Investor Lawyers Blog

SEC Charges ACI Capital Group Owner with New York Securities Fraud

Published on: September 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed charges against Fredrick D. Scott, the New York money manager who owns investment advisory firm ACI Capital Group. The regulator contends that he falsely claimed that the company’s assets under management were as high as $3.7 billion to give him greater credibility when he promoted investment opportunities that were too good to be true. Scott allegedly ran a number of financial scams that targeted small businesses and individual investors.

The SEC says that Scott solicited investors for money by promising high return rates and then stole their funds the moment they deposited it with his investment advisory firm. He used their money to pay for personal expenses and investors never received returns.

One securities scam Scott purportedly perpetuated was what is referred to as an advance fee scheme. Investors were promised that ACI would give multimillion-dollar loans to people wanting bank financing. However, they first had to advance a percentage of the loan figure to the investment advisory firm. Afterwards, they were to get the remaining balance that was promised to them. Unfortunately, investors never received this money.

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.

VSR Financial Services Agrees to Pay FINRA $550,000 Fine Over Inadequate Supervision Allegations Involving Non-Conventional Investments

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

The Financial Industry Regulatory Authority is fining VSR Financial Services Inc. $550,000 over claims that the firm did not set up, keep up, and enforce a supervisory system that was reasonable over its sale of non-conventional investments. The SRO says that the firm did not properly monitor concentrated client positions of alternative investments. Also fined was VSR owner Donald Joseph Beary, who also received a suspension from associating with other FINRA members for 45 days.

According to the SRO, the firm’s written supervisory procedures stipulated that just up to 40-50% of a client’s exclusive net worth could be cumulatively invested in alternative investments-that is, except for when there was a reason that justified going beyond the guidelines. VSR, through Beary, also set up procedures that gave a discount to certain instruments that were non-conventional, lowering the percentage of how much liquid net worth a customer had invested. It was Beary’s job to implement and oversee the discount program.

However, in a letter to the financial firm, the SEC said that it found that the SRO did not have proper written procedures for the program and that this same deficiency remained even two years after the regulator notified VSR about the problem. The Commission said that Beaury failed to take reasonable action to make sure the WSPs were implemented or to shut down the discount program if not.

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.

Five Years After Lehman’s Bankruptcy, How is the US Financial System Doing Now?

Published on: September 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

It was nearly five years ago on September 15, 2008 when the public learned that Lehman Brothers had gone bankrupt, resulting in billions of dollars of losses on a financial system already struggling with a housing market that was failing, as well as a growing credit crisis. Also, Merrill Lynch (MER) would be forced to join with Bank of America (BAC), the US car industry was in trouble, and insurer AIG stood on the brink of collapse. Now, while there has the economy has somewhat recovered, many Americans can’t help but worry that such a financial meltdown could happen again.

Back then, Wachovia (WB) was also in peril of going down and Washington Mutual (WAMUQ) was failing miserably—to become the biggest US banking failure to date—and government and financial industry leaders scrambled to save what they could. Bailouts were issued and emergency measures taken including: a federal takeover of housing finance giants Freddie Mac and Fannie Mae, which kept the housing market going by allaying worries that the two entities would default on bonds,the guaranteeing of money market mutual funds that the then-trillion dollar industry depended on for the business short-term funding as well as retirement, and the setting up of the Troubled Asset Relief Program (allowing the Treasury to help put back confidence in banks via the buying of equities of securities in many of these banks and recapitalizing the system.

In a USA Today article, ex-US senator Christopher Dodd said that he believes there will be another crisis; only this one could also involve China, Brazil, and India—not just the US and the European continent. Meantime, while US Chamber of Commerce’s Center for Capital Markets Competitiveness CEO and President David Hirschmann said that a crisis as big as the one in 2008 is not as likely, he predicts there will still be failures. He also said that it is unclear whether we’ve established a better system for identifying problems and risks.

Many Financial Fraud Victims Don’t See It Coming, Says Survey

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

According to people who took a survey a report called the Financial Fraud and Fraud Susceptibility in the United States, while most people have been targeted by financial scammers, nearly half of them don’t see it coming. Almost 24,000 adults in the 40 and over age group participated.

Among the survey results:

• Over 80% of respondents had been approached about taking part in what was potentially financial scam.

Morgan Keegan to Pay $60,000 Fine Over Inadequate Supervision Over SBA Pools and Sales

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

Morgan Keegan & Co. has agreed to pay the Financial Industry Regulatory Authority $60,000 over allegations that its Small Business Administration Desk bought small business loans guaranteed by the gov’t from regional banks in this country and then pooled together the loans with qualities that were similar, securitizing them into SBA pools and then selling them to institutional clients.

When the demand for these pools started to go down, the inventory at the Desk went up a lot and stayed over Morgan Keegan’s allowable levels so that they seemed lower than what was actual and therefore in compliance with what was allowed. As a result, the head trader went into fake pool trades totaling about $82 million.

Per FINRA’s findings, because of the fake trades, Morgan Keegan thought its SBA loan levels went down down by $75 million. Also, aside from allegedly making the false trades happen, the trader moved forward the dates of settlement on a repeated basis, continuing to move the date ahead whenever a settlement date was approaching. This gave him more time so he could sell the SBA pools, leading to the generation of correct and cancel tickets for trades that went on for several months. The head trader later admitted his wrongdoing and Morgan Keegan fired him.

The SRO found that Morgan Keegan’s supervisory system and written supervisory procedures (WSP) for government loans were not adequate enough that they were able to prevent the fictitious trading that the head trader engaged in. FINRA also said that the firm lacked a way to monitor SBA loans that were more than four months old, as well as aged SMA pools, nor did it have a system for comparing and confirming ex-clearing transactions or one to assess transactions that were modified or cancelled to determine if they were reasonable.

FINRA says that Morgan Keegan did not properly address the SBA Desk inventory positions’ marking because the firm’s WSPs mandated that SBA pools get marked monthly, rather than daily. The WSPs did not properly prevent the head trader from approving his own transactions without a supervisor overseeing his actions.

Even as it submitted its Letter of Acceptance, Waiver, and Consent to FINRA, accepting the fine and ensure and consenting to the sanctions described, Morgan Keegan did not deny or admit to any wrongdoing.

Financial Industry Regulatory Authority

More Blog Posts:
Previous Dissent by Arbitrator is Not Reason to Vacate Award Morgan Keegan Was Ordered to Pay Investors, Says District Court, Stockbroker Fraud Blog, April 8, 2013

Court Upholds Ex-NBA Star Horace Grant’s $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker Fraud Blog, October 30, 2012

Morgan Keegan Must Buy Back Auction-Rate Securities and Pay $110,500, Says District Judge, Institutional Investor Securities Blog, February 12, 2013

NEXT Financial Group Gets $250,000 FINRA Fine Over E-Mail Violations

Published on: September 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

NEXT Financial Group, Inc. will pay a $250,000 fine and perform an audit to identify all non-company email accounts that were used by the firm’s registered persons to conduct communications that were securities-related. It will also identify whether the accounts were captured by its servers, reviewed during regular email surveillance, and retained according to federal securities laws and FINRA rules. NEXT Financial will then present a written statement to the SRO describing the audit results and any corrective action to make sure that emails are captured, retained, and reviewed in the future.

FINRA says that for four years, two of NEXT Financial’s registered representatives ran an outside business activity that was approved and, during certain times, they outside business email addresses to communicate with customers about out securities-related matters. The SRO says that firm’s written supervisory procedures let registered persons communicate with NEXT Financial customers via the non-firm email accounts as long as the external domain names were firm-hosted and approved and could be captured and reviewed on the company’s server.

However, says the SRO, during a yearly branch audit, NEXT Financial found that registered representatives’ outside emails were not being maintained or captured on the server and, as a result, no review was taking place. FINRA contends that even after discovering this, NEXT financial did not take corrective action.

NEXT Financial consented to the sanctions described by FINRA, as well as to the entry of findings but did not deny or admit to them.

FINRA E-mail Enforcement Actions
According to InvestmentNews, FINRA has been stepping up its e-mail enforcement actions as of late, with the number of e-mail related violations rising. The SRO imposed $6.5 million in fines over this matter last year—an 81% rise from the year prior—over 632 email cases.

FINRA and the Securities and Exchange Commission mandate that brokerage firms set up systems and written procedures to catch and hold all e-mail communications with members of the public for three years. The firms also must pre-approve or regularly examine at least some e-mail samplings sent to customers by brokers. Unfortunately, proper retention and review of emails is proving to be a struggle for some brokerage firms.

Finra going all out to control e-mail, InvestmentNews, May 26, 2013

FINRA

More Blog Posts:
LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures, Institutional Investor Securities Blog, May 22, 2013

Next Financial Ordered to Pay One Million Dollars for Supervisory Deficiencies that Led to Texas Securities Fraud, Stockbroker Fraud Blog, August 4, 2009

FINRA NEWS: Goldman Sachs Appeals Vacating of Securities Award, Non-Customers of Brokerage Firm Can’t Compel Arbitration, & Three Governors Named To FINRA Board, Stockbroker Fraud Blog, August 21, 2013