Articles Posted in Regulatory Audits & Investigations

Michael J. Breton of Massachusetts was banned from the securities industry by the SEC according to a recent InvestmentNews report.  According to the report, Mr. Breton cost his clients $1.3 million by “cherry-picking” trades – i.e., placing trades through one central account then allocating the profitable trades to himself and the losing trades to clients.  This practice reportedly continued from 2011 to July of this past year.

 

On Wednesday, the SEC filed charges against Mr. Breton and Strategic Capital Management, Mr. Breton’s firm, in federal court in Massachusetts.  Mr. Breton has agreed to plead guilty to criminal securities fraud and forfeit $1.3 million, per the report.  According to InvestmentNews, the US Attorney’s Office has agreed to recommend a maximum sentence of no more than three years.

BlackRock has been charged by the SEC with removing whistleblower incentives in their separation agreements with employees, per the SEC. According to the Commission, BlackRock’s charges stemmed from allegations that the company forced employees to waive their ability to obtain whistleblower awards.

Provisions such as those in Dodd-Frank provide for monetary compensation to those who provide information to the SEC concerning securities law violations, provided certain criteria are met. Whistleblowers may also file anonymously.

Per the SEC, over 1,000 employees signed such agreements, in which the employee was forced to waive the right to monetary recovery as a condition for receiving separation payments from the company.

As reported recently, the Financial Industry Regulatory Authority has commenced an investigation into the cross-selling activities of several broker dealers in the wake of the Wells Fargo fallout. FINRA’s objective has reportedly been to determine just how much cross selling is taking place (including promotion of products such as credit cards and loans) and what incentives are being provided to employees to engage in the conduct.

A FINRA spokesperson was quoted as saying, ““In light of recent issues related to cross-selling, FINRA is focused on the nature and scope of broker-dealers’ cross-selling activities and whether they are adequately supervising these activities by their registered employees to protect investors.”

Supervision at broker dealers is a very critical aspect of customer service. It is important that brokers and their firms are only promoting and selling products to customers that are appropriate for that customer and in the customer’s best interest. As has been shown by the Wells Fargo disaster, cross-selling incentive programs can compromise that goal by creating a conflict of interest.

Morgan 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.”

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