will be determined at a later date by the court upon the SEC’s motion.