FINRA Broker Disciplinary Action Report May 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.
Bankers & Investors Co. (CRD® #6874, Kansas City, Kansas)
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 rollover discounts to certain customers’ eligible purchases of unit investment trusts (UITs), resulting in customers paying excessive sales charges of approximately $53,000.
J.J.B. Hilliard, W.L. Lyons, LLC (CRD #453, Louisville, Kentucky)
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.
MidAmerica Financial Services, Inc. (CRD #47351, Joplin, Missouri)
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.
Alton Securities Group Inc. (CRD #39639, Alton, Illinois)
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). In addition, the firm failed to adopt and implement WSPs relating to markups and markdowns on corporate debt transactions, and failed to tailor its procedures to the firm’s business in corporate debt securities. The firm also failed to implement a reasonable system to supervise its registered representatives’ sales activities. In general, the firm’s supervision of registered representative sales activity consisted of only a daily review of a trade blotter reflecting sales the registered representatives’ made on the previous day. The blotter did not contain details relating to the transacting customer’s investment objective, risk tolerance, age or other information relevant to reviewing transactions for suitability
Lombard Securities Incorporated (CRD #27954, Baltimore, Maryland)
Without admitting or denying the allegations, the firm consented to the sanctions and to the entry of findings that it failed to establish, maintain, and enforce a supervisory system and WSPs that were reasonably designed to ensure the retention, preservation and review of email, and it failed to retain and review certain emails. Firm principals were aware that registered representatives were using outside email accounts for business-related communications, even though it was contrary to the firm’s supervisory procedures. The findings stated that the firm failed to establish, maintain, and enforce a supervisory system and WSPs reasonably designed to prevent unsuitable mutual-fund switching and to supervise the sale of leveraged, inverse and inverse-leveraged exchange-traded funds (ETFs). As a result, the firm failed to adequately supervise and failed to reject mutual fund switches despite the presence of “red flags.” The firm did not have any electronic surveillance reports or exception reports to detect mutual fund switches, but instead relied on a manual blotter review. The firm’s manual monitoring system was unreasonable and resulted in the firm’s failure to detect most, if not all, of the mutual-fund switches. The firm also failed to employ any sort of exception report or other automated surveillance to monitor holding periods for non-traditional ETFs.
Stuart Horowitz (CRD #2795019, Coral Springs, Florida)
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. Shortly after Horowitz’s association with his member firm, he began sending emails to firm personnel requesting a quick approval process for the preferred notes. Horowitz told the firm that it was urgent that there be a quick approval process so that he could begin selling the preferred notes because there may only be a short period in which they could be sold.
Harry James Poulos (CRD #810909, Berwyn, Pennsylvania)
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.
Robert Gerald Stein (CRD #869186, Sudbury, Massachusetts)
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.
Adrian Robert Barr (CRD #5002855, Dunwoody, Georgia)
Without admitting or denying the findings, Barr consented to the sanction and to the entry of findings that he failed to appear for FINRA on-the-record testimony in connection with an investigation into the circumstances surrounding his termination from his member firm for allegedly transferring self-directed client accounts to his personal representative code.
Robert Kevin Connors (CRD #1365861, Darien, Connecticut)
Without admitting or denying the findings, Connors consented to the sanctions and to the entry of findings that he participated in a private securities transaction without disclosing his participation to his member firm or obtaining its permission to do so. The findings stated that Connors sought and obtained a $200,000 loan from a customer. The loan Connors obtained was not permitted under his firm’s procedures, and he did not disclose the loan to the firm or seek its approval to enter into the loan.
Christopher Jamal Elliott (CRD #5349493, Oxon Hill, Maryland)
Without admitting or denying the findings, Elliott consented to the sanctions and to the entry of findings that he recommended unsuitable inverse and inverse-leveraged ETFs and exchange-traded notes (ETNs) (collectively, nontraditional ETFs and ETNs) transactions to his customers. The findings stated that Elliott recommended transactions in ETFs and ETNs that did not comport with the customers’ financial situations, moderate investment objectives and minimal tolerance for risk, as stated on the customers’ account profiles. Elliott held several of these non-traditional ETFs and ETNs in his customers’ accounts for periods as long as a month, despite the fact that these products were short-term trading vehicles not meant to be held for extended periods. Collectively, the customers lost approximately $24,850 because of their investments in non-traditional ETFs and ETNs.
William Robert Hambrecht (CRD #234793, San Francisco, California)
Without admitting or denying the findings, Hambrecht consented to the sanctions and to the entry of findings that he willfully failed to timely amend his Form U4 to disclose unsatisfied judgments relating to outside businesses totaling approximately $22.5 million, which were entered against him.
Steven Douglas Ridgley (CRD #4263203, Louisville, Kentucky)
Without admitting or denying the findings, Ridgley consented to the sanctions and to the entry of findings that he exercised discretion in effecting hundreds of securities transactions in customer accounts, without obtaining his customers’ prior written authorization or his member firm’s prior written approval to exercise discretion in these accounts.
Thomas Paul Schober (CRD #1058291, Rumson, New Jersey)
Without admitting or denying the findings, Schober consented to the sanction and to the entry of findings that he recommended unsuitable annuity exchanges in the accounts of two senior customers. The findings stated that the victims of Schober’s unsuitable recommendations maintained separate brokerage accounts with Schober at his member firm. One of the customers held power of attorney for the other, who suffers from dementia.
David Joseph Escarcega (CRD #4367584, Phoenix, Arizona)
Fined $52,270, plus prejudgment interest, and barred from association with any FINRA member in any capacity. The sanctions were based on findings that Escarcega intentionally or recklessly made materially false oral and written misrepresentations or omissions to customers in connection with the sales of renewable secured debentures issued by a company. The findings stated that Escarcega did not have any basis to tell his customers that the debentures were guaranteed or safe when the prospectus was replete with warnings about their high risk as an investment.
FINRA Securities Litigation Attorneys
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