FINRA Disciplinary Action Report August 2016

FINRA Broker Disciplinary Action Report August 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 & Brokers, Fined & Sanctioned

Foresight Investments, LLC of Northbrook, Illinois

Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it effected transactions involving restricted shares of microcap securities that should have raised “red flags” for unregistered distributions of securities or other potentially suspicious activity. The findings stated that the firm failed to adequately investigate the facts surrounding the microcap transactions in a customer’s account, missed numerous red flags, and otherwise failed to conduct the review required by its own WSPs and its obligations with respect to its anti-money laundering (AML) Compliance Program (AMLCP). The findings stated that the firm liquidated 7.8 million shares that were deposited in certificated form into one of the customer’s accounts. The value of these transactions was approximately $4.3 million. The firm failed to establish and implement an adequate supervisory system to detect and prevent violations of Section 5 of the Securities Act related to transactions of microcap securities.

Morgan Stanley Smith Barney LLC of Purchase, New York

Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to adequately supervise by following firm policies and procedures to detect and cause the reporting of potentially suspicious transactions. The findings stated that a firm client was able to kite checks between his financial management account maintained at the firm and a separate bank account maintained at a local bank, in furtherance of a fraudulent Ponzi scheme, despite his activity raising red flags identified in firm policies and procedures as being indicative of potentially suspicious activity. The firm permitted the client to write checks against uncleared funds. The client had been engaged in a fraudulent Ponzi scheme that he kept afloat in part by moving money between the firm account and the bank account. During this period of increased deposit and withdrawal activity, the firm account had almost no securities transactions. Instead, the account was used almost exclusively to transfer funds between the firm account and the bank account. The activity in the firm account triggered red flags indicative of potentially suspicious activity that were, appropriately, identified in the firm’s written AML policies and procedures that are issued to firm employees. In addition, the firm’s electronic alert system generated alerts as a result of the rapid movement of funds through the firm account and, as a result, the firm reviewed the client relationship and met with the client. The firm received what it believed was a plausible business explanation for the activity. However, the alerts and the red flags indicative of potentially suspicious activity continued. The firm again reviewed the activity in the client’s account. As a result of this review, the firm concluded that it would no longer pay the client’s checks on uncleared funds. The client’s Ponzi scheme then collapsed when he bounced several checks.

Individuals Barred or Suspended

Nathan D. Bartow of Canton, Ohio

He was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Bartow consented to the sanction and to the entry of findings that he failed to provide FINRA with requested documents and information related to an investigation into allegations that he negligently managed and converted a customer’s investment assets.

Edward Joseph Bosch Sr. of Florence, Kentucky

He was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Bosch consented to the sanction and to the entry of findings that during the course of a FINRA investigation into allegations that he converted customer funds and generated false account statements to conceal his misconduct, he refused to respond to FINRA’s request for documents and information.

Shannon Braymen of San Antonio, Texas

She was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Braymen consented to the sanction and to the entry of findings that she failed to appear and provide FINRA with on-the-record testimony during an investigation into possible net capital violations by her member firm and the potential submission of a falsified document to FINRA in connection with the investigation. (FINRA Case #2015043464401) Kevin Albert Busto (CRD #2584875, Huntington, New York) was barred from association with any FINRA member in any capacity. The sanction was based on findings that Busto failed to appear for testimony during the course of FINRA’s investigation into the circumstances leading to his termination by his member firm in connection with his activities in his personal bank accounts.

John Albert Coleman of Bethel Park, Pennsylvania.

He was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Coleman consented to the sanction and to the entry of findings that he refused to appear for FINRA on-the-record testimony during the course of its investigation into whether he had failed to disclose his involvement in an outside business activity. (FINRA Case #2016048859001) Frank Dominic Corto (CRD #2537861, York, Pennsylvania) submitted an AWC in which he was fined $10,000 and suspended from association with any FINRA member in any capacity for four months. Without admitting or denying the findings, Corto consented to the sanctions and to the entry of findings that he willfully failed to timely amend his Uniform Application for Securities Industry Registration or Transfer (Form U4) to disclose outstanding federal, state and local tax liens.

Arthur Espinoza of Port Saint Lucie, Florida

He was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Espinoza consented to the sanction and to the entry of findings that he engaged in an outside business activity without disclosing this activity to his member firm. The findings stated that Espinoza incorporated a company that he operated and obtained investors who collectively invested more than $325,000 with the company. In return for the investments, which were undocumented, Espinoza orally agreed to pay the investors an annual or semi-annual payment equaling 5.25 percent of their invested principal. Espinoza is unable to account for substantial amounts of the funds he raised from the investors, is not currently able to pay the principal back, and does not have any credible plans to do so. The findings also stated that Espinoza failed to disclose outside brokerage accounts he controlled at two third-party FINRA member firms.

Darrin Barton Farrow of Westlake, Ohio

Without admitting or denying the findings, Farrow consented to the sanctions and to the entry of findings that he participated in undisclosed outside business activities without disclosing his involvement to his member firm. The findings stated that Farrow founded an unincorporated entity that provides consulting services to the cannabis industry, and cultivates, produces and manufactures cannabis in states where such activities are legal. Farrow also formed a limited-liability company that grows cannabis and supplies it to dispensaries throughout Oregon. The findings also stated that Farrow participated in undisclosed private securities transactions with firm customers involving the sale of $1 million of membership interests in his limited-liability company by soliciting customers to invest in the company. Farrow did not disclose the sale of these membership interests to his firm and the firm did not approve them.

Brandon Daryl Gioffre of South Salem, New York

Without admitting or denying the findings, Gioffre consented to the sanction and to the entry of findings that he participated in private securities transactions without providing prior notice to his member firm. The findings stated that Gioffre received commissions totaling $100,000 for the sale of approximately $2 million of securities to purchasers, who lost their entire investments. Gioffre recommended to several people, including a customer of his firm, an investment in a private placement that was not offered through the firm. Gioffre created the false impression that the firm sanctioned the private placement by meeting with the issuer and potential investors at the firm’s offices and using his firm-issued email address to communicate with the issuer and potential investors.

John Lewis Grosso of Schwenksville, Pennsylvania

He was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Grosso consented to the sanction and to the entry of findings that he refused to appear for FINRA on-the-record testimony, and failed to produce documents and information FINRA requested during the course of its investigation into whether he submitted fabricated expense receipts for reimbursement while associated with his member firm.

Francisco Gabriel Hervella of Florida

admitting or denying the findings, Hervella consented to the sanctions and to the entry of findings that he engaged in undisclosed and unapproved outside business activities as the 50 percent owner of a British Virgin Islands (BVI) entity without providing written notice or otherwise disclosing his ownership interest to his member firm. The findings stated that Hervella acted on behalf of the BVI entity as the director of a limited partnership domiciled in New Zealand, in which his role was that of a signatory, without providing written notice or otherwise disclosing to the firm his actions, which were outside the scope of his employment at the firm. Hervella’s firm did not approve his involvement with the entities. The findings also stated that Hervella participated in an advisory capacity in undisclosed private securities transactions with institutional customers totaling more than $250 million without providing prior written notice or receiving his firm’s approval for the transactions.

Lawrence Michael LaBine of Fountain Hills, Arizona

Without admitting or denying the allegations, LaBine consented to the sanction and to the entry of findings that he made fraudulent misrepresentations and omissions of material facts to customers in connection with the sale of senior debentures (Series D) issued by a company that developed software for real estate management companies. The findings stated that LaBine was receiving regular updates about the company’s poor financial condition from senior management at the company and the company’s lead investment banker, and had arranged to receive compensation and other valuable consideration from the company such as a seat on its board of directors, for meeting Series D fundraising targets. The information about the company’s perilous financial condition and LaBine’s personal incentive to sell Series D was material to the investors, yet LaBine failed to disclose this information to these customers when he made his recommendations. The company ultimately filed for bankruptcy. LaBine also made fraudulent misrepresentations and omissions of material fact to customers in connection with the sale of securities of an entity he had formed with others in an effort to acquire the assets of the bankrupt company. As a result of his conduct, LaBine willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and FINRA Rules 2010 and 2020, and failed to comply with Section 17(a)(1) of the Securities Act. The findings also stated that LaBine made unsuitable sales of non-traded real estate investment trusts (REITs) and other alternative investments, including Series D and his entity’s securities, to customers who were elderly and/or inexperienced investors. LaBine’s recommendations of Series D, his entity’s securities, REITs and other alternative investments to the customers were unsuitable, given that the investments were illiquid, hard to value, complex and high risk.

Douglas P. Simanski of Lilly, Pennsylvania

He was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Simanski consented to the sanction and to the entry of findings that he failed to provide FINRA with documents and information related to an investigation into allegations of conversion of funds.

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