FINRA Broker Disciplinary Action Report March 2017
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
Cadaret, Grant & Co., Inc. (CRD #10641, Syracuse, New York) and Charles Lee Deremo (CRD #713036, Apple Valley, Minnesota).
Deremo was fined of $5,000, suspended from association with any FINRA member in any capacity for 10 business days and ordered to pay $4,917.96, plus interest, in partial restitution to a customer. Without admitting or denying the findings, the firm and Deremo consented to the sanctions and to the entry of findings that the firm failed to enforce its WSPs and conduct an adequate suitability review of Deremo’s recommended investment strategy for a customer. The findings stated that the firm failed to identify that Deremo’s basis for the recommendation of a strategy for the customer may not have been suitable given the customer’s age, his investment objectives, his risk tolerance and the concentration of his investment. Moreover, the customer relied on monthly withdrawals from his variable annuity for living expenses. The findings also stated that Deremo employed a recommended strategy for a customer, which was unsuitable for the customer given his investment objective, risk tolerance, income needs and age. Deremo recommended that the customer exchange his existing variable annuity for a new variable annuity issued by another entity so that Deremo could execute a strategy wherein he would, at his discretion, move the full account balance between a precious metals fund subaccount (Precious Metals Fund) and a money market subaccount based on market factors monitored by Deremo. Specifically, Deremo planned to move the customer’s funds back and forth between the two subaccounts based on his monitoring of certain factors in the precious metals market, the most significant factor being the price of gold (the Precious Metals Strategy). At the time the customer exchanged variable annuities, the customer was 79 years old and his investment objectives were growth and income. Deremo marked the customer’s risk tolerance between moderate and high on the customer’s new account form.
CUSO Financial Services, L.P. (CRD #42132, San Diego, California)
The firm consented to the sanctions and to the entry of findings that a registered representative unsuitably solicited and sold to customers certain unit investment trusts (UITs) that invested in closed-end mutual funds that employed leverage. The findings stated that the firm, through the registered representative and the two principals who supervised him and approved his UIT transactions, failed to have a reasonable basis to recommend and approve UIT transactions sold to customers. Neither the registered representative nor the principals who approved the UIT transactions understood the potential risks of the UITs and, in particular, neither understood that the UITs might employ leverage. The firm, through the registered representative and principals, sold these UITs to customers, including some seniors, in transactions totaling $4,636,146. The customers lost approximately $443,000 on the UITs that the registered representative sold without a reasonable basis. Some of these customers indicated that they had low risk tolerances, which should have raised questions about the suitability of the UITs for them. The firm voluntarily provided restitution totaling approximately $325,000 to many of the customers who indicated that they had low or medium risk tolerances. The findings also stated that these unsuitable UIT recommendations occurred, in part, because of the firm’s lack of reasonable supervision. The firm’s supervisory system was not reasonably designed to ensure that the firm’s solicitations and sales of these UITs were suitable for customers. The firm’s WSPs directed certain principals to review the UIT transactions to determine whether the recommended transactions are suitable.
Individual Brokers Barred, Suspended, or Fined
Cyrus M. Alphonse (CRD #5087583, Newburyport, Massachusetts)
Alphonse consented to the sanctions and to the entry of findings that he failed to Disciplinary and Other FINRA Actions 11 March 2017 reasonably supervise the private securities transactions of a registered representative at his member firm. The findings stated that Alphonse did not supervise the representative’s participation with a private equity fund because he considered it an outside business activity and not private securities transactions. In addition, the transactions were not recorded on the firm’s books and records. The findings also stated that Alphonse reviewed and approved research reports the firm’s research analysts had written. However, Alphonse was not licensed to do so since he never passed the relevant qualification examination.
Christopher B. Ariola (CRD #2957096, Santa Monica, California)
Ariola was barred from association with any FINRA member in any capacity and ordered to pay a total amount of $137,993.13, plus prejudgment interest totaling $18,657.43, in restitution to customers. The sanctions were based on findings that Ariola made unsuitable recommendations to elderly retirees to invest a substantial portion of their limited retirement assets in certain high-risk gold and energy stocks. The findings stated that these recommendations were unsuitable given these customers’ financial circumstances, investment objectives and low risk tolerances, and because the recommendations resulted in the customers’ accounts being unduly concentrated in gold and energy stocks. Ariola made similar unsuitable recommendations with respect to a former customer’s retirement account that he controlled on the former customer’s behalf. As a result of his unsuitable recommendations, these customers suffered combined realized losses of $137,993.13. The findings also stated that Ariola obtained access to the former customer’s retirement account and engaged in securities trading in that account on the customer’s behalf without providing the required written notice of such outside brokerage account to his member firm or of his registered status with it to the firm that held the retirement account.
John Paul Corsi (CRD #1268728, Parma, Ohio)
Corsi was assessed a deferred fine of $20,000 and suspended from association with any FINRA member in any capacity for 20 months. Without admitting or denying the findings, Corsi consented to the sanctions and to the entry of findings that he engaged in an outside business activity without first disclosing the complete nature and scope of his involvement to his member firm in writing, in accordance with its WSPs. The findings stated that although Corsi disclosed his outside business activity to the firm, he only described his position as manager of sales and customer service, and failed to disclose his role in fundraising. The findings also stated that Corsi failed to disclose the existence of promissory notes issued by his outside business activity that he was recommending to firm customers for compensation.
Richard Gomez (CRD #4727721, Jackson Heights, New York)
Gomez was suspended from association with any FINRA member in any capacity for one year. In light of Gomez’s financial status, no monetary sanction has been imposed. Without admitting or denying the findings, Gomez consented to the sanction and to the entry of findings that he engaged in several types of misconduct in the Individual Retirement Accounts (IRAs) of three of his member firm’s customers. The findings stated that without obtaining prior written authorization from two of these customers—who are husband and wife and senior investors—and without the firm’s acceptance of the customers’ IRAs as discretionary accounts, Gomez effected discretionary trades in these customers’ IRAs. Gomez failed to discuss the trades with the customers on the dates of the transactions. The findings also stated that Gomez’s trading in these accounts was excessive. The turnover and cost-to-equity ratios far exceeded the thresholds indicating excessive trading. Further, the strategy was inconsistent with the investment objective of capital preservation and a moderate to moderately aggressive risk tolerance that the customers expected for their respective IRAs.
Michael Scott Lavolpe (CRD #5054798, Brooklyn, New York)
Lavolpe was barred from association with any FINRA member in any capacity. The sanction was based on findings that Lavolpe failed to respond to FINRA requests for documents and information as part of an examination into his allegedly unsuitable trading in a customer’s account.
Gary Saitowitz (CRD #4238395, Marietta, Georgia)
Saitowitz was assessed a deferred fine of $10,000, suspended from association with any FINRA member in any capacity for 18 months and ordered to pay $11,455, plus interest, in restitution a customer. Without admitting or denying the findings, Saitowitz consented to the sanctions and to the entry of findings that he had customers sign blank and incomplete brokerage forms, which he placed in customer files maintained as books and records at his member firm. The findings stated that some of the pre-signed forms authorized fund movement or loans from customer accounts, while others related to customer financial information the firm used to supervise whether transactions Saitowitz solicited were suitable for customers. Maintaining these pre-signed forms enhanced the risk that customers would be placed in unsuitable investments or subject to unauthorized account activity. The findings also stated that Saitowitz caused the firm to maintain inaccurate books and records in connection with sales of non-traded real estate investment trusts (REITs). The firm imposed limits on the amount of a customer’s liquid assets that could be invested in non-traded REITs. To circumvent the firm’s concentration limits, Saitowitz maintained records overstating the liquid net worth of certain customers in connection with sales of non-traded REITs. Saitowitz impeded his firm’s ability to supervise his non-traded REIT activities. The findings also included that Saitowitz recommended that four customers, including a senior citizen, allocate unsuitable amounts of their assets to non-traded REITs.
Ronald Edward Siemon (CRD #1488312, Albuquerque, New Mexico)
Siemon was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Siemon consented to the sanction and to the entry of findings that he failed to provide FINRA with requested documents during the course of its investigation relating to a customer complaint.
FINRA Securities Litigation Attorneys
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