FINRA

Lawmakers & Industry Folk Address the DOL Amending the Definition of Fiduciary, Reg A Plus Offerings, Oversight, Rogue Brokers, and Expungement Rules

Published on: November 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

US House Passes A Bill Prohibiting the US Labor Department DOL From Amending Its Definition of “Fiduciary” Until SEC’s Uniform Conduct Standard is Established

A bill that would not allow the Department of Labor to amend its rules regarding the definition of the term “fiduciary” until after Securities and Exchange Commission adopts its own rule that places broker-dealers and investment advisers under a uniform standard of conduct has passed in the US House of Representatives. The DOL has been trying to revise its definition of “fiduciary” in the Employee Retirement Income Security Act (ERISA). Those who voted to prohibit revising the definition have been worried about possibly ending up with two rulemakings that were inconsistent with one another.

Reg A Plus Offerings and Their Oversight Get Capitol Hill Debate

FINRA Arbitration Panel Issues $1.2M in Awards in Case Against BBVA Securities of Puerto Rico, Inc.

Published on: October 25, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a FINRA arbitration case filed by claimants Felix Bernard-Diaz, Julian Rodriguez and Luz Rodriguez against BBVA Securities of Puerto Rico, Inc., Jorge Bravo, Rafael Colon Ascar, Julio Cayere, and Sonia Marbarak, a Financial Industry Regulatory Authority Panel has awarded $1.2M to the claimants. The Rodriguezes and Felix Bernard-Diaz asserted unsuitable investments, breach of fiduciary duty, gross negligence related to an allegedly unsuitable naked option trading strategy, excessive trading, margin use, and churning.

The respondents denied the accusations and asserted a number of affirmative defenses. They also asked for the CRD files of two of the respondents, Bravo and Marbarak, to be expunged. Last year, respondent Cayere sought bankruptcy protection. The arbitrators did not issue a determination against him.

The FINRA panel said Ascar and BVA were liable, severally and jointly. Now, the respondents must pay Bernard-Diaz $635K in damages and $15K in expenses. The Rodriguezes were awarded $547K in damages and $15K in costs.

FINRA Considers Making Broker-Dealers Carry Insurance Covering Arbitration Payments

Published on: October 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority intends to weigh whether to mandate that brokerage firms have insurance covering payments for possible arbitration awards issued to investors. The SRO is aware that there has been frustration among claimants who have not received their awards.

It can be a problem when a brokerage firm closes its doors without paying legal claims and awards it owes customers. Making broker-dealers carry insurance could lower the amount of awards that go unpaid. Unfortunately, some firms have such a small financial cushion that they can be forced to close shop over just one arbitration award.

According to SNL Financial, which conducted an analysis for The Wall Street Journal, over 940 firms reported having a net capital of under $50,000 in financial reports from as recent as July. FINRA says that 11% of all arbitration awards issued in 2011 have yet to be paid-that’s $51 million. This is 4% increase from what was unpaid from 2009 and 2010.

FINRA Accuses John Carris Investments of Pump-and-Dump Scam

Published on: September 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is charging John Carris Investments LLC with misleading and bilking investors. It seeks a cease and desist order against the financial firm and George Carris, its CEO, to immediately stop soliciting customers to buy Fibrocell Science, Inc. stock without giving them the correct disclosures. The SRO contends that in May 2013, JCI made solicitations to customers without revealing that Carris and another principal of the firm were selling their shares.

In an amended complaint, FINRA accused Carris, JCI, and five other firm principals of committing securities violations and other fraud. The SRO alleges that as JCI played the role of placement agent for FIbrocell, the firm and Carris artificially inflated Fibrocell stock’s price by pre-arranging trading and making Fibrocell stock buys that were not authorized in the accounts of customers.

FINRA contends that JCI and Carris fraudulently sold notes and stock in Invictus Capital, Inc., the firm’s parent company, without disclosing that its financial state was poor. The SRO believes that there was no reason to believe that investors would gain anything economically and Carris and JCI misled investors of Invictus by paying dividends to the latter’s early investors with funds that came from the sales of the company’s securities. Also, FINRA is accusing JCI of putting out false documentation that did not show payments the firm made for Carris’s personal spending and not remitting employee payroll taxes to the US Treasury.

FINRA Broker Bonus Plan Would Require Brokers to Disclose Their Recruitment Compensation

Published on: September 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority’s Board of Governors has approved a proposal mandating that brokerage firms disclose how much recruitment compensation they were paid to move to another firm. The rule applies to up-front and back-end bonuses, signing bonuses, accelerated payouts, loans, and transition assistance of $100,000 or greater, as well as future payments upon performance criteria.

While the $100,000 threshold is not going to be relevant for many independent representatives, since the majority of their packages don’t reach this benchmark, this could impact independent brokerage firms with higher forgivable notes of up to 40% and may hurt their recruitment.

Now, it is up to the Securities and Exchange Commission to look at the plan and either give its approval or present the proposal to the public for comment.

FINRA Arbitration Panel Orders Citigroup to Pay Senior Investor Couple $3.1M for Alleged Broker Fraud Related to “Selling Away” Practice

Published on: September 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Inc. (C) now has to pay Dr. Nasirdin Madhany and Zeenat Madhany $3.1 million over claims that the financial firm failed to properly supervise a broker, which caused the couple to sustain over $1 million losses. The broker is accused of directing them to invest in real estate developments that later went sour.

In 2010, the couple filed a FINRA arbitration case alleging fraud, negligence, and other wrongdoings related to over $1 million in real estate investments they made between ’04-and ’07. The Madhanys, who are senior investors, were customers of then-Citigroup worker Scott Andrew King, who referred them to politician Lawton “Bud” Chiles III. The latter was looking for investors for a number of real estate projects. King, who allegedly had a conflict of interest (that he did not disclose) from buying two condominiums from Chiles at a discount, is said to have connected the couple and the politician without Citigroup’s knowledge.

The Madhanys invested in two real estate projects, which began to have problems in 2007 when the US housing market failed and that is when the couple lost their money. Also, they, along with other investors, had signed personal loan guarantee related to a $12 million loan on one of the projects. When the loan defaulted in 2009, Wachovia sued all of them. Last year, a court submitted a $10 million judgment against the investors, with each person possibly liable for the whole amount.

Broker Gets 1-Year Suspension From FINRA Over Inadequate Due Diligence and Supervision

Published on: September 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Gary Mitchell Spitz, a broker and a registered principal of an Iowa-based brokerage firm, is suspended from associating with any FINRA member for a year and must pay a $5,000 fine. The SRO says that Spitz did not perform proper due diligence of an entity—a Reg D, Rule 506 private offering of up to $2 million—even though this action is mandated by his firm’s written supervisory procedures.

FINRA’s finding state that because of Spitz’s inadequate review, he did not make sure that the offering memorandum had audited financials of the issuer or make sure that these financials were accessible to non-accredited investors prior to a sale—also, a Regulation D requirement. The SRO says that Spitz let certain registered representatives, who were associated with the firm, to sell the entity’s shares and turn in offering documents that customers had executed directly to that entity. This meant that Spitz did not get copies of the documents or perform a suitable review of the transactions before they were executed. Certain customers even invested in the entity prior to Spitz getting the subscription documents from these representatives.

Spitz also is accused of not acting to make sure that the representatives made reasonable attempts to get information about the financial status, risk tolerance, and investment goals of customers. FINRA says he did not retain and review these representatives’ email correspondence and that they worked for a company that was the entity’s manager. Spitz let these representatives use the company’s email address to dialogue with customers and prospective clients but that the firm’s server did not capture the correspondence.

Registered Representatives Get FINRA Bar Following Securities Fraud Allegations

Published on: September 13, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Texas Registered Rep Under Investigation for Financial Fraud Declined to Turn in Supplementary Documents

Conrad Tambalo Bautista, a registered representative in Texas, is now barred from associating with any other Financial Industry Regulatory Authority member in any capacity. While not denying or admitting to the SRO’s findings, Bautista agreed to the described sanction as well as the entry of findings.

According to FINRA’s findings, Bautista would not respond to its requests for supplemental documents related to a customer complaint about him. The SRO had asked for certain financial data for an investigation into whether/not he took part in fraudulent financial scams, private securities transactions or external business activities, borrowed customers’ money, or failed to disclose an IRS tax lien.

Foremost Trading LLC Must Pay $400K to CFTC for Supervisory Violations

Published on: September 12, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Foremost Trading LLC has settled the securities charges filed against it by the US Commodity Futures Trading Commission. The regulator accused the introducing broker of failing to properly supervise the handling of specific trading accounts by employees, agents, and officers. To settle, Foremost Trading must pay a $400K civil penalty and cease and desist from future CFTC regulation violations.

According to the agency’s order, the accounts involved were held by clients who were referred to the introducing broker via three unregistered entities that sold futures trading systems. Foremost Trading and its staff are accused of disregarding warning signs that the Systems-Systems Providers were using fraudulent means and business practices to get these clients.

Clients complained to Foremost. However, contends the CFTC, the latter did not properly investigate claims or let other clients know about the allegations. Meantime, the introducing broker kept setting up accounts for clients referred to it by Systems Provider, even vouching for the latter’s track record when communicating with clients.

FINRA Fines Santander Investment Securities Inc. $350,000 For Not Supervising Foreign Fund Offerings

Published on: September 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining Santander Investment Securities Inc. $350,000 over allegations that the brokerage firm failed to adequately supervise foreign fund offerings. The SRO says that the broker-dealer did not have a system in place to properly oversee communications between brokers, a registered firm principal, non-registered employees, and investors about the purchase of non-US funds.

FINRA found that the principal had the job of determining interest from institutional investors in the US for funds overseen by a fund manager who was affiliated with the firm but was not regulated by SRO or based in the US. The principal and those mentioned above contacted investors about buying non-US funds in the future.

FINRA says that Santander Investment Securities should have had a registered individual supervising the registered personnel in relation to these communications. It also found that these interactions took place at presentations where sales materials were given out to prospective investors. However, notes the SRO, the brokerage firm did not appoint an individual registered with the firm to make sure procedures and policies were being enforced at these gatherings, nor did it apply these protocols with the public or look at and approve the fund presentations and other materials. Copies of the material that was distributed were not kept, as required. FINRA says that the materials included claims that were exaggerated.