Articles Posted in NASD Enforcement

Claimant Leonard Claus was awarded $25,000 by a National Association of Securities Dealers’ arbitration panel for his Texas securities arbitration claim. Claus had made a verbal agreement with Jerry Short, who worked for Institutional Capital Management Inc. over the sale and purchase of bonds.

Clause, who bought the bonds, was planning to sell them to Sterling Financial Investment Group Inc. The resale plan didn’t work out, and he sold them to another buyer at cost.

Clause then sued ICM and Sterling for breach of contract, violations of federal and state securities laws, and negligence.

In addition to the $25,000 compensatory damages award, NASD charged Clause $22,000 in arbitration fees. They awarded his lawyer $70,000 in legal fees.

ICM and Sterling asked that the Texas securities fraud award be vacated by the district court. A magistrate judge vacated, claiming that the NASD panel went beyond its authority when it violated Texas law and directly issued an award to Clause’s lawyer.

Clause and IMS appealed, claiming that the judge made a mistake when vacating the entire award on the basis of the awarded attorney’s fee. Meantime, Sterling and ICM contended that the attorney’s fee violated Texas law and that it conflicted with the contingency fee arrangement between clause and his attorney, which the NASD panel is not allowed to override. ICM and Sterling said the legal fee award was unreasonable.

Court of Appeals ruled that even though Texas statute must directly authorize any fee awards, the party that is told to pay the fee cannot challenge the payment’s propriety. The court called the award error harmless and “immaterial to the party” that is ordered to pay it. The court also noted that ICM/Sterling did not challenge the evidence that supported the fee award.

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A new report by the Inspector General at the Securities Exchange Commission recounts 16-years of failures at the SEC which led to the financial crime of the century perpetrated by Bernard Madoff and his firm. The report states that the agency “never properly examined or investigated Madoff’s trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme.”

The IG confirms that the SEC failed to heed direct warnings and warning signs as early as 1992 which “could have uncovered the Ponzi scheme well before Madoff confessed” to the $50 billion fraud, leading to his 150 year prison sentence.

Critics of cecurities regulators and the securities regulatory system have for years complained that the system is not only inept but perhaps corrupt. Accusations have included that regulators overlook wrongdoing by Wall Street insiders while “rounding up the usual suspects” to appear as if they are doing their jobs. Madoff may be the poster child for this theory.

The NYSE and its former boss Dick Grasso were heavily criticized over salary and benefits to Grasso of well over $100 million. Many thought it unconscionable for the head of a self-regulatory body to earn that kind of money. For that reason, and so it could play ball in the international arena, the NYSE simply bribed all 5000+ members of the NASD $35,000 each to vote to take over its regulatory functions.

The National Association of Securities Dealers, Inc. is an association. Its members are securities dealers. Yet, it does not like its name and wants to change it. After all, it sounds strange for an association of securities dealers to be the primary regulator of securities dealers – too much like a fox in charge of a hen house.

The NYSE takeover seemed a perfect excuse to change the name. So a few folks at the NASD thought about names that would sound more like it was something other than an association of securities dealers. After not so careful thought, the NASD came up with “The Securities Industry Regulatory Authority”, or SIRA.

Securities America, Inc. agreed to a $375,000 fine to settle charges by the NASD that it received improperly directed mutual fund commissions on behalf of one of its brokers, failed to supervise and failed to disclose the arrangements to the affected mutual fund owners.

The NASD said that this situation, in which a mutual fund company directed brokerage fees specifically for the benefit of a lone broker, is the first known case of its kind. NASD rules prohibit registered firms from allowing sales personnel to participate in directed brokerage arrangements. NASD fair dealing regulations also require disclosure to clients of such fees and other compensation received through arrangements involving their accounts.

A directed brokerage arrangement is one in which a client, such as a pension fund, directs a planner to use a certain broker-dealer for trade executions. In return for the commissions received on the transactions, the broker-dealer provides other services to the advisor or these can be rebated to the clients. The Securities America broker arranged for such commissions from union-sponsored retirement plan clients to be directed to his firm for his own benefit.

NASD levied a fine of $250,000 against Wells Fargo Securities LLC and $40,000 against its former research director, plus other sanctions, for failing to disclose that the lead analyst on reports issued on a company had accepted a position with that company.

The research reports concerned Cadence Design Systems, which designs semi-conductors for use in the global electronics market. According to the NASD, the analyst had applied for a job with that company prior to issuance of a report in 2005, and had two job interviews prior to issuance of others, none of which was disclosed in the reports.

The NASD’s sanctioning order states that the analyst was then offered a position at Cadence to earn over $300,000, plus Cadence stock and options, which she disclosed to the Wells Fargo and its head of research. Yet, weeks later Wells Fargo published a third research report favorable to Cadence, without disclosure of the hiring.

The NASD fined four firms for mutual fund sales violations and for failures to properly supervise such sales. The fine amounts are $473,000 against MML Investors Services, Inc., $354,000 against NYLIFE Securities LLC, $322,000 against Securities America, Inc. and $100,000 against Northwestern Mutual Investment Services.

The violations charged include sales of Class B and Class B shares, causing investors not to receive the benefits of price breaks on Class A shares, failures to properly notify clients of available cost free transfers from one mutual fund to another at the funds’ net asset values and failure to have adequate supervisory systems and procedures to prevent such violations.

In resolving the case, MML and Northwestern must also pay their clients who qualified for, but did not receive, the net asset transfer benefits and pay refunds to those who did not benefit from the price breaks. Including the refunds already paid, it is estimated that thousands of clients of these two firms will receive a total of more than $6.5 million.

As a former Vice President and registered representative at several major brokerage firms for 20 years, I witnessed Wall Street in action. My assessment of Wall Street is that the majority of the 600,000+ registered representatives at over 5,000 brokerage firms are fairly honest people who seek the best interest of their clients. Unfortunately, there are some “bad apples” in that barrel – brokers who seek to line their own pockets with little regard for their clients.

Yet, it is not so much the apples but the “orchard” that is most troubling today. When I began my investment career in 1970, those running investment firms sought to take care of their clients and maintain their firm’s image. Over the following 20 years, I witnessed their profit motive increasingly outstrip those goals.

Today, it is clear that most financial firms pay little more than lip-service to their clients’ welfare. In the past decade, those who run these firms have discovered an important fact: Crime pays on Wall Street! The best example is the widespread research scandal which led to massive investigations, fines and lawsuits.

NASD and NYSE regulators, which will soon merge, jointly released proposed guidance for broker-dealers to establish policies and procedures on electronic communications employees use to conduct business and to “take reasonable steps” to monitor such compliance.

The two securities self-regulatory organizations (SRO’s) stated that brokerage firms should have a supervisory system in place to make sure brokers are complying with all applicable rules when employing all types of electronic communications.

The SRO’s added that, once “reasonable” policies and procedures are in place, the firms would themselves decide what “additional supervisory policies and procedures are required to adequately supervise their business and manage the member’s reputational, financial, and litigation risk.” Unlike SRO rules, SRO “guidelines” do not require approval of the SEC.

HSBC Brokerage, a New York firm which allegedly directed all government securities orders to an affiliated broker-dealer, agreed to pay $250,000 to settle NASD charges it failed to have adequate systems in place to ensure the best execution for its clients.

Allegedly the firm routed orders to affiliate, HSBC Securities (HSI), without taking adequate steps to ensure that its customers could not get better prices through other sources. The NASD said in a news release that “HBI’s inability to provide documentary evidence of its supervisory review for best execution of trades inhibited NASD’s ability to review transactions for best execution.” HBI settled this action without admitting or denying the charges.

Prior to a merger of the two related firms, HBI’s retail brokerage business was primarily located in HSBC bank branches, the NASD said. To support the retail business, HBI operated a trading desk to handle orders placed by brokers.

The NASD fined Omaha, Neb.-based Securities America Inc. a total of over $15 million for luring 32 long-term employees of Exxon Corporation into early retirement using false promises of high returns. The NASD stated that supervisors at Securities America largely ignored such actions by its registered representative who has been charged with violating securities regulations.

The NASD is focusing much of its enforcement resources on brokers and investment firms specializing in retirement planning services. The NASD’s chief counsel of the New Orleans region said retirement-age workers are extremely vulnerable to retirement planning investment scams. In many cases, the workers have little financial sophistication, but huge portfolios of assets that must be invested for post-employment purposes.

Employees of large companies such as Exxon are tempting targets for unscrupulous brokers touting inflated predictions of earnings to generate huge fees for the brokers. The target employees are able to “rollover” their retirement accounts, sometimes worth over a million dollars, to banks or brokerage firms. Often these workers hive little or no experience in investing and must rely entirely upon an investment advisor. This problem will grow as the baby boom generation retires.

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