Broker Misconduct

Massachusetts Regulator Galvin Investigates Whether Exchanges Are Giving Kickbacks to Brokers for Making Institutional Investor Trades

Published on: August 18, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Massachusetts Secretary of the Commonwealth William Galvin is probing whether there are brokers who are getting paid kickbacks by exchanges in return for investor trades. The investigation comes in the wake of an op-ed article published in The New York Times last month alleging that there are financial representatives who have been sending orders to specific exchanges for these kickbacks, referred to as “rebates,” even if it means poorer results for their institutional investors.

The op-ed was written by Yale Law Professor Jonathan Macey and Yale University Chief Investment Officer David Swensen. Already, the state regulator has sent inquiry letters to Morgan Stanley & Co. (MS), E*TRADE Securities, Charles Schwab & Co. (SCHW), and Fidelity Brokerage Services LLC.

According to the article, because of these “rebates,” brokers are frequently selecting less favorable trades for their institutional investors clients to use these exchanges. If this is true, then it would be distressing considering that institutional brokers are legally bound to make trades on the exchange that has the terms that are most favorable for a client. Failure to do so could be grounds for a securities case. Meantime, it is supposed to be up to the exchanges, all 12 of them, to compete to provide the best trading opportunities.

BNP Paribas Settles NY Currency Rigging Investigation for $350M

Published on: May 30, 2017 | by Shepherd Smith Edwards & Kantas, LLP

BNP Paribas will pay the New York Department of Financial Services (DFS) $350M to settle a probe into allegations that it was involved in currency rigging in the bank’s foreign exchange business. In a statement, the French bank said that it “deeply regrets” the misconduct, which took place between ’07 and ’13.

The DFS said that over a dozen BNP Paribas sales people and traders in NY as well as other trading hubs rigged forex rates and took part in other illegal activities. BNP Paribas traders worked in online chat rooms with traders from competing companies, making fake trades and improperly sharing customer information that should have stayed confidential. Members of the bank’s sales team are also accused of misleading customers regarding prices.

Among the alleged misconduct cited by the DFS is that of a BNP Paribas trader in NY who is accused of not only rigging different currencies but also of executing bogus trades overnight to move rates and then frequently cancelling the trades within seconds of making them. In another example cited, one of the bank’s traders in Japan allegedly improperly disclosed customer information involving yen trading with several competitor traders.

Securities Crimes: Trader Jesse Litvak is Sentenced to Prison for MBS Fraud—Again, North Carolina Who Bilked NFL Players Will Serve Prison Time, and Ex-Stockbroker Gets Jail Time and Must Pay $3.5M to Investors

Published on: April 28, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Jefferies Trader Will Go to Prison for Mortgage-Backed Securities Fraud After All
Jesse Litvak, the ex-Jefferies (JEF) managing director, has once again been sentenced to two years in prison. Litvak was found guilty of mortgage-backed securities fraud in 2014 and sentenced to two years behind bars. The conviction at the time was for multiple securities fraud charges and for making false statements, as well as for defrauding TARP.

Claiming that expert witnesses hadn’t been able to testify for him, Litvak was able to get that sentence tossed. However, the US government continued to go after him and he was found guilty on one fraud count. Now, he has again been sentenced to two years in prions.

Litvak also must pay $2M because he lied about bond prices to a customer. (The earlier conviction had come with a $1.75M fine.) According to U.S. District Judge Janet C. Hall, Litvak’s victims only invested because he lied to them.

Securities Fraud: Former Merrill Lynch Broker Admits to Bank Fraud of More than $8M, Theranos Investors Claim Company Threatened Bankruptcy if Sued, & Arkansas Retirement System’s Pension Fund Agrees to More than $28M Settlement

Published on: April 20, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Merrill Lynch Broker Pleads Guilty to Bank Fraud

Jeffrey Kluge, a longtime Merrill Lynch broker, has pleaded guilty to defrauding two banks of more than $8.7M. His bank fraud ran from 2001 through November 2016.

Kluge’s plea agreement said that he committed bank fraud by fabricating account statements under Merrill Lynch’s name and pledging fake collateral to the banks so he could set up multi-million dollar credit lines. For instance, in 2001 he was able to get a $150K credit line with Alliance Bank in Minnesota by telling the financial institution that he had enough municipal bond funds as collateral. In fake account statements he sent the bank as evidence of these bond holdings, Kluge concealed from Alliance Bank that he had already promised the assets in the accounts for loans from the firm.

In 2007, Kluge was able to get a $1M credit line from Platinum Bank, which is also in Minnesota. His bank fraud scheme defrauded Platinum Bank in a similar fashion.

Morgan Stanley to Pay Massachusetts $1M to Settle Charges Alleging Unethical Sales Contests Involving Brokerage Customers

Published on: April 12, 2017 | by Shepherd Smith Edwards & Kantas, LLP

To settle charges over a high-pressure sales contest involving its financial advisers and brokerage clients, Morgan Stanley (MS) will pay $1 million to Massachusetts Secretary of the Commonwealth William Galvin. By settling, the firm did not deny or admit to the charges. It must, however, reassess its sales contest policies and notify the state of what is included in them, as well as what changes it might make in the wake of this review.

It was last year that Galvin charged the broker-dealer for cross selling and encouraging wealthy clients to borrow against their brokerage accounts. He also accused senior Morgan Stanley staff of knowing about the contest, determining that it violated the firm’s own internal policies (in addition to Massachusetts securities rules), but yet allowing the contest to continue for a few more months. It was only then that the firm’s Compliance and Risk decided that the contest was “impermissible.”

The program, which also involved a similar contest in Rhode Island, ran between ’14 and ’15. 30 financial advisers at five Morgan Stanley offices participated. The financial representatives are accused of persuading investors to set up new lending accounts. The broker-dealer purportedly rewarded them with bigger “business development allowances” when their efforts were successful. Advisers were given $1K for every 10 loan accounts that were opened, $3K for every 20 accounts, and $5K for every 30 accounts.

Insider Trading Cases: Ex-Oppenheimer Adviser Sentenced to Six Months, Las Vegas Sports Gambler is on Trial, and SEC Files Civil Case Against Ex-Home Security Guard

Published on: March 18, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Oppenheimer Stockbroker Pleads Guilty in Insider Trading Case
David Hobson, an ex-Oppenheimer Holdings (OPY) investment adviser, was sentenced to six months behind bars for insider trading using information provided to him by a friend who was employed with Pfizer Inc. at the time.

Hobson pleaded guilty to the criminal charges against him. He was ordered to forfeit over $385K. His friend, Michael Maciocio, reached a plea deal with prosecutors for his part last year.

Hobson started insider trading in 2008 while employed at RBC Capital Markets and he continued with his illicit activities at Oppenheimer. He was Maciocio’s stockbroker.

Securities News: SEC Orders Voya to Pay $3.1M For Not Disclosing Mutual Fund Sale-Related Payments, FINRA Bars Ex-Waddell & Reed Broker, and Alabama Pension Fund Loses Millions in Ponzi Scam

Published on: March 15, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Voya Accused of Not Disclosing Revenue Received for Mutual Fund Sales
The US Securities and Exchange Commission said that Voya Financial Advisors (VOYA) would pay approximately $3.1M to regulators and investors for not telling customers about revenue the firm was paid related to a mutual fund program that didn’t bill transaction fees. Voya’s clearing broker-dealer paid the firm a percentage of the money made from the mutual fund sales. This was information that should have been shared with investors.

Also, since 2014, Voya and the third-party brokerage firm were involved in a separate agreement under which Voya provided certain administrative services in return for a percentage of service fees involving certain mutual funds. The regulator said that these payments were a conflict because they gave Voya incentive to preference these funds over other investments, which could have impacted what the firm recommended to advisory clients. As part of the settlement, Voya will pay about $2.6M of disgorgement, approximately $175K of interest, and a $300K penalty. The firm is not, however, denying or admitting to the SEC’s findings.

Fired Waddell & Reed Broker is Barred from the Securities Industry
The Financial Industry Regulatory Authority has barred an ex-Waddell & Reed Inc. broker from the industry. Paul D. Stanley was fired from the firm last year for allegedly violating its policies regarding supervision, compensation, and conduct.

Ex-Deutsche Bank Broker Found Guilty for Insider Trading Related to Operation Tabernula Probe

Published on: May 10, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Martyn Dodgson, a former Deutsche Bank AG (DB) broker and managing director, and Andrew Hind, an accountant, were convicted of insider trading in London. The Financial Conduct Authority said that that Dodgson and another broker gave insider information about certain business deals to Hind, who then passed on the information to two other traders. They allegedly made $10.7M from trading half a dozen stocks in what is being called the largest insider trading case in the U.K.

The probe into the insider trading allegations, known as Operation Tabernula, has been going on for nine years. Already, three other convictions have been rendered related to the investigation. According to prosecutors, those involved employed conventional techniques and modern technology to conceal their trades. For example, they would meet at Indian restaurants where they’d hand over money in envelopes. They also purportedly used pay-as-you-go phones and encrypted memory sticks.

After investigators planted a bug in the office of day trader Benjamin Anderson, a conversation was recorded involving Iraj Parvizi, another day trader, in which Dodgson was described. Anderson and Parvizi, who were both acquitted of criminal charges, claimed that they had no reason to believe that the tips they were receiving was insider information.

It was in 2014 that former Moore Capital Management LLC trader Julian Rifat pleaded guilty to insider trading in an offshoot probe of this investigation. He admitted to sharing insider information that he received while employed at the firm to associate Graeme Shelley, who then traded to benefit the two of them. Shelley, who was formerly with Novum Securities, also pleaded guilty to insider dealing with Rifat and associate Paul Milsom, who entered his own guilty plea.

FINRA News: Regulator Seeks to Restrict Brokers’ Political Contributions, Sends SEC Proposal Regarding Broker-Compensation, and Fines Firm $2.95M Over Inaccurate Blue Sheet Data

Published on: December 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) is proposing rules that would limit how much in political contributions brokers would be allowed to make to avoid conflicts of interest. FINRA is now calling for feedback during the comment period regarding the proposed rule, which runs for 21 days after notice is published in the Federal Register.

Under the proposed rule, brokers would have a contribution cap of $350 during an election year and $150 during any other year. Should a broker contribute beyond these caps, there would not be a penalty as long as a refund is issued within four months of the donation’s receipt. A failure to satisfy exemptions will lead to a bar for the broker from being allowed to solicit a government entity or official for business purposes for two years after the donation was made.

It was in 2010 that the U.S. Securities and Exchange Commission (SEC) adopted “pay-to-play” rules that placed investment advisers under the same limits.

FINRA Probes Broker Pay for Conflicts of Interest

Published on: August 20, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has sent a targeted exam letter seeking to examine possible conflicts of interest in the way firms pay brokers. About a dozen brokerage firms received the letter, which the regulator said is aimed at gathering information as opposed to seeking out violations.

In its letter, the self-regulatory organization inquires about each firm’s different compensation practices, including common payout grids, mutual fund fees, and recruiting incentives. FINRA also wants to know about any compensation that firms may receive from product sponsors and how certain products are promoted. It also wants to learn about production thresholds that allow certain brokers to get bonuses and more compensation for additional revenue earned, improved compensation tied to revenue from certain product types, and policies for monitoring conflicts of interest as they relate to compensation.

FINRA Executive Vice President of Regulatory Operations/Shared Services Dan Sibears said that the SRO is conducting the sweeps to see if firms are properly managing conflicts of interest or if additional guidance needs to be issued. Enforcement actions typically do not result from this type of sweep unless egregious violations are discovered.