FINRA Broker Disciplinary Action Report: April 2016

FINRA BROKER DISCIPLINARY ACTION REPORT: APRIL 2016

Each month and again on a quarterly basis, the agency that regulates the financial industry, FINRA (Financial Industry Regulatory Authority), produces a detailed report that runs down all disciplinary actions recently taken against brokerage firms and brokers. This long list of alleged wrongdoing and misconduct reads a lot like a police blotter. We strongly encourage any investor who suspects their broker and/or broker-dealer of having lost them money on dubious terms to at least skim this report to see if you recognize any names, schemes, products, or securities.

For our part, in addition to circulating the entire report to help get the word out about these alleged misdeeds, we like to pick out some of the highlights from each report. Specifically, we’re looking for schemes or abuses that might be more far-reaching than the individual cases brought through the FINRA arbitration process. In other words, we name names here because we hope to raise awareness out there about certain brokers and products that might otherwise go unnoticed except for the case appearing in the report.

Electronic Transaction Clearing, Inc. of Los Angeles, California submitted an Offer of Settlement in which the firm was censured; fined $875,000, to be paid collectively to FINRA, NASDAQ Stock Market LLC, BATS Exchange, Inc., and NYSE Arca Equities, Inc., of which $218,750 shall be paid to FINRA; and required to comply with an enhanced supervisory undertaking in accordance with the terms of the Offer. Without admitting or denying the allegations, the firm consented to the sanctions and to the entry of findings that the firm’s supervisory systems and procedures and risk management controls were not reasonably designed to supervise and manage the risks of its market access (MA) business involving thousands of foreign-based traders, and therefore, could not reasonably monitor, detect and prevent potentially manipulative activity. The findings stated that the firm profited significantly, earning millions of dollars from executing securities trades on behalf of its MA customers. The firm failed to adequately monitor “red flags” and the trading of its MA customers, particularly those who posed heightened risk; failed to adequately detect and prevent potentially manipulative trades, including prompt and decisive follow-up and review and investigation; invest appropriate and sufficient resources in its supervisory technology, compliance infrastructure and compliance staff; and failed to ensure that all trading activities entered under the firm’s mnemonics or market participant identifiers (MPIDs) complied with applicable federal securities laws and regulations, and the rules of FINRA and other exchanges. Despite numerous red flags, heightened risks and repeated notice by regulators of potentially manipulative activity being effected by certain MA customers, the firm’s approach to its regulatory responsibilities was inadequate.

 

J.J.B. Hilliard, W.L. Lyons, LLC of Louisville, Kentucky submitted an AWC in which the firm was censured, fined $175,000 and ordered to pay $328,491 in restitution to customers. The firm has paid restitution to all affected customers and provided proof of payment to FINRA. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to identify and apply sales-charge discounts to certain customers’ eligible purchases of UITs, which resulted in customers paying excessive sales charges of $328,491. The findings stated that the firm failed to establish, maintain and enforce a supervisory system reasonably designed to ensure that customers received sales-charge discounts on all eligible UIT purchases. The firm relied primarily on its registered representatives to ensure that customers received appropriate UIT sales-charge discounts, despite the fact that the firm did not effectively inform and train representatives and their supervisors to identify and apply such sales charge discounts.

 

Legend Securities, Inc. of New York, New York submitted an AWC in which the firm was censured, fined $125,000 and required to retain an independent consultant to conduct a comprehensive review of the adequacy of the firm’s policies, systems and procedures (written and otherwise), and training. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to tailor its AML program to its penny stock liquidation business. The findings stated that the firm’s system for reviewing trading activity, which consisted primarily of a manual review of daily trade blotters, was not reasonably designed to detect patterns of suspicious activity that might occur over the course of days, weeks or months, given the volume of penny stock transactions being executed through the firm.

 

MidAmerica Financial Services, Inc. of Joplin, Missouri submitted an AWC in which the firm was censured and fined $150,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to exercise due diligence in investigating offerings before recommending them to customers. The findings stated that the firm’s WSPs did not set forth a process for investigating or approving private offerings. The firm did have a due-diligence checklist for use in reviewing private offerings, but for the offerings at issue, the firm failed to complete the checklists fully. The firm did not collect any third-party due-diligence materials regarding any of the offerings at issue and did not make any direct contact with any of the issuers. FINRA informed the firm of these failures and the firm amended its WSPs. The firm participated in private offerings but in doing so, did not adhere to its WSPs. The firm’s due-diligence files showed that it did not conduct internal reviews or obtain subscriber lists for three offerings, and the firm failed to obtain and review third-party due-diligence reports for two offerings. The firm failed to obtain a distribution list for the offering document for any offerings.

 

Stephens Inc. of Little Rock, Arkansas submitted an AWC in which the firm was censured, fined $235,000 and ordered to pay $458,747.07 in restitution to customers. The firm has paid restitution to all affected customers. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to identify and apply sales charge discounts to certain customers’ eligible purchases of UITs, resulting in customers paying excessive sales charges of approximately $458,747. The findings stated that the firm failed to establish, maintain, and enforce a supervisory system and WSPs reasonably designed to ensure customers received sales charge discounts on all eligible UIT purchases. The firm relied primarily on its registered representatives to ensure that customers received appropriate UIT sales charge discounts despite the fact that the firm did not effectively inform and train representatives and their supervisors to identify and apply such sales charge discounts.

 

U.S. Bancorp Investments, Inc. of Saint Paul, Minnesota submitted an AWC in which the firm was censured, fined $150,000 and ordered to pay $144,456.38 in restitution to customers. The firm has paid restitution to all affected customers. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to identify and apply sales-charge discounts to certain customers’ eligible purchases of UITs resulting in customers paying excessive sales charges of approximately $144,456.38. The findings stated that the firm failed to establish, maintain and enforce a supervisory system and WSPs reasonably designed to ensure that customers received sales-charge discounts on all eligible UIT purchases. Although the firm had WSPs related to UIT sales-charge discounts, the firm failed to effectively inform and train registered representatives and supervisors to ensure that representatives followed these procedures and identified and applied all applicable discounts.

 

Alton Securities Group Inc. of Alton, Illinois submitted an AWC in which the firm was censured and ordered to pay $75,000, plus interest, in partial restitution to customers. In the interest of maximizing restitution to customers, FINRA did not impose any fine after considering, among other things, the firm’s revenue and financial resources. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish, implement and maintain a supervisory system reasonably designed to ensure compliance with the securities laws. The findings stated that in particular, the firm’s supervisory system was not reasonably designed to ensure that registered representatives made suitable recommendations of complex products such as leveraged, inverse or inverse-leveraged ETFs (non-traditional ETFs), and leveraged, inverse or inverse-leveraged mutual funds (non-traditional mutual funds).

 

Bret Michael Ackerman of New York, New York submitted an AWC in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Ackerman consented to the sanction and to the entry of findings that he refused to appear and provide testimony FINRA sought during its investigation to obtain information regarding certain corporate bond transactions Ackerman executed while he was employed at a member firm.

 

Carlton Eugene Burton of Pensacola, Florida submitted an AWC in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Burton consented to the sanction and to the entry of findings that he failed to provide FINRA with documents and information during the course of its investigation into allegations that Burton misappropriated assets from an investment advisory firm where he worked.

 

Andrew Scott Corbman of Ashburn, Virginia submitted an AWC in which he was suspended from association with any FINRA member in any capacity for one month. In light of Corbman’s financial status, no monetary sanction has been imposed. Without admitting or denying the findings, Corbman consented to the sanction and to the entry of findings that he made unsuitable recommendations to customers that were inconsistent with the customers’ investment objectives and risk tolerances, and resulted in over-concentration of their liquid net worth in these investments. The findings stated that the investments exposed the customers to a risk of loss that exceeded each customer’s risk tolerance and investment objectives. The findings stated Corbman distributed a sales brochure for an alternative mutual fund to his customers that contained information that was misleading and failed to provide a sound basis for evaluating the referenced alternative mutual fund.

 

Robert Joe Cross Jr. of Rome, Georgia submitted an AWC in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Cross consented to the sanction and to the entry of findings that he failed to appear for FINRA on-the-record testimony during the course of its investigation into Cross’ outside business activities, financial reporting obligations, and whether he accepted unapproved loans from a customer while engaging in a private securities transaction.

 

Stuart Horowitz of Coral Springs, Florida submitted an AWC in which he was assessed a deferred fine of $100,000 and suspended from association with any FINRA member in any capacity for one year. Without admitting or denying the findings, Horowitz consented to the sanctions and to the entry of findings that he recommended and engaged in unsuitable trading in preferred notes of an unregistered limited partnership investment fund. The findings stated that his recommendations lacked a reasonable basis because he failed to adequately investigate red flags that the fund was not a viable investment.

 

John Joseph Labarca of Spotswood, New Jersey submitted an AWC in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Labarca consented to the sanction and to the entry of findings that he refused to provide FINRA with requested information and documents in connection with its investigation into allegations made against Labarca in a statement of claim a customer had filed.

 

Matthew Dale Maberry of Bethalto, Illinois submitted an AWC in which he was fined $10,000, suspended from association with any FINRA member in any capacity for five months and ordered to pay $38,445, plus interest, in restitution to customers. Without admitting or denying the findings, Maberry consented to the sanctions and to the entry of findings that he failed to ensure that his member firm implemented a supervisory system reasonably designed to supervise the sales activity of its registered representatives. The Disciplinary and Other FINRA Actions 17 April 2016 findings stated that Maberry was his firm’s chief executive officer (CEO) and CCO, and was solely responsible for the design and implementation of the firm’s supervisory system. The firm’s supervisory system was not reasonably designed to ensure that registered representatives made suitable recommendations of complex products such as leveraged, inverse and inverse-leveraged ETFs (non-traditional ETFs), and leveraged, inverse or inverse/leveraged mutual funds (non-traditional mutual funds). The firm failed to evidence that it conducted ongoing monitoring of customer accounts to detect problematic trends, and failed to use any exception reports or similar tools in connection with its supervision of registered representative sales activity. The firm also failed to reasonably supervise its registered representatives’ sales of non-traditional ETFs and non-traditional mutual funds. Notwithstanding guidance from FINRA, the firm sold non-traditional ETFs (as well as non-traditional mutual funds, which are subject to similar risks) to its customers, many of whom held these products for far longer than one trading session. Although the firm sold non-traditional ETFs and non-traditional mutual funds, it failed to conduct adequate due diligence on non-traditional ETFs and non-traditional mutual funds, and failed to adequately train its registered representatives on the unique risks associated with these products.

 

Bahram Mirhashemi of Newport Coast, California submitted an AWC in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Mirhashemi consented to the sanction and to the entry of findings that he churned customer accounts, engaged in excessive and unauthorized trading and made unsuitable recommendations to customers. Mirhashemi consistently spread mutual fund purchases across multiple fund families, and in so doing, failed to obtain breakpoint discounts for customers. These short-term mutual fund trades were both excessive and unsuitable, and cost the customers more than $150,000 in overall commissions. Mirhashemi also churned customers’ accounts by conducting short-term equity trades in customer accounts. Such trading was unsuitable and cost the customers more than $665,000 in overall commissions. As a result of his conduct, Mirhashemi willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and FINRA Rules 2020, 2111 and 2010. The findings also stated that Mirhashemi willfully filed untimely, false and misleading Forms U4, and willfully failed to file Forms U4 to disclose his liens, compromises with creditors and an outside business activity. The findings also included that Mirhashemi distributed materially false and misleading communications to customers.

 

Matthew Edward O’Callaghan of Upper Saddle River, New Jersey submitted an AWC in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, O’Callaghan consented to the sanction and to the entry of findings that he failed to provide FINRA with documents and information during the course of its investigation into allegations concerning O’Callaghan’s possible conversion and theft of funds related to transactions involving secondary market syndicate loan trades.

 

Harry James Poulos of Berwyn, Pennsylvania submitted an AWC in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Poulos consented to the sanction and to the entry of findings that he failed to appear for FINRA on-the-record testimony during the course of its investigation into, among other things, the conduct described on Poulos’ Uniform Termination Notice for Securities Industry Registration (Form U5), which stated that he was terminated for failing to comply with firm policy, in that he did not fully disclose information related to his approved outside business activities.

 

Wayne Anthony Schultz of Oxford, New Jersey submitted an AWC in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Schultz consented to the sanction and to the entry of findings that he failed to provide FINRA with requested documents and information during its investigation concerning certain notes that he had issued to an elderly client.

 

Robert Gerald Stein of Sudbury, Massachusetts submitted an AWC in which he was fined $5,000 and suspended from association with any FINRA member in any capacity for three months. Without admitting or denying the findings, Stein consented to the sanctions and to the entry of findings that he recommended and effected unsuitable purchases of reverse convertible notes (RCNs) totaling approximately $4 million for customers’ accounts. The findings stated that most of the customers were over the age of 60 and had modest or conservative investment objectives and risk profiles. Furthermore, all of the customers’ accounts were heavily concentrated in RCNs, with the amounts of these investments constituting a substantial portion of their net worth. Stein’s recommendations were unsuitable given the customers’ risk tolerances, investment objectives, ages and net worth.

 


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