Articles Posted in Regulatory Audits & Investigations

businessman-silhouette-1237565-228x300Morgan Stanley broker Armando Fernandez has been suspended by the Financial Industry Regulatory Authority (FINRA) for 20 business days, according to publicly available FINRA records.  Per a Letter of Acceptance, Waiver and Consent filed with FINRA, Mr. Fernandez was accused of exercising discretion in a customer account without prior written acceptance of the account as discretionary from his member firm.  FINRA records indicate that Mr. Fernandez was also fined $7,500.

Generally, brokers are prohibited from placing trades in a customer account without speaking to the customer first, unless an account is a discretionary account.  When discretion is given by the customer to the broker, it is typically documented in a signed agreement.  When there is not such a signed agreement, and a broker executes transactions on a discretionary basis anyway, violations of FINRA Rules likely have taken place.

Customers who have been the victim of brokers improperly exercising discretion in their accounts (or violating other FINRA Rules) may be entitled to recover their losses in an action against the firm and/or broker responsible.

Brokers beware; FINRA is watching your firm, and you.  Becoming embroiled in a regulatory inquiry or investigation can become a major and costly headache and impediment to registered representatives’ business.

In January 2016, the Financial Industry Regulatory Authority (FINRA) released its annual list of priorities, showing what sorts of sweeps they may perform, and investigations they may bring, in the coming year.  brokers working in the securities industry should be aware of the priorities that are relevant to them, including those having to do with sales practice.

FINRA’s 2016 Priorities make clear that they intend a top-down review of the following areas, which may lead to firm-wide or broker specific investigations, including:

The sad truth is that the Government loves the easy kill.  It is often easier for regulators to extract settlements and punishments against smaller market participants, including brokers, traders and analysts, than the giant wire houses, because large companies can match the resources of the Government.

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), among other regulators, regularly engage in investigations to explore, deter and punish market conduct that violates the securities laws and industry rules.  While it can be hard to know what those investigations will be, the regulators like the SEC disclose regulatory priorities on an annual basis.  These examination priorities are areas where the SEC will be dedicating resources throughout 2016.

Of the 2016 Priorities announced by the SEC, the following may lead to broad investigations:

Recently, FINRA issued the 11th Regulatory and Examination Priorities Letter that addresses issues in the financial industry, if left unaddressed could adversely effect market integrity and investors. In 2016 their key points of emphasis have been identified as  (1) culture, conflicts of interest and ethics; (2) supervision, risk management and controls; and (3) liquidity. The Letter also highlights specific policies and procedures the FINRA will use to ensure that member firms are compliant with the priorities identified.

According to Richard G. Ketchum, CEO and Chairman, FINRA, “ Firm culture, ethics and conflicts of interest remain a top priority for FINRA. A firm’s culture contributes to, and is also a product of, a firm’s supervision and its approaches to identifying and managing conflicts of interest and the ethical treatment of customers. Given the significant role culture plays in how a firm conducts its business, this year the letter addresses how we will formalize our assessment of firm culture to better understand how culture affects a firm’s compliance and risk management practices.”

  • Culture, Conflicts of interest and Ethics


Per Financial Industry Regulatory Authority’s (FINRA) announcement this week, a former registered representative of Caldwell International Securities Corp., Richard Adams aka Rasheed Aree Adams, has been barred permanently from the securities industry for churning customer accounts, other securities violations, and failure to report many unsatisfied judgments and liens on his U4 Registration Form as stipulated in FINRA rules. In addition to Caldwell, he was also previously registered with PHD Capital and E1 Asset Management Inc. from 2002 to 2011.

FINRA’s investigation revealed that Adams excessively traded the accounts of two customers, between July 2013 and June 2014, resulting in profits and commissions in the excess of $57,000 for himself while resulting in losses amounting to over $37,000 for customers. The findings stated that as a result Adams willfully violated section 10(B) of the Securities Exchange Act of 1934 and rule 10B-5, willfully failed to amend Form U4, and failed to provide documents requested by FINRA. Adams neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Richard Adams is no stranger to regulatory and legal proceedings and has a reported history of customer disputes and violations. According to the CRD 13 judgement/liens, 5 customer disputes, 2 investigations and 1 regulatory disclosures have been reported against him. In 2001 there were allegations of unsuitability, unauthorized trading, and churning made against him while he was employed at The Golden Lender Financial Group, Inc, and this customer dispute was finally settled for $10,000. Currently, there is a pending FINRA investigation against Adams for potential violation of FINRA rules 2010 and 2111, and willful violations of Article V, section 2 from 2014.

FINRA has announced that it has fined Aegis Capital Corp. $950,000 for sales of unregistered penny stocks and anti-money laundering violations.    According to FINRA, this fine was also related to supervisory failures within the firm.

The firm was not the only one that FINRA appears to have come down hard upon.  Reports show that Charles D. Smulevitz and Kevin C. McKenna, who each served as the firm’s Chief Compliance and AML Compliance Offices were given 30-day and 60-day principal suspensions and fined $5,000 and $10,000, respectively, per FINRA.  Aegis’ president, Robert Eide, was also reportedly given a “time-out” in the form of a 15-day suspension for failing to disclosed more than a half-million dollars in outstanding liens, in violation of FINRA rules.

FINRA reportedly found that from April of 2009 through June of 2011, Aegis liquidated almost 4 billion shares of penny stocks which were neither properly registered nor exempted from registration with the US Securities and Exchanges Commission.  According to FINRA, Aegis committed these violations in spite of a multitude of “red flags” or warning signs that something was amiss.

“My broker dealer wants me to meet with its lawyers.”  This is the start of a FINRA registered representative’s worst nightmare.

Your heart is pounding and your head starts to race.  “Why me?” “What do they want to know?”  “What could I have done?”  “Are they going to ask me about the XYZ account?”  “I’m sure that I did everything right and by the book, didn’t I?”

If you did do something that may have been a violation of the law, FINRA Rules, or the firm’s manual, you will likely begin to think about the potential punishment (fine, suspension, termination) even before you hang up the phone or close the door to your office.  Once an investigation into your conduct starts, you are not able to leave with a “voluntary” termination, but at best would be “permitted to resign during a firm investigation.”

The Securities and Exchange Commission (SEC) announced today that is has formally charged Malcolm Segal with running a Ponzi scheme and stealing investor money from his office in Pennsylvania.  According to his BrokerCheck Report, Mr. Segal was formerly a registered stockbroker with Aegis Capital Corp. and Cumberland Advisors.  Mr. Segal reportedly was a partner in J&M Financial and the president of National CD Sales.

According to the SEC, Mr. Segal allegedly sold what he called certificates of deposit (CDs) to his brokerage customers under the false pretense that he could get them a higher rate of interest than was then available through banks.  Mr. Segal allegedly represented to his victims that his CDs were FDIC insured and risk-free. Mr. Segal reportedly defrauded at least fifty investors out of roughly $15.5 million.

As his scheme was unravelling, Mr. Segal allegedly began to steal from his customers’ brokerage accounts by falsifying fraudulent paperwork such as letters of authorization. This fake paperwork reportedly allowed Mr. Segal to withdraw funds from his customers’ accounts without them knowing.  Ultimately, in July 2014, the scheme collapsed completely.  Mr. Segal has since been barred from the securities industry by the Financial Industry Regulatory Authority.

Broker Dealer Financial Services Corp. (BDFS) based out of West Des Moines, Iowa just learned the hard way that nontraditional Exchange Traded Funds (ETFs) are risky, speculative investments and are not appropriate for all investors.

The Financial Industry Regulatory Authority (FINRA) recently fined BDFS $75,000 for 1. failing to properly supervise the sale of leveraged ETFs to its customers, 2. not properly training its sales force about the appropriate use of leveraged ETFs in customer accounts, and 3. not adequately supervising nontraditional ETF activity in customer accounts.

According the Letter of Acceptance, Waiver, and Consent, from March of 2009 to April of 2012, BDFS “recommended nontraditional ETFs to more than 200 customers” without “a reasonable basis for believing that the nontraditional ETF transactions it recommended were suitable for any investor.”  BDFS’s ETF related misconduct was said to have violated NASD Rules 2310 and 3010 along with FINRA Rules 2010 and 2111.

The Financial Industry Regulatory Authority (FINRA) has permanently barred Nicholas Hansen Harper.  Harper worked in Wells Fargo’s Topeka, Kansas branch office from 1997 through 2013 according to his BrokerCheck Report.

Per the Letter of Acceptance Waiver and Consent filed with FINRA, Harper resigned from Wells Fargo on August 7, 2013, shortly after the firm’s compliance department began to review trading in the accounts of certain of his customers.  The timing of Harper’s resignation can only serve to raise suspicions.

Presumably suspicious of Harper, in March of 2015, FINRA requested Harper provide testimony to FINRA investigators pursuant to Rule 8210.   More than one month after the request was issues, FINRA staff spoke to Harper’s attorney, who purportedly indicated that Harper would not be appearing before FINRA to provide testimony at any time.