FINRA Disciplinary Action Report - October 2016

Each month, 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. 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, 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.

FINRA Firms & Individuals, Fined & Sanctioned

Caldwell International Securities Corporation of Nassau, Bahamas, Greg Allen Caldwell of Austin, Texas and Paul Joseph Jacobs of Austin, Texas submitted an Offer of Settlement in which the firm was censured, fined $1,000,000, and required to pay $1,026,089.48 in restitution to customers. Greg Caldwell was assessed a deferred fine of $50,000 and barred from association with any FINRA member in any principal capacity. Jacobs was suspended from association with any FINRA member in any principal capacity for six months. Without admitting or denying the allegations, the firm, Caldwell and Jacobs consented to the sanctions and to the entry of findings that the firm, by and through one or more of its principals, including Caldwell and Jacobs, failed to develop, maintain and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably tailored to its business model, allowing many of its registered representatives to recommend an unsuitable active trading investment strategy that the representatives did not understand and which caused significant financial losses to customers while generating substantial profits for the firm, Caldwell, Jacobs and others. 

Boenning & Scattergood, Inc. of West Conshohocken, Pennsylvania submitted an AWC in which the firm was censured and fined $100,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to reasonably supervise a registered representative’s private securities transactions. The findings stated that the representative operated a registered investment advisor (RIA) that held customer accounts at broker-dealers other than the firm. The RIA was disclosed to the firm and approved as an outside business activity. Although the representative participated in securities transactions for compensation through the RIA, including transactions executed on behalf of firm customers, the firm did not record these securities transactions on the firm’s books and records or otherwise supervise these activities, as required. Moreover, the firm’s WSPs failed to address the approval process for private securities transactions or provide procedures for their ongoing supervision. The findings also stated that the firm failed to reasonably supervise consolidated reports and failed to retain consolidated reports sent to customers.

Sigma Financial Corporation of Ann Arbor, Michigan submitted an AWC in which the firm was censured, fined $100,000, and required to pay $92,053.63, plus interest, in restitution to customers. The firm paid full restitution, plus statutorily calculated interest, 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 unit investment trusts (UITs), resulting in customers paying excessive sales charges of approximately $92,053.63. 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. 

Individuals Barred, Suspended, Fined, or Sanctioned

Thomas Edward Brenner Jr. of Orrville, Ohio submitted an AWC in which he was assessed a deferred fine of $30,000, suspended from association with any FINRA member in any capacity for 16 months, and ordered to pay deferred disgorgement of commissions of $189,000, plus interest. Without admitting or denying the findings, Brenner consented to the sanctions and to the entry of findings that he engaged in two separate private placements which were rife with supervisory and substantive violations. The findings stated that in soliciting customers to purchase a private placement offering, Brenner provided customers with a private placement memorandum (PPM) for the offering and a program summary, the latter of which provided a brief summary of the offering. Both the PPM and the program summary contained several statements that claimed or implied that the investments were secured, or suggested a level of safety in the investments or reliability in forecasting returns by investors.

Joseph Ronald Butler ofBrandywine, Maryland was barred from association with any FINRA member in any capacity and ordered to pay $170,408.18, plus interest, in restitution to his former customer. The SEC affirmed the findings and sanctions following appeal of a NAC decision. The sanctions were based on findings that Butler converted an elderly customer’s funds and named himself the beneficiary of her annuity by submitting a falsified beneficiary change request form falsely representing that he was her son. The findings stated that Butler took advantage of his elderly customer, who was suffering from declining mental health and relied on him to help manage her finances. Butler, aware of her diminished capacity, withdrew funds from the customer’s bank account by writing and cashing checks payable to himself and to “cash,” made wire transfers from the customer’s account to his own, and used her accounts to pay his personal tax liabilities. Butler also took the customer to his attorney, where she ultimately executed papers naming Butler her personal representative and the primary beneficiary under her will, and giving him power of attorney.

Adam Denny Estes of Bloomington, Indiana submitted an AWC in which he was fined $15,000 and suspended from association with any FINRA member in any capacity for 15 months. Without admitting or denying the findings, Estes consented to the sanctions and to the entry of findings that he participated in private securities transactions totaling over $1.2 million without providing prior written notice to his member firm, nor did he seek or obtain the firm’s permission to participate in them. The findings stated that these transactions involved small businesses in which Estes and others, including a firm customer, invested. Estes also engaged in outside businesses that he formed with others without providing prior written notice to the firm, and were outside the course and scope of his employment with the firm. The findings also stated Estes made misrepresentations and omissions concerning the private securities transactions and outside business activities in annual firm questionnaires and other compliance documents.

Lennie Simmons Freiman of Texas submitted an Offer of Settlement in which he was assessed a deferred fine of $75,000 and barred from association with any FINRA member in any principal capacity. Without admitting or denying the allegations, Freiman consented to the sanctions and to the entry of findings that while serving as a principal of his member firm, he failed to develop, maintain and enforce a supervisory system, including WSPs, reasonably tailored to the firm’s business model, allowing many of its registered representatives to recommend an unsuitable active trading investment strategy that the representatives did not understand and which caused significant financial losses to customers while generating substantial profits for Freiman and others at the firm. The findings stated that Freiman’s firm’s WSPs designated Freiman as one of the principals responsible for reviewing the business in which the firm was engaged, and for ensuring that the firm had systems and procedures designed to detect and prevent violations of, and achieving compliance with, securities laws and regulations. Freiman, however, failed to establish and maintain a system to supervise certain activities that was reasonably designed to achieve compliance with applicable securities laws and regulations and NASD/FINRA rules. Freiman failed to monitor for, detect and, when detected, investigate multiple instances of potential misconduct by the firm’s brokers involving unsuitable active trading investment strategies, unsuitable ETFs, discretionary trading without written authorization and excessive trading/churning in multiple customer accounts across multiple branches of the firm. Freiman did not take any meaningful steps to monitor for excessive trading or churning. Even when faced with findings contained in an independent consultant’s report identifying specific instances of misconduct, Freiman failed to act to address such practices until the firm finally began calculating the cost-to-equity ratios and turnover rates in accounts. However, Freiman’s response was inadequate and the firm continued to fail to reasonably monitor for and detect excessive trading. In addition, Freiman failed to implement a reasonable supervisory system to adequately review trades for unsuitable recommendations, such as ETFs, and adequately monitor whether the firm’s representatives understood the risks and benefits of the active trading investment strategy they were recommending, nor did the firm monitor whether the representatives had done any due diligence on the recommended active trading investment strategy. As a result of the grossly inadequate supervisory system Freiman had established, firm brokers made unsuitable recommendations to customers to purchase and hold ETFs.

James Michael Griegel of Sauk Village, Illinois submitted an AWC in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Griegel consented to the sanction and to the entry of findings that in his role as treasurer of the town of Sauk Village, Illinois, he forged the signatures of Sauk Village officials on police pension fund checks made payable to himself for his own use and benefit. The findings stated that in total, Griegel converted checks totaling $21,206 from the Sauk Village Police Department Pension Fund. 

William Fredrick Kerschbaumer Jr. of New Philadelphia, Ohio submitted an AWC in which he was assessed a deferred fine of $12,500 and suspended from association with any FINRA member in any capacity for 12 months. Without admitting or denying the findings, Kerschbaumer consented to the sanctions and to the entry of findings that he signed customer names on member firm documents related to their annuity investments without the customers’ knowledge and/or authorization. The findings stated that in addition to signing the customers’ names without their knowledge and/or consent, Kerschbaumer caused the firm to maintain inaccurate books and records. Kerschbaumer also made an untrue statement to the firm in connection with the firm’s investigation of a customer complaint relating to the falsified signatures. The findings also stated Kerschbaumer misrepresented the surrender period for his customers’ variable annuity. Kerschbaumer falsely represented to the customers that their additional contribution to their variable annuity was subject to the same surrender period as their initial investment, but he did not take any steps to confirm the accuracy of this statement. In fact, the customers’ additional contribution to their variable annuity was subject to a new surrender period.

Paul George Liebezeit of Berwyn, Pennsylvania submitted an AWC in which he was fined $5,000 and suspended from association with any FINRA member in any capacity for six months. Without admitting or denying the findings, Liebezeit consented to the sanctions and to the entry of findings that he participated in a private securities transaction by recommending that potential customers invest in a fund of hedge funds away from his member firm that was not approved for sale through the firm. The findings stated that Liebezeit did not provide prior written notice of his participation in this transaction, and he did not obtain the firm’s written approval to participate in the transaction. 

Bernard G. McGee of Cazenovia, New York was barred from association with any FINRA member in any capacity and ordered to pay $237,643.25, plus interest, in restitution to a customer. The NAC imposed the sanctions following McGee’s appeal of an OHO decision. The sanctions were based on findings that McGee willfully failed to inform a customer of the more than $59,000 in commissions McGee received in connection with the customer’s purchase of a charitable gift annuity; and that McGee made an unsuitable recommendation to the customer when he proposed that the customer surrender variable annuities and purchase the charitable gift annuity. The NAC also determined that McGee engaged in undisclosed outside business activities, failed to timely update his Form U4, and made misrepresentations on his firm’s annual compliance questionnaires, but the NAC declined to impose additional sanctions on McGee for this misconduct in light of the bar it assessed for his fraud and suitability violations

Gregory Scott Taylor of Dallas, Texas submitted an Offer of Settlement in which he was assessed a deferred fine of $5,000 and suspended from association with any FINRA member in any capacity for three months. Without admitting or denying the allegations, Taylor consented to the sanctions and to the entry of findings that he engaged in unethical conduct involving an elderly customer at his member firm. The findings stated that Taylor was named the beneficiary of the customer’s bank accounts, which held more than $59,000 in funds. While associated with the firm, Taylor was named as the executor of the customer’s estate, which contained at least $2 million in assets, and given power of attorney over the customer in the event she became incapacitated. The findings also stated that, in violation of the firm’s policies and procedures, Taylor failed to disclose to his firm that he had been named the beneficiary of the customer’s bank accounts, the executor of her estate and her attorney-in-fact. Although the customer was no longer a customer of the firm when Taylor learned that she had named him the executor of her estate and her attorney, the firm’s policies and procedures prohibited Taylor from accepting a fiduciary appointment from a non-family member-related person absent firm approval. The findings also included that Taylor accepted a cash gift from the customer, which was prohibited by the firm’s policies and procedures. Approximately one month after accepting the cash gift, Taylor submitted a compliance questionnaire to the firm in which he falsely denied accepting any prohibited gifts from a firm customer within the preceding 12 months.

Thomas Leo Thesier of Mason, Michigan submitted an AWC in which he was assessed a deferred fine of $7,500 and suspended from association with any FINRA member in any capacity for six months. Without admitting or denying the findings, Thesier consented to the sanctions and to the entry of findings that he signed his customers’ names to insurance applications and other insurance-related forms, with their knowledge and authorization after they had communicated to him that it was inconvenient for them to sign the documents themselves. The findings stated that Thesier submitted falsified insurance information that enabled his customers to qualify for discounts on their insurance premiums. 

Winston Wade Turner of Tampa, Florida was barred from association with any FINRA member in any capacity. The sanction was based on findings that Turner falsified information relating to variable annuity transactions. The findings stated that Turner circumvented his member firm’s supervisory review process by misrepresenting the source of funds in variable annuity application materials in connection with exchanges by customers. Turner further circumvented his firm’s supervisory review process by lying to the firm about the source of funds for the variable annuity purchases and about the relationship between a customer and Turner’s former marketing assistant. Turner also engaged in deceptive conduct by misrepresenting his personal email addresses as the email address of his customers, by submitting documents bearing forged signatures of a customer, and by making payments to a customer from his own funds while creating the false appearance that the funds were coming from the firm. The findings also stated that Turner falsified his firm’s books and records by submitting falsified variable annuity applications, questionnaires, customer information forms, and related documents for the exchanges by customers, by submitting documents with forged signatures of a customer, and by misrepresenting his own email address as that of customers. 

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