Inadequate Supervision

Massachusetts Fines LPL Financial $1.1M

Published on: July 2, 2019 | by Shepherd Smith Edwards & Kantas, LLP

Secretary of the Commonwealth of Massachusetts William Galvin has imposed a $1.1M fine on target=”_blank” rel=”noopener noreferrer”>LPL Financial (LPLA) after finding that the brokerage firm did not properly register 651 of its advisors in the state. Galvin’s office contends that for six years, LPL let these brokers work in Massachusetts despite the lack of registration and that this violates the state’s securities laws.

In Massachusetts, a brokerage firm is required to register its agents before they are allowed to engage in securities-related business in the state. As of May 9, LPL had 4,219 agents who were registered in the state.

However, the lack of registration by 651 of its agents between March 2013 and April 4, 2019 prevented Massachusetts securities regulators from being able to check their qualifications and histories to ensure that investors who worked with them were in safe hands. 441 of these unregistered agents acted as financial advisors to at least one or more state residents during the period at issue. The other 210 agents supervised the agents who were advisors to these customers.

Investors Awarded $3M In Claim Against Spire Securities

Published on: June 29, 2019 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority (FINRA) arbitration panel has awarded 23 investors $3M in their claim against Spire Securities, its CEO David Lloyd Blisk, and CCO Suzanne Marie McKeown. The broker-dealer and its executives were accused of inadequately supervising former broker Patrick Evans Churchville, whom the investors contend fraudulently sold them investments that caused them to lose money in a $21M Ponzi scam.

Churchville sold the investments through ClearPath Wealth Management, a registered investment adviser that he operated outside of Spire Securities. Still, the claimants contended that the broker-dealer should have prevented Churchville from causing them financial harm while he was a Spire Securities broker and could have done so had they properly overseen him.

Churchville pleaded guilty in 2016 to criminal charges accusing him of operating a $21M Ponzi scam. In 2017, he was sentenced to seven years in prison for tax evasion and wire fraud.

CFD Investments Ordered to Pay $125K Fine Over the Inadequate Supervision of Variable Annuity Sales

Published on: January 21, 2019 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering CFD Investments to pay a $125K fine over what the self-regulatory authority (SRO) found to be the inadequate supervision of its registered representatives when they sold variable annuities(VAs) to customers. FINRA said that between 7/2014 and 7/2016 the broker-dealer did not set up, keep up, or enforce written procedures or a supervisory system designed in a reasonable enough manner that would allow the firm to properly oversee these transactions.

The SRO found that of the 1,574 VA purchase and exchanges made by the firm during the period in question, over 18% of them were L-share contracts, most of which came with long-term riders. However, according to FINRA, many of broker-dealer’s customers that bought these shares wanted a long-term investment horizon and would have benefited more from being sold B-share contracts. Also, unlike L-share contracts, B-share contracts don’t come with 30-50 basis point annual fees.

Inadequate Supervision and Inappropriate Recommendations

Merrill Lynch to Pay $300K to Settle Inadequate Supervision Allegations

Published on: December 14, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) is ordering Merrill Lynch to pay $300K after finding that it did not properly supervise former broker Eva Weinberg, who went to prison for defrauding former NFL football player Dwight Freeney. Merrill, which is now a wholly-owned Bank of America (BAC) subsidiary, consented to the fine and censure imposed for not properly investigating and overseeing Weinberg even after the firm had internally flagged three of her emails and a $1.7M default judgment had been rendered against her in a civil case. (It should be noted that this case is not listed on her BrokerCheck record but was reported by InvestmentNews.)

What Weinberg’s BrokerCheck record does state is that she began working in the industry in 1988, but then in 2004 she took several years away to work at a real estate company owned by a man named Michael Stern, who is also now in prison for defrauding Freeney. Even before Freeney, however, Stern already had a criminal record.

FINRA said that when Weinberg applied to Merrill for employment in 2009, she did not mention the years she had spent working for Stern. The broker-dealer went on to hire her in their Miami office where she worked with professional athletes, including Freeney. She is the one who introduced the former NFL player to Stern.

H. Beck Ordered to Pay $400K for Unsuitable Variable Annuity Sales to Customers

Published on: November 27, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) is ordering H. Beck to pay a $400K fine. The self-regulatory authority (SRO) contends that the independent brokerage firm sold variable annuities (VA) to clients even though they were not suitable for some of them.

According to FINRA, of the over 7,000 variable annuity contracts that H. Beck sold, making almost $34.9M in revenue between 1/2013 and 12/2014:

2,835 of those were L-share contracts with quite a number of them tied to long-term riders.

Securities Fraud Allegations Against Former Merrill Lynch/RBC Financial Adviser Could Lead to More Unauthorized Trading and Failure to Supervise Claims

Published on: August 14, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this year, the US Securities and Exchange Commission barred ex-RBC broker Thomas Buck from the industry. The action came less than four months after the regulator filed a civil case accusing Buck of investor fraud. He allegedly made material misrepresentations and omissions to investment advisory clients and certain customers while he was a Merrill Lynch financial adviser in order to get get paid excess fees and commissions.

As a result, more than 50 customers and clients under Buck ended up paying over $2.5M unnecessarily.

Buck also allegedly did not tell clients that they could have saved money if only they’d opted for a fee-based payment structure instead of the commission model. Meantime, he’d told Merrill Lynch compliance staff on several occasions that the clients knew about the less costly options.

Sanctions Against Wedbush Securities in SEC and FINRA Rulings Are Upheld by the 9th Circuit

Published on: April 24, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The United States Court of Appeals for the 9th Circuit has refused to overturn the US Securities and Exchange Commission ruling that Wedbush Securities Inc. engaged in inadequate supervision of its own regulatory compliance. The appeals court also affirmed the suspension of the brokerage firm’s president and principal Edward W. Wedbush.

The SEC’s 2016 finding had sustained a 2014 ruling by the Financial Industry Regulatory Authority’s National Adjudicatory Council, which ordered Wedbush to pay a $350K fine for either not filing, or filing late, dozens of documents regarding complaints and judgments that had been brought against the investment firm and its financial representatives. Finra found that Wedbush Securities violated the bylaws and rules of the NASD, the NYSE, and the self-regulatory organization itself 158 times and was delinquent in submitting the documents at issue over a five-year period, from 1/2005 to 7/2010.

Wedbush and its president had tried to argue before the SEC that FINRA was wrong in finding that the broker-dealer failed to supervise reporting requirements. The brokerage firm also questioned whether the hearing it received before the SRO was a fair one since a FINRA rule did not specifically note suspension as a sanction.

RBC Capital Markets Must Pay $1M Fine and $434K Restitution to Customers Over Unsuitable Reverse Convertible Sales

Published on: April 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering RBC Capital Markets to pay restitution to customers for supervisory failures that allowed for the sale of reverse convertibles that were unsuitable for them. The firm must pay them about $434,000 plus a $1 million fine.

According to the self-regulatory organization, RBC Capital Markets lacked supervisory systems that were reasonably designed to identify transactions that warranted review when the reverse convertibles were sold to customers. This purported inadequacy is s a violation of FINRA’s rules and suitability guidelines.

Although RBC had guidelines for selling reverse convertibles, specific criteria were established regarding annual income, investment goals, liquid net worth, and investment experience. Because of this, the firm was unable to detect the sale of 364 reverse convertible transactions by 99 of its registered representatives. The transactions involved 218 accounts and they were not suitable for the account holders. The customers lost at least $1.1 million.

Morgan Stanley to Pay a $280,000 Fine to CFTC for Records and Supervision Failures Involving SureInvestment and $35M Ponzi Scam

Published on: September 16, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Smith Barney, LLC (MS) has settled civil charges by the U.S. Commodity Futures Trading Commission (CFTC) accusing the firm of records violations and inadequate supervision involving its know-your-customer procedures. Aside from a $280,000 fine, the broker-dealer will have to disgorge commissions from the subject accounts involved.

According to the regulator, Morgan Stanley did not diligently oversee its employees, officers, and agents when they opened firm accounts for a family of companies known as SureInvestment, which purportedly ran a hedge fund that was partially based in the British Virgin Islands-considered to be a risky jurisdiction. Because of this geographic circumstance, when the accounts were opened the firm should have subjected them to special observation pursuant to its procedures, including watching out for red flags indicating suspect activities.

The CFTC’s order, however, notes that even though there were a number of red flags in the account opening documents for SureInvestments, Morgan Stanley failed to identify them. Later, it was discovered that SureInvestment doesn’t even exist and that its owner, Benjamin Wilson, was conducting a $35 million Ponzi scam based in the U.K. (Wilson, who has pleaded to criminal charges brought by the Financial Conduct Authority, has been sentenced to time behind bars.)

FINRA Fines Minneapolis Broker-Dealer $1M for Inadequate Supervision of Penny Stocks

Published on: September 13, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has issued an enforcement action charging Feltl & Company for not notifying certain customers of the suitability and risks involving certain penny-stock transactions, as well as for failing to issue customer account statements showing each penny stock’s market value. The brokerage firm is based in Minneapolis, Minnesota.

FINRA claims that the firm failed to properly document transactions for securities that temporarily may not have fulfilled the definition of a penny stock and did not properly track penny-stock transactions involving securities that didn’t make a market.

Feltl made a market in nearly twenty penny stocks. The brokerage firm made $2.1 million from at least 2,450 customer transactions that were solicited in 15 penny stocks between 2008 and 2012. The SRO says it isn’t clear how much the firm made from selling penny stocks that it didn’t keep track of but that revenue from this would have been substantial.