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.
FINRA Firms & Brokers, Fined & Sanctioned
Dakota Securities International, Inc. (CRD #132700, Miami, Florida) and Bruce Martin Zipper (CRD #1019731, Miami, Florida).
Without admitting or denying the findings, the firm and Zipper consented to the sanctions and to the entry of findings that the firm failed to preserve and maintain all business-related electronic communications. The findings stated that a firm registered principal used text messages in connection with the firm’s securities-related business. The firm failed to capture the text messages, and failed to retain and preserve the text messages for the required period and in a non-rewritable, non-erasable format. Moreover, the firm and Zipper knew that the principal was using text messages to conduct firm business. Zipper, in his capacity as the firm’s chief compliance officer (CCO), was the person responsible for ensuring that the firm preserved the registered principal’s text messages. The findings also stated that the firm and Zipper failed to establish, maintain and enforce an adequate supervisory system to ensure that business-related text messages were subject to retention and supervision.
PTX Securities, LLC (CRD #7735, Plano, Texas)
The firm consented to the sanctions and to the entry of findings that it failed to conduct adequate due diligence on oil and gas private placement offerings of an issuer into, among other things, the potential impact of an adverse money judgment against the issuer. The findings stated that the firm derived the majority of its revenue from its role as a managing wholesaler broker-dealer for oil and gas private placements for the issuer.
Purshe Kaplan Sterling Investments, Inc. (CRD #35747, Albany, New York)
The firm consented to the sanctions and to the entry of findings that it failed to conduct adequate due diligence of its registered representatives’ outside business activities.
The Rockwell Financial Group, Inc. (CRD #26153, Hicksville, New York)
The firm consented to the sanctions and to the entry of findings that it failed to retain and store electronic communications. The findings stated that the firm’s WSPs required the firm’s registered representatives to copy all email correspondence to its CCO for review and retention. However, the CCO’s email account was not properly configured to retain these emails and, therefore, the firm failed to retain dozens of business-related emails to and from the firm’s representatives. Moreover, even if the CCO’s email account had been properly configured, any emails retained in his email account would not have been retained in a non-rewriteable, non-erasable format, as required.
Frank John Capuano (CRD #844182, West Springfield, Massachusetts)
Capuano consented to the sanctions and to the entry of findings that he engaged in undisclosed and unapproved private securities transactions. The findings stated that Capuano offered and sold approximately $1.1 million in notes to customers of his member firm, all of whom were his close friends and family, and purchased $55,000 of the notes for himself and his wife. Capuano received over $34,000 in commissions in connection with these transactions. Capuano did not seek or obtain approval from his firm before participating in these private securities transactions, nor did he disclose them to his firm.
Richard F. DiVenuto (CRD #2513921, Newburgh, New York)
DiVenuto consented to the sanction and to the entry of findings that he willfully made misrepresentations and omissions to an individual in connection with the individual’s purchase of an outside business entity’s stock in exchange for the intellectual property rights to a non-securities product owned by the individual. The findings stated that as a result of his conduct, DiVenuto violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and FINRA Rule 2020. The findings also stated that DiVenuto engaged in an outside business activity without providing prior written notice to his member firm. DiVenuto helped start the outside business entity, acted as one of its principals and senior managers, and received shares in the business entity as compensation.
Timothy Francis Dufresne (CRD #3237322, Bamberg, South Carolina)
Dufresne consented to the sanction and to the entry of findings that he converted at least $400,000 from customers by improperly obtaining distributions of funds from the customers’ variable annuities, depositing the funds in his business account, and using the funds for his own benefit without the customers’ authorization. The findings stated that Dufresne obtained, through distribution request forms, checks totaling more than $400,000 from customers’ variable annuity accounts. Thereafter, he endorsed each check and deposited the funds into his business account.
Gerard A. Fagnant (CRD #1886886, Westminster, Massachusetts)
Fagnant consented to the sanction and to the entry of findings that while associated with a member firm, he improperly accepted loans totaling $325,000 from firm customers with notifying or receiving approval from his firm. The findings stated that of the $325,000 loaned to Fagnant, the customers obtained $300,000 from their brokerage account. The activity resulted in the near depletion of the customers’ brokerage account. The customers wrote checks to Fagnant, which he then deposited into his personal bank account held outside of the firm. The loans were subsequently documented in a promissory note. The findings also stated that after a few months, Fagnant ceased making interest-only payments to the customer; and to date, the principal balance remains outstanding. The findings also included that Fagnant’s firm’s written policies and procedures precluded him from accepting such loans; and he falsely represented on two firm compliance questionnaires that he was in compliance with the firm’s policies and procedures concerning lending arrangements and promissory notes.
Leonard Allen Goldberg (CRD #223972, Rancho Mirage, California)
Goldberg consented to the sanction and to the entry of findings that he caused over $123,600 in losses to five customers Disciplinary and Other FINRA Actions 23 June 2016 while making over $77,900 for himself and his member firms by using discretion without the requisite written authorization in connection with 300 mutual fund and exchange traded fund (ETF) transactions to his benefit and the customers’ detriment.
John Rothrock McKinstry Jr. (CRD #1012658, St. Louis, Missouri)
McKinstry consented to the sanction and to the entry of findings that he failed to continue to provide FINRA with information and documents and failed to appear for on-the-record testimony during the course of an investigation into whether he had made unsuitable securities recommendations to customers, whether he had entered into lending arrangements on behalf of a certain 501(c)(3) charitable entity with customers through the issuance of promissory notes, whether his recommendations to his customers violated FINRA rules, and whether he made materially misleading statements and omissions in connection with lending arrangements his customers entered into with the entity, for which he serves as an unpaid director.
Chris Blaine Palkowitsh (CRD #3090435, Cumming, Georgia)
Palkowitsh consented to the sanction and to the entry of findings that he excessively traded and churned customer accounts. The findings stated that the trading in the customers’ accounts was, as evidenced by the high annualized cost-to-equity ratios and number of transactions, excessive in light of, and inconsistent with, the customers’ investment objectives and financial situations. None of the customers acquiesced or consented to the heavy level of trading in the accounts. After the customers sustained substantial losses, Palkowitsh placed their remaining equity at risk by concentrating each account in a low-priced security.
Michael David Taylor (CRD #5747559, Buffalo, New York)
Taylor consented to the sanctions and to the entry of findings that he circumvented his member firm’s annuity replacement procedures by failing to identify and submit variable annuity purchases totaling approximately $700,000 as annuity replacements, even though each purchase was funded by the sale of another annuity. The findings stated that Taylor concealed the replacement transactions from the firm’s supervisory review by transferring the proceeds from the replaced annuity to a firm money market account in the customer’s name.
Brett Ian Friedberg (CRD #5012184, New York, New York)
Friedberg was barred from association with any FINRA member in any capacity; ordered to pay $600,000, plus interest, in restitution to customers; and required to pay $36,250, plus interest, in disgorgement of commissions. The sanctions are based on findings that Friedberg recommended and sold notes in a private placement offering to customers, promising that they would earn a one-year 100 percent rate of return, without a reasonable basis to conclude that the notes were suitable for any investor. The findings stated that Friedberg did not satisfy his reasonable-basis suitability obligation before recommending the investment to his customers. Friedberg relied solely on statements his member firm had made to him and on the information contained in the offering documents, which did not constitute a reasonable investigation. Friedberg had an independent duty to investigate the security. Friedberg could not simply rely on what he was told by his superiors at the firm, even though he trusted them and understood that the firm was fully vetting the offering, and he was inexperienced in the sale of private placements.