Enforcement: Case Studies Wednesday, May 27 …...Enforcement: Case Studies Wednesday, May 27 1:45 p.m. – 3:00 p.m. Speaker Outline FINRA Department of Enforcement: 2015 Enforcement

© 2015 Financial Industry Regulatory Authority, Inc. All rights reserved.

Enforcement: Case Studies Wednesday, May 27 1:45 p.m. – 3:00 p.m. Topics:

Identify and describe the Enforcement process. Discuss and manage how your company responds to Enforcement inquiries. Describe best practices when using outside counsel.

Speakers:

J. Bradley Bennett (moderator) Executive Vice President FINRA Enforcement Bradley Bondi Partner Cahill Gordon & Reindel LLP Susan Schroeder Deputy Chief FINRA Enforcement Tanya Stern Bernotas Director and Deputy Head of Regulatory Relations The Royal Bank of Scotland (RBS)

© 2015 Financial Industry Regulatory Authority, Inc. All rights reserved. 1

Enforcement: Case Studies Wednesday, May 27 1:45 p.m. – 3:00 p.m. Speaker Outline FINRA Department of Enforcement: 2015 Enforcement Priorities

A. Fraud and Misrepresentations

1. Avenir Financial Group, CEO Michael Clements, and RRs Karim Ibrahim and Cesar Rodriguez (2015044960501)

On April 27, 2015, FINRA announced that Avenir Financial Group, its CEO Michael Clements, and registered representative Karim Ibrahim aka Chris Allen consented to an order halting further fraudulent sales of equity interests in the firm and promissory notes pending a hearing on fraud charges relating to the same offerings. The sales, which occurred from October 2013 to the present, were often to elderly customers of the firm, and the respondents' capital-raising practices were continuing. FINRA obtained the order based on its concern regarding ongoing customer harm and depletion of investor assets prior to the completion of a formal disciplinary proceeding against the firm and these individuals. FINRA also permanently barred registered representative Cesar Rodriguez from the securities industry for fraud and for improperly using $77,000 of investor funds for personal expenses in a related offering.

Avenir is a New York, NY-based full-service broker-dealer. During its three-year operation as a FINRA member firm, Avenir and its branch offices have raised over $730,000 in 16 issuances of equity or promissory notes. Most of these sales of equity and promissory notes were to elderly customers of the firm.

In its related underlying complaint, FINRA charges that Avenir, Clements and Ibrahim committed fraud in the sale of equity or promissory notes of the firm, and that Clements aided and abetted the fraud. FINRA specifically alleges that in November 2013, Avenir and Ibrahim defrauded a 92-year-old investor by failing to disclose that Avenir was in dire financial condition at the time they sold a 5 percent equity interest in the firm to him for $250,000. FINRA alleges Ibrahim was aware of the firm's financial difficulties because his unfunded margin trading on behalf of another customer led to a $196,000 margin call and a request by Clements for all Avenir representatives to raise money. FINRA further charges that Clements aided and abetted that fraud by instructing Ibrahim regarding the sale price and also on how he should characterize the offering. In the complaint, FINRA charges that in connection with that same sale, Avenir and Clements defrauded the same elderly investor by providing him with a misleading purchase agreement offering a 5 percent interest in the firm for $250,000. FINRA alleges that the document was misleading because it omitted material information that a few weeks earlier, Avenir offered ownership to other investors at materially different terms; other investors paid significantly lower prices for their ownership interest and there was no basis for the changes in price.


Avenir continues to face financial challenges and continues to attempt to raise revenue through equity offerings.

In addition, FINRA alleges that Avenir, through Rodriguez, defrauded six investors, many of whom are elderly, in an Avenir branch office Rodriguez owned. In its complaint, FINRA charges that Avenir, through Rodriguez, misrepresented that $173,800 in proceeds from purchases of equity or promissory notes would be used for general operating expenses and instead, Rodriguez improperly used $77,000 of the proceeds for personal expenses, including jewelry, shoes and toys. FINRA alleges that Clements aided and abetted this fraud because he advised Rodriguez that personal use of investor funds was acceptable.

In settling this matter, Rodriguez neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

The charges against Avenir, Clements and Ibrahim will be litigated in a disciplinary hearing.

2. Brookville Capital Partners LLC and President Anthony Lodati (2012030968601)

On March 12, 12015, FINRA ordered Brookville Capital Partners LLC, based in Uniondale, NY, to pay full restitution of more than $1 million to the victims and fined the firm $500,000 for fraud in connection with sales of a private placement offering. FINRA also barred Brookville President Anthony Lodati from the securities industry.

FINRA found in its settlement and alleged in a May 2014 complaint that Brookville and Lodati defrauded Brookville customers in connection with the sale of a private placement offering called Wilshire Capital Partners Group LLC, through which investors would purportedly have an indirect interest in pre-initial public offering shares of Fisker Automotive. The conduct took place from January 2011 to October 2011.

During the time Brookville solicited customers to invest in the offering, Lodati learned that John Mattera, an individual with a significant criminal and regulatory background, had effected transactions on behalf of Wilshire as Wilshire's CEO and Managing Director. Instead of disclosing that, among other things, Mattera had been sanctioned by the Securities and Exchange Commission (SEC) in 2010 for securities fraud and convicted of a felony in Florida in 2003, Lodati and Brookville purposely withheld this information and information about Mattera's involvement with Wilshire, and continued to solicit its customers to invest. In total, Brookville sold over $1 million worth of interests in Wilshire to 29 customers. Brookville received more than $104,000 in commissions for the sales.

In November 2011, the SEC sued Mattera and others in connection with a scheme that included Wilshire, through which they defrauded investors of $13 million. These individuals were also criminally prosecuted and convicted, and Mattera has been sentenced to prison. The SEC obtained a court order freezing all of Wilshire's assets, including the interests owned by Brookville's customers. The Brookville customers who invested in Wilshire lost their entire investment.

3. John Carris Investments and CEO George Carris (2011028647101)

On Oct. 14, 2013, FINRA obtained a TCDO by consent by John Carris Investments, LLC (JCI) and its CEO, George Carris, to immediately halt solicitations of its customers to purchase Fibrocell Science, Inc. stock without making proper disclosures. FINRA alleged that during May 2013, JCI fraudulently solicited its customers to buy Fibrocell stock, without disclosing that during the same time period, Carris and another firm principal were selling their shares.


In January 2015, a FINRA hearing panel expelled JCI and barred George Carris from the securities industry for fraud and suitability violations. The panel found that JCI and George Carris recklessly sold shares of stock and promissory notes issued by JCI's parent company using misleading statements and by omitting material facts. Andrey Tkatchenko, a registered representative, was suspended for two years and fined $10,000 for recommending the stock and promissory notes without a reasonable basis. JCI and Carris were also expelled and barred for manipulating the price of Fibrocell stock. The panel found that JCI and Carris manipulated the price of Fibrocell stock through unfunded purchases of large blocks of the stock and pre-arranged trading accomplished through reported matched limit orders. Head Trader Jason Barter was suspended for 18 months, fined $5,000 and must re-qualify to enter the securities industry for his role in the manipulation of the Fibrocell stock.

The panel found that JCI and Carris fraudulently sold stock and notes in its parent company by not disclosing its poor financial condition. According to the decision, the firm and Carris omitted material facts in the Offering documents, including omissions in the Bridge Offering documents that JCI was out of net capital compliance. JCI should have ceased operating when it was out of net capital compliance, but instead it continued to sell Bridge Offering notes to investors and used the proceeds from sales of the Offerings to cure its net cap deficiency. Carris failed to inform investors that proceeds would be used to cure JCI's net cap deficiencies. He also omitted other material information from the Offering documents regarding how proceeds would be used. For instance, Carris used proceeds from the sales of the Offerings to pay for personal expenses such as purchases at liquor stores, clothing stores and dry cleaning. Carris also failed to remit hundreds of thousands of dollars in employee payroll taxes to the United States Treasury; although during the same time period, he paid dividends to investors in the Offerings.

The panel noted in its decision that it did not find Carris credible. For example, when confronted about emails pertaining to employee payroll taxes, Carris asserted he never received or read his emails, claiming that a friend set up a personal email account for him so that Carris could "get on the PlayStation and also some other games that I was playing at the time," when in fact Carris used an iPhone to send emails.

In addition to the violations stated above, the panel found that JCI and George Carris kept inaccurate books and records, failed to remit payroll taxes for employees, maintained insufficient net capital, failed to implement its anti-money laundering policies and procedures, and failed establish and enforce a reasonable supervisory system. The panel dismissed charges against Randy Hechler, the firm's Chief Compliance Officer, related to supervisory violations that occurred during a time period unrelated to the above violations.

4. Success Trade (201234211301) (April 2013)

In April 2013, FINRA obtained a TCDO by consent to halt further fraudulent activities by Success Trade Securities and its CEO & President, Fuad Ahmed, as well as the misuse of investors' funds and assets. Ahmed and the company agreed to the TCDO, thus immediately freezing their activities. FINRA sought the TCDO based on the belief that ongoing customer harm and depletion of investor assets were likely to continue before a formal disciplinary proceeding against Success Trade Securities. At that time, FINRA also issued a complaint against Success Trade Securities and Ahmed charging fraud in the sales of promissory notes issued by the firm's parent company, Success Trade, Inc., in which Ahmed holds a majority ownership interest.

In June 2014, a FINRA Hearing Panel expelled Success Trade Securities and Barred Fuad Ahmed for the fraudulent sale of promissory notes and for creating a Ponzi scheme. The hearing panel ordered the firm and Ahmed jointly and severally to pay approximately $13.7 million in restitution to 59 investors, the majority of whom were current and former NFL and NBA players.


Following a hearing on the allegations in the complaint, the panel found that from February 2009 through March 2013, Ahmed and Success Trade sold $19.4 million in Success Trade promissory notes to investors while misrepresenting or omitting material facts. The decision notes that Ahmed and Success Trade omitted material facts from the offering documents that would have revealed that the parent company was in dire financial condition. During the hearing, Ahmed admitted that the parent company lost money every year in the last 14 years except for 2007. Success Trade and Ahmed also misrepresented to investors that the proceeds would be used for business expenses to promote and build the parent company's businesses when, in fact, the funds were used to make unsecured loans to Ahmed for personal expenses and to make interest payments to existing noteholders, thereby creating a Ponzi scheme that enabled the fraud to continue. In addition, as notes issued in 2009 and 2010 began to mature, Ahmed sought to persuade investors to convert their notes to equity or to extend the term of the notes by creating the false impression that his businesses were thriving and about to be listed on a European exchange. He also falsely led investors to believe that he was about to make a $15 million acquisition of an Australian company.

5. Brookstone Securities (2007011413501) (May 2012)

FINRA hearing panel ruled that Brookstone Securities of Lakeland, FL, and the firm's Owner/CEO Antony Turbeville and one of the firm's brokers, Christopher Kline, made fraudulent sales of collateralized mortgage obligations (CMOs) to unsophisticated, elderly and retired investors. The panel fined Brookstone $1 million and ordered it to pay restitution of more than $1.6 million to customers, with $440,600 of that amount imposed jointly and severally with Turbeville, and the remaining $1,179,500 imposed jointly and severally with Kline.

The panel also barred Turbeville and Kline from the securities industry, and barred Brookstone's former Chief Compliance Officer David Locy from acting in any supervisory or principal capacity, suspended him in all capacities for two years and fined him $25,000. The ruling resolves charges brought by FINRA in December 2009. In March 2015, the NAC upheld the panel’s findings and affirmed the sanctions.

The panel found that from July 2005 through July 2007, Turbeville and Kline intentionally made fraudulent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks associated with investing in CMOs. All of the affected customers were retired investors looking for safer alternatives to equity investments. According to the decision, Turbeville and Kline "preyed on their elderly customers' greatest fears," such as losing their assets to nursing homes and becoming destitute during their retirement and old age, in order to induce them to purchase unsuitable CMOs. By 2005, interest rates were increasing, and the negative effect on CMOs was evident to Turbeville and Kline, yet they did not explain the changing conditions to their customers. Instead, they led customers to believe that the CMOs were "government-guaranteed bonds" that preserved capital and generated 10 percent to 15 percent returns. During the two-year period, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers named in the December 2009 complaint, while those same customers lost $1,620,100.

Two of Kline's customers were elderly widows with very limited investment knowledge, who, vulnerable after their husbands' deaths, were convinced to invest their retirement savings in risky CMOs. Kline told the widows that they could not lose


money in CMOs because they were government-guaranteed bonds, and Kline further increased their risk by trading on margin. Also, the panel noted that Locy completely ignored his responsibility as chief compliance officer and "should have been a line of defense against Turbeville's and Kline's egregious conduct," but instead "he looked the other way while Turbeville and Kline traded CMO accounts that were unsuitable for their customers." The hearing panel concluded that Brookstone was responsible for Turbeville's and Kline's action. According to the decision, "the firm neither acknowledged nor accepted responsibility for the misconduct at issue in this matter. Instead, through Turbeville and Kline, it attempted to blame the customers for their own losses."

B. Conversion and Misuse of Customer Funds

1. Westor Capital Group (2012031479601) (Jan. 2013)

FINRA obtained a TCDO against Westor Capital Group, Inc. and its President, Chief Compliance Officer and Financial and Operations Principal, Richard Hans Bach, to immediately stop the further misappropriation and misuse of customer funds and securities. In addition, FINRA filed a complaint against Westor and Bach, charging them with failing to allow customers to withdraw account balances and deliver securities, misusing customer securities, failing to maintain physical possession or control of securities, and for operating an unapproved self-clearing business. In December 2013 a FINRA Panel expelled Westor Capital Group from membership, finding that it willfully violated Section 15(c) of the Exchange Act and Exchange Act Rule 15c3-1 (the Net Capital Rule), by engaging in securities transactions when it had a net capital deficiency; willfully violated Section 15(c) of the Exchange Act and Exchange Act Rule 15c3-3 (the Customer Protection Rule), by failing to perform reserve calculations and failing to obtain a required certification from a bank at which it maintained an account for the exclusive benefit of customers; willfully violated FINRA Rule 1122 by filing a false Form BD; violated NASD Rule 1017 by violating its FINRA membership agreement, by changing its clearing arrangement and failing to obtain FINRA approval for a material change in business operations; violated FINRA Rule 8210 by failing to submit timely and complete responses to requests for documents and information; violated FINRA Rule 2150 by failing to deliver securities to a customer despite repeated requests; violated NASD Rule 2330(b) and willfully violated Section 15 of the Exchange Act and Exchange Act 15c3-3 by failing to maintain physical possession or control of customers’ fully-paid securities; and violated FINRA Rule 2150 by refusing to return a free credit balance to a customer despite repeated requests for the funds. Bach was barred from the industry.

2. Jeffrey C. McClure (2014043071301) (December 2014)

FINRA barred RR Jeffrey McClure from the securities industry for converting nearly $89,000 from an elderly customer's bank account while working for Wells Fargo Advisors, LLC and an affiliated bank in Chico, California. The affiliated bank has made the customer whole for her losses.

FINRA found that from December 2012 to August 2014, McClure wrote himself 36 checks totaling $88,850 drawn on the customer's affiliated bank account without her knowledge or consent. McClure had access to the checks because the elderly customer had authorized him to pay her rent and other expenses as agreed. Instead, McClure deposited the checks into his personal bank account and used the funds for his personal expenses.


3. Fernando L. Arevalo and Jimmy E. Caballero (20130375318; 20130372958) (December 2013)

FINRA barred brokers Fernando L. Arevalo and Jimmy E. Caballero from the securities industry for wrongfully converting approximately $300,000 from an elderly widow with diminished mental capacity, and for failing to fully cooperate with FINRA's investigation. Arevalo and Caballero's misconduct occurred while employed as brokers with JPMorgan Chase Securities, LLC. Although JPMorgan was not a party to this action, it reimbursed the elderly customer for the money Caballero and Arevalo converted. FINRA's investigation found that the elderly customer maintained accounts at JPMorgan and a related bank affiliate. Between April and July 2013, the customer deposited approximately $300,000 in proceeds from the sale of two annuities into a bank account Arevalo had opened for her. The funds were then withdrawn from the account via two cashier's checks, and on the same day, Caballero deposited the money into a joint account he opened in his name and the customer's name at a different bank. When the bank questioned the deposits and required further confirmation before clearing the deposits, Arevalo picked up and drove the customer to the bank to confirm the source of the funds. Funds from the account were then depleted through numerous checks payable to Arevalo, and Caballero and Arevalo used the account debit card for personal expenses including payments on a real estate loan, car loan and various retail purchases. The customer was unaware of any withdrawals or purchases against the joint account by Arevalo or Caballero, and did not authorize the transactions. In addition, Arevalo failed to provide testimony to FINRA. Although Caballero initially provided testimony to FINRA, he subsequently refused to provide additional information that was relevant to the investigation.

4. High Risk Broker program Cross-department initiative launched in February 2013 focused on fast-tracked regulatory actions against brokers who have been identified as posing an imminent risk to investors and/or the market place. In January 2014, Enforcement formed a dedicated team to investigate high risk broker cases.

C. AML and Suspicious Trading

FINRA’s focus on AML and Section 5 compliance is closely linked to microcap fraud concerns. While a fraudster may perpetrate schemes from outside a broker-dealer (e.g., a stock promoter who does not work for the broker-dealer may engineer a microcap fraud), firms that facilitate microcap transactions and liquidations must have adequate supervisory systems tailored to their high-risk business model. Microcap or penny stocks are particularly vulnerable to market manipulation given the lack of transparency in their underlying business, lack of verifiable financial history and the opaque nature of their operations. We are particularly concerned with fraud schemes that can harm retail investors. FINRA’s focus includes, among other issues, individuals who use brokerage firms to liquidate microcap holdings, whereby the firm may be facilitating an unregistered distribution. As part of their anti-money laundering (AML) responsibilities, member firms are obligated to monitor for suspicious activity and to file Suspicious Activity Reports where warranted.


1. Brown Brothers Harriman (2013035821401)(Feb. 2014)

FINRA fined Brown Brothers Harriman & Co. (BBH) $8 million for substantial anti-money laundering compliance failures including, among other related violations, its failure to have an adequate anti-money laundering program in place to monitor and detect suspicious penny stock transactions. BBH also failed to sufficiently investigate potentially suspicious penny stock activity brought to the firm's attention and did not fulfill its Suspicious Activity Report (SAR) filing requirements. In addition, BBH did not have an adequate supervisory system to prevent the distribution of unregistered securities. BBH's former Global AML Compliance Officer Harold Crawford was also fined $25,000 and suspended for one month.

Penny stock transactions pose heightened risks because low-priced securities may be manipulated by fraudsters. FINRA found that from Jan. 1, 2009, to June 30, 2013, BBH executed transactions or delivered securities involving at least six billion shares of penny stocks, many on behalf of undisclosed customers of foreign banks in known bank secrecy havens. BBH executed these transactions despite the fact that it was unable to obtain information essential to verify that the stocks were free trading. In many instances, BBH lacked such basic information as the identity of the stock's beneficial owner, the circumstances under which the stock was obtained, and the seller's relationship to the issuer. Penny stock transactions generated at least $850 million in proceeds for BBH's customers. FINRA also found that although BBH was aware that customers were depositing and selling large blocks of penny stocks, it failed to ensure that its supervisory reviews were adequate to determine whether the securities were part of an illegal unregistered distribution. FINRA Regulatory Notice 09-05 discusses "red flags" that should signal a firm to closely scrutinize transactions to determine whether the stock is properly registered or exempt from registration, or whether it is being offered illegally. BBH customers deposited and sold penny stock shares in transactions that should have raised numerous red flags.

2. Wells Fargo Advisors and Wells Fargo Financial Network (2123412351) (December 2014)

Wells Fargo Advisors (WFA) and Wells Fargo Advisors Financial Network (WFAFN), agreed to pay a joint fine of $1.5 million for anti-money laundering (AML) failures. For nine years, the firms failed to comply with a key aspect of the anti-money laundering compliance program for broker-dealers by failing to subject approximately 220,000 new customer accounts to the required identity-verification process.

As part of the AML compliance program requirements, broker-dealers must establish

and maintain a written Customer Identification Program (CIP) that enables them to verify the identity of each customer opening a new account. Through the CIP, the broker-dealer must obtain and verify certain minimum identifying information from each customer prior to opening an account, maintain records of that identity-verification process, and provide customers with notice that information is being collected to verify their identities.


FINRA found that the firms' CIP system was deficient, as the electronic systems supporting it contained a design flaw, which persisted from 2003 to 2012. When the firms' transaction-processing system assigned customer identifiers to new customer accounts, it sometimes recycled identifiers previously assigned to accounts that had been closed. When that recycled identifier was transmitted to the firms' CIP system for verification of customer identities, the system did not recognize it as being assigned to new customer accounts, and therefore did not subject those new customers to identity verification. This resulted in the failure to conduct customer identity verification for nearly 220,000 new accounts. Further, approximately 120,000 accounts that had never been subjected to identity verification were already closed when the problem came to light.

3. Wedbush Securities (20090206344-01) (August 2014)

FINRA filed a complaint against Los Angeles-based Wedbush Securities Inc. for systemic supervisory and anti-money laundering (AML) violations in connection with providing direct market access and sponsored access to broker-dealers and non-registered market participants. During the period at issue, Wedbush was one of the securities industry's largest market access providers, which included overseas high-frequency, high-volume, algorithmic day-trading firms, and made millions of dollars from its market access business. The complaint alleges that from January 2008 through August 2013, Wedbush failed to dedicate sufficient resources to ensure appropriate risk management controls and supervisory systems and procedures. This enabled its market access customers to flood U.S. exchanges with thousands of potentially manipulative wash trades and other potentially manipulative trades, including manipulative layering and spoofing. Despite its obligations to monitor, review, and detect suspicious and potentially manipulative trades, Wedbush largely relied on its market access customers to self-monitor and self-report such trading without sufficient oversight and controls to detect "red flags." FINRA also alleges that despite receiving notice of regulatory and compliance risks associated with its market access business — including published industrywide notices, disciplinary decisions taken against other industry participants and multiple self-regulatory organization inquiries and examinations — Wedbush's regulatory risk management controls and supervisory procedures were not reasonably designed to manage such risks, and, in fact, created incentives that rewarded Wedbush compliance personnel with compensation based on market access customer trading volume. Additionally, the complaint alleges that the firm failed to establish, maintain and enforce adequate AML policies and procedures, and failed to report suspicious and potentially manipulative transactions.

4. COR Clearing LLC (2009016234701) (Dec. 2013)

FINRA fined COR Clearing $1 million for numerous failures to comply with anti-money laundering (AML), financial reporting, and supervisory obligations. COR is also ordered to retain an independent consultant to conduct a comprehensive review


of its relevant policies, systems, procedures and training; to submit proposed new clearing agreements to FINRA for approval while the consultant conducts its review; and for one year, submit certifications from its CEO and CFO stating that each has reviewed the firm's customer reserve and net capital computations for accuracy prior to submission.

COR provides clearing services for approximately 86 correspondent firms through fully disclosed clearing arrangements. As a clearing firm, COR performs order processing, settlement and recordkeeping functions for introducing broker-dealers that do not maintain back-office facilities to perform these functions. It services introducing firms with significant numbers of accounts, conducting activity in low-priced securities, as well as third-party wire activity. In its 2013 examination letter, FINRA identified microcap fraud and anti-money laundering compliance as regulatory priorities that it would focus on throughout the year because of the risk they pose to investor protection and market integrity. FINRA specified the importance that firms monitor customer accounts liquidating microcap and low-priced OTC securities to ensure that, among other things, the firm is not facilitating, enabling or participating in an unregistered distribution.

FINRA found that COR's AML surveillance program did not reasonably address the risks of its business model. These types of accounts present a higher risk of money laundering and other fraudulent activity. In addition, many of these correspondent firms had been the subject of past disciplinary action for AML-related rule violations. Notwithstanding the heightened AML risk, FINRA found that COR's surveillance program failed to identify "red flags" related to its correspondent firms and transactions by their customers.

Specifically, FINRA found that for several months in 2012, COR's AML surveillance system suffered a near-complete collapse, resulting in the firm's failure to conduct any systematic reviews to identify and investigate suspicious activity. FINRA also found that in 2009, COR implemented a "Defensive SARS" program, which the firm used to file suspicious activity reports without first completing the investigation necessary to support filing the report.

FINRA also found that COR made numerous financial reporting errors over the four-year period, including repeatedly making erroneous customer reserve and net capital computations, and filing inaccurate FOCUS reports with FINRA. In addition, FINRA found that COR had committed an extensive list of supervisory violations, including failing to establish adequate supervisory systems relating to Regulation SHO, the outsourcing of back-office functions, and the firm's funding and liquidity. Finally, FINRA found that COR failed to retain and review emails of one of its executives and failed to ensure that its president was properly registered as a principal.

5. Oppenheimer & Co. (2009018668801) (Aug. 2013)

FINRA fined Oppenheimer and Co., Inc. $1,425,000 for the sale of unregistered penny stock shares and for failing to have an AML compliance program to detect and report suspicious penny stock transactions. Oppenheimer is also required to retain an independent consultant to conduct a comprehensive review of the adequacy of Oppenheimer's penny stock and AML policies, systems and procedures.


Oppenheimer agreed to the sanctions to resolve charges first brought against the firm in a FINRA complaint in May 2013.

FINRA found that from Aug. 19, 2008, to Sept. 20, 2010, Oppenheimer, through branch offices located across the country, sold more than a billion shares of twenty low-priced, highly speculative securities (penny stocks) without registration or an applicable exemption. The customers deposited large blocks of penny stocks shortly after opening the accounts, and then liquidated the stock and transferred proceeds out of the accounts. Each of the sales presented additional "red flags" that should have prompted further review to determine whether the securities were registered. FINRA also found that the firm's systems and procedures governing penny stock transactions were inadequate, and were unable to determine whether stocks were restricted or freely tradable. Oppenheimer also failed to conduct adequate supervisory reviews to determine whether the securities were registered.

FINRA also found that Oppenheimer's AML program did not focus on securities transactions and therefore failed to monitor patterns of suspicious activity associated with the penny stock trades. In addition, Oppenheimer failed to conduct adequate due diligence on a correspondent account for a customer that was a broker-dealer in the Bahamas, and therefore a Foreign Financial Institution under the Bank Secrecy Act; the firm's failure contributed to Oppenheimer's failure to understand the nature of the customer's business and the anticipated use of the account, which was to sell securities on behalf of parties not subject to Oppenheimer's AML review. This is the second time Oppenheimer has been found to have violated its AML obligations.

6. Ameriprise Financial Services, Inc. and American Enterprise Investment Services, Inc. (2010025157301) (March 2013)

FINRA found that Ameriprise and AEIS failed to establish, maintain and enforce supervisory systems designed to review and monitor the transmittal of funds from customer accounts to third-party accounts. The firms did not have policies or procedures to detect or prevent multiple transmittals of funds going to third-party accounts, instead relying on a manual review of wire requests without the benefit of exception reports that could have helped to discern suspicious patterns. Ameriprise and AEIS also failed to adequately track or further investigate wire transfer requests that had been rejected. Ameriprise agreed to a $750,000 fine.

D. Foreign finders

Foreign finders and related foreign affiliates pose compliance risks and may elevate a firm’s AML risk level. Recent examinations and enforcement cases have uncovered problematic arrangements with foreign finders. NASD Rule 1060(b) permits member firms, in limited circumstances, to pay transaction-related compensation to non-registered foreign persons or foreign finders. Specifically, the sole involvement of the foreign finder in the member firm’s business must be the initial referral of non-U.S. customers to the firm. FINRA reminds firms that the scope of permissible business activities and the associated regulatory requirements differ between foreign finders and foreign associates. Examiners have found finders whose activities go beyond an initial referral of non-U.S. customers to the firm and who are involved in the servicing of non-U.S. customer accounts, including having trading authority over accounts, entering customer orders directly to the clearing firm’s online platform, and processing new account documents and funds transfers.


As a result of such activities, the foreign finder provisions in NASD Rule 1060(b) are not applicable, and the finder is required to be registered as a Foreign Associate pursuant to NASD Rule 1100, or in another appropriate registration category and be supervised as an associated person of the firm. Firms that engage foreign finders should ensure their procedures appropriately address the limited scope of activities permissible under such arrangements and potential risks. See Notices to Members 01-81 and 95-37.

A firm’s AML risk may be elevated by foreign finders and related foreign affiliates depending on the geographical regions involved, types of customers introduced, and products and services offered. Some of the red flags observed include customer accounts exhibiting significant account activity with very low levels of securities transactions, significant credit or debit card activity/withdrawals with very low levels of securities transactions, wire transfers to/from financial secrecy havens or high-risk geographic locations without an apparent business reason, and payment by third-party check or money transfer without an apparent connection to the customer. Relationships with foreign finders and related foreign entities have also been used to hide securities activities and payment of transaction-based compensation to previously disciplined individuals, and to engage in cross-trading for the inappropriate benefit of the finder. Prior to entering into these relationships, firms must have reasonably designed procedures to, among other things, assess and address the potential AML risks associated with the business, and monitor any subsequent activity conducted with foreign finders and related foreign entities.

1. Banorte-Ixe Securities ( 2010025241301) (Jan. 2014) FINRA fined Banorte-Ixe Securities International, Ltd., a firm that services Mexican clients investing in U.S. and global securities, $475,000 for not having adequate anti-money laundering (AML) systems and procedures in place and for failing to register approximately 200 to 400 foreign finders who interacted with the firm's Mexican clients. FINRA also suspended Banorte Securities' former AML Officer and Chief Compliance Officer, Brian Anthony Simmons, for 30 days in a principal capacity, as he was responsible for the firm's AML procedures and for monitoring suspicious activities. As a result of the firm's AML compliance failures, Banorte Securities opened an account for a corporate customer owned by an individual with reported ties to a drug cartel, and did not detect, investigate or report the suspicious rapid movement of $28 million in and out of the account. FINRA found that Banorte Securities' AML program failed in three respects. First, the firm did not properly investigate certain suspicious activities. The Bank Secrecy Act requires broker-dealers to report certain suspicious transactions that involve at least $5,000 in funds or other assets to the Financial Crimes Enforcement Network. Banorte Securities lacked an adequate system to identify and investigate suspicious activity, and therefore failed to adequately investigate and, if necessary, report activity in three customer accounts. In one example, it failed to adequately vet a corporate customer in Mexico who deposited and withdrew a substantial amount of money within a short period of time—$25 million in a single month—a "red flag" for suspicious activity. A few weeks later, the same customer transferred $3 million into and out of another corporate account via two wire transfers two and a half weeks apart. Had Banorte Securities conducted a simple Google search in response to the suspicious movement of funds, it would have learned that one of the owners of the corporate customer had been arrested by Mexican authorities in February 1999 for alleged ties to a Mexican drug cartel. Secondly, Banorte Securities did not adopt AML procedures adequately tailored to its business, relying instead on off-the-shelf procedures that were not customized to identify the unique risks posed by opening accounts, transferring funds and effecting securities transactions for customers located in Mexico, a high-risk jurisdiction for


money laundering, or the risks that arose from the firm's reliance on foreign finders. Third, Banorte Securities did not fully enforce its AML program as written.

In addition, FINRA found that from January 1, 2008, to May 9, 2013, Banorte Securities failed to register 200 to 400 foreign finders. The firm's Mexican affiliates employed foreign finders who not only referred customers to Banorte Securities but also performed various activities requiring registration as an associated person, including discussing investments, placing orders, responding to inquiries, and in some instances, obtaining limited trading authority over customer accounts. The firm had previously registered individuals performing the same functions prior to July 2006.

2. Monex Securities Inc. (2011025617702) (December 2014)

FINRA ordered Monex Securities Inc. to pay $1,100,000 in disgorgement of commissions, plus interest, obtained by unregistered foreign individuals who sold securities on the firm's behalf. FINRA also fined Monex $175,000 for failing to register the foreign representatives and for related supervisory deficiencies over a period of two and a half years. Additionally, Monex's President and Chief Compliance Officer, Jorge Martin Ramos Landero (Ramos), was suspended from acting in a principal capacity for 45 days and fined $15,000.

FINRA's rules require any associated individual engaged in the investment banking or securities business to be registered under the appropriate category of registration and the individual must pass the appropriate qualification examination. FINRA found that Ramos executed an agreement on behalf of Monex with its parent company in Mexico that permitted numerous employees to conduct securities business on Monex's behalf by, among other things, collecting client information needed to open accounts, making investment recommendations to clients and transmitting orders. Monex paid these individuals transaction-related compensation for these efforts. None of these individuals, however, was registered in any capacity with FINRA. Ramos and Monex also failed to establish, maintain and enforce supervisory systems and written procedures to ensure compliance with applicable securities laws and regulations.

E. Complex Products and Alternative Investments

1. Reasonable Basis Suitability

a. David Lerner Associates, Inc. and David E. Lerner (2009020741901) (Oct. 2012)

FINRA ordered David Lerner Associates, Inc. (DLA) to pay approximately $12 million in restitution to affected customers who purchased shares in Apple REIT Ten, a non-traded $2 billion Real Estate Investment Trust (REIT) DLA sold, and to customers who were charged excessive markups. As the sole distributor of the Apple REITs, DLA solicited thousands of customers, targeting unsophisticated investors and the elderly, selling the illiquid REIT without performing adequate due diligence to determine whether it was suitable for investors. To sell Apple REIT Ten, DLA also used misleading marketing materials that presented performance results for the closed Apple REITs without disclosing to customers that income from those REITs was insufficient to support the distributions to unit owners. FINRA also fined DLA more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) it sold over a 30 month period, and for related supervisory violations.


In addition, FINRA fined David Lerner, DLA's founder, President and CEO, $250,000, and suspended him for one year from the securities industry, followed by a two-year suspension from acting as a principal. David Lerner personally made false claims regarding the investment returns, market values, and performance and prospects of the Apple REITs at numerous DLA investment seminars and in letters to customers. To encourage sales of Apple REIT Ten and discourage redemptions of shares of the closed REITs, he characterized the Apple REITs as, for example, a "fabulous cash cow" or a "gold mine," and he made unfounded predictions regarding a merger and public listing of the closed Apple REITs, which he inappropriately claimed would result in a "windfall" to investors. FINRA also sanctioned DLA's Head Trader, William Mason, $200,000, and suspended him for six months from the securities industry for his role in charging excessive muni and CMO markups. The sanctions resolve a May 2011 complaint (amended in December 2011) as well as an earlier action in which a FINRA hearing panel found that the firm and Mason charged excessive muni and CMO markups.

b. ETFs:

In May 2012, FINRA sanctioned Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities. ETFs that employ optimization strategies using synthetic derivatives can expose individual investors to the risk of significant tracking errors. In other words, the performance of the ETF may differ from that of the underlying benchmark during times of stress or volatility in unanticipated ways. These risks can be exacerbated when the ETFs employ significant leverage. The firms were fined more than $7.3 million and required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases.

Wells Fargo (20090191139) (May 2012) – $2.1 million fine and $641,489 in restitution

Citigroup (20090191134) (May 2012) – $2 million fine and $146,431 in restitution

Morgan Stanley (20090181611) (May 2012) – $1.75 million fine and $604,584 in restitution

UBS (20090182292) (May 2012) – $1.5 million fine and $431,488 in restitution

ETFs are typically registered unit investment trusts (UITs) or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market.

FINRA found that from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding


the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms' registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile. Leveraged and inverse ETFs have certain risks not found in traditional ETFs, such as the risks associated with a daily reset, leverage and compounding. Accordingly, investors were subjected to the risk that the performance of their investments in leveraged and inverse ETFs could differ significantly from the performance of the underlying index or benchmark when held for longer periods of time, particularly in the volatile markets that existed during January 2008 through June 2009. Despite the risks associated with holding leveraged and inverse ETFs for longer periods in volatile markets, certain customers of these firms held leveraged and inverse ETFs for extended time periods during January 2008 through June 2009.

c. J.P. Turner (20110260985010) (Dec. 2013)

J.P. Turner & Co., L.L.C. ordered to pay $707,559 in restitution to 84 customers for sales of unsuitable leveraged and inverse ETFs and for excessive mutual fund switches. FINRA found that J.P. Turner failed to establish and maintain a reasonable supervisory system and instead, supervised leveraged and inverse ETFs in the same manner that it supervised traditional ETFs. The firm also failed to provide adequate training regarding these ETFs. J.P. Turner also allowed its registered representatives to recommend these complex ETFs without performing reasonable diligence to understand the risks and features associated with the products. As a result, many J.P. Turner customers held leveraged and inverse ETFs for several months. J.P. Turner also failed to determine whether the ETFs were suitable for at least 27 customers, including retirees and conservative customers, who sustained collective net losses of more than $200,000.

In addition, J.P. Turner engaged in a pattern of unsuitable mutual fund switching. Mutual fund shares are typically suitable as long-term investments and are not proper vehicles for short-term trading because of the transaction fees and commissions incurred from repeated buying and selling of mutual fund shares. J.P. Turner failed to establish and maintain a reasonable supervisory system designed to prevent unsuitable mutual fund switching and lacked sufficient procedures to adequately monitor for trends or patterns involving mutual fund switches. During the relevant period, despite the presence of several red flags, J.P. Turner failed to reject any of the more than 2,800 mutual fund switches that appeared on the firm's switch exception reports. As a result, 66 customers paid commissions and sales charges of more than $500,000 in unsuitable mutual fund switches.


d. Stifel Nicholas and Century Securities (2012034576901 and 2011025493401) (Jan. 2014)

FINRA ordered Stifel, Nicolaus & Company, Inc. and Century Securities Associates, Inc. – to pay combined fines of $550,000 and a total of nearly $475,000 in restitution to 65 customers in connection with sales of leveraged and inverse exchange-traded funds (ETFs). Stifel and Century are affiliates and are both owned by Stifel Financial Corporation.

FINRA found that between January 2009 and June 2013, Stifel and Century made unsuitable recommendations of non-traditional ETFs to certain customers because some representatives did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs; nonetheless, Stifel and Century allowed the representatives to recommend them to retail customers. Customers with conservative investment objectives who bought one or more non-traditional ETFs based on recommendations made by the firms' representatives, and who held those investments for longer periods of time, experienced net losses.

FINRA also found that Stifel and Century did not have reasonable supervisory systems in place, including written procedures, for sales of leveraged and inverse ETFs. Stifel and Century generally supervised transactions in leveraged and inverse ETFs in the same manner that they supervised traditional ETFs, and neither firm created a procedure to address the risk associated with longer-term holding periods in the products. Further, both firms failed to ensure that their registered representatives and supervisory personnel obtained adequate formal training on the products before recommending them to customers.

Stifel agreed to pay a fine of $450,000 and to make restitution of nearly $340,000 to 59 customers. Century agreed to pay a fine of $100,000 and to make restitution of more than $136,000 to six customers.

2. Supervision

a. LPL Financial LLC (2013035109701) On May 6, 2015, FINRA announced that it has censured LPL Financial LLC and fined it $10 million for broad supervisory failures in a number of key areas, including the sales of non-traditional exchange-traded funds (ETFs), certain variable annuity contracts, non-traded real estate investment trusts (REITs) and other complex products, as well as its failure to monitor and report trades and deliver to customers more than 14 million trade confirmations. In addition to the fine, FINRA ordered LPL to pay approximately $1.7 million in restitution to certain customers who purchased non-traditional ETFs. The firm may pay additional compensation to ETF purchasers pending a review of its ETF systems and procedures.

FINRA found that, at various times spanning multiple years, LPL failed to supervise sales of certain complex structured products, including ETFs, variable annuities and non-traded REITs. With regard to non-traditional ETFs, the firm did not have a system to monitor the length of time that customers held these securities in their accounts, did not enforce its limits on


the concentration of those products in customer accounts, and failed to ensure that all of its registered representatives were adequately trained on the risks of the products. Also, LPL failed to supervise its sales of variable annuities, in some instances permitting sales without disclosing surrender fees, and in connection with certain mutual fund "switch" transactions, it used an automated surveillance system that excluded these trades from supervisory review. Additionally, LPL failed to supervise non-traded REITs by, among other things, failing to identify accounts eligible for volume sales charge discounts.

FINRA also found that LPL's systems to review trading activity in customer accounts were plagued by multiple deficiencies. For example, LPL used a surveillance system that failed to generate alerts for certain high-risk activity, including low-priced equity transactions, actively traded securities and potential employee front-running. The firm used a separate, but flawed, automated system to review its trade blotter that failed to provide trading activity past due for supervisory review. LPL failed to deliver over 14 million confirmations for trades in 67,000 customer accounts. In addition, due to coding defects that remained undetected for nearly six weeks, LPL's anti-money laundering surveillance system failed to generate alerts for excessive ATM withdrawals and ATM withdrawals in foreign jurisdictions. FINRA also found that LPL failed to report certain trades to FINRA and the MSRB, and failed to ensure it provided complete and accurate information to FINRA and to federal and state regulators concerning certain variable annuity transactions.

FINRA further found that LPL failed to reasonably supervise its advertising and other communications, including its registered representatives' use of consolidated reports. LPL did not monitor the creation or use of consolidated reports, and failed to ensure that these reports reflected complete and accurate information.

In settling this matter, LPL neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

b. RBC Capital Markets, LLC (2010022918701) (April 2015) On April 23, 2015, FINRA announced that it has ordered RBC Capital Markets to pay a $1 million fine and approximately $434,000 in restitution to customers for supervisory failures resulting in sales of unsuitable reverse convertibles. Reverse convertibles are interest-bearing notes in which repayment of principal is tied to the performance of an underlying asset, such as a stock or basket of stocks. Depending on the specific terms of the reverse convertible, an investor risks sustaining a loss if the value of the underlying asset falls below a certain level at maturity or during the term of the reverse convertible. In February 2010, FINRA issued Regulatory Notice 10-09 specific to reverse convertibles, emphasizing the need for firms to perform a suitability analysis in connection with sales of this complex product. FINRA found that RBC failed to have supervisory systems reasonably designed to identify transactions for supervisory review when reverse convertibles were sold to customers, in violation of FINRA's rules as well as the firm's own suitability guidelines. RBC established suitability guidelines for the sale of reverse convertibles setting specific criteria for customer investment objectives, annual income, net worth, liquid net worth and investment experience. Consequently, the firm failed to detect the sale by 99


of its registered representatives of 364 reverse convertible transactions in 218 accounts that were unsuitable for those customers. The customers incurred losses totaling at least $1.1 million. RBC made payments to numerous customers pursuant to the settlement of a class action lawsuit; FINRA ordered restitution to the remainder of affected customers.

c. Oppenheimer & Co. (2009017408102) (March 2015) FINRA fined Oppenheimer & Co. Inc. $2.5 million and ordered the firm to pay restitution of $1.25 million for failing to supervise Mark Hotton, a former Oppenheimer broker who stole money from his customers and excessively traded their brokerage accounts. FINRA permanently barred Mark Hotton from the securities industry in August 2013.

FINRA found that Oppenheimer failed to supervise Hotton in multiple respects. First, Oppenheimer failed to adequately investigate Hotton prior to hiring him, even though FINRA records showed that he was subject to 12 reportable events, including criminal charges and seven customer complaints. The firm also failed to place Hotton under heightened supervision despite learning, shortly after Hotton joined the firm, that his business partners had sued him for defrauding them out of several million dollars. Additionally, Oppenheimer failed to respond to "red flags" in correspondence and wire transfer requests demonstrating that Hotton was wiring funds from Oppenheimer customer accounts to entities that he owned or controlled. This allowed Hotton to transfer more than $2.9 million from those customers' accounts. Finally, Oppenheimer failed to adequately supervise Hotton's trading of his customers' accounts despite the fact Oppenheimer's surveillance analysts detected Hotton was trading the accounts at presumptively excessive levels.

In addition, FINRA found that Oppenheimer failed to make more than 300 required filings to FINRA about some of its brokers in a timely manner. On average, these filings were 238 days late; and thus, the investing public and other broker-dealers were not timely made aware of serious allegations made against Oppenheimer's registered representatives, including Hotton. Also, during the course of FINRA's investigation, Oppenheimer repeatedly failed to provide timely responses to FINRA requests for information and documents.

Oppenheimer has paid more than $6 million to resolve customer arbitration claims related to its supervision of Hotton. FINRA ordered $1.25 million in restitution to 22 additional customers who suffered losses but had not filed arbitration claims.

d. Berthel Fisher and Securities Management & Research (2012032541401) (Feb. 2014)

FINRA fined Berthel Fisher & Company Financial Services, Inc. and its affiliate, Securities Management & Research, Inc., a combined $775,000 for supervisory deficiencies, including Berthel Fisher's failure to supervise the sale of non-traded real estate investment trusts (REITs), and leveraged and inverse exchange-traded funds (ETFs). As part of the settlement, Berthel Fisher must retain an independent consultant to improve its supervisory procedures relating to its sale of alternative investments. FINRA found that from January 2008 to December 2012, Berthel Fisher had inadequate supervisory systems and written procedures for sales of


alternative investments such as non-traded REITs, managed futures, oil and gas programs, equipment leasing programs, and business development companies. In some instances, the firm failed to accurately calculate concentration levels for alternative investments, thus, the firm did not correctly enforce suitability standards for a number of the sales of these investments. Berthel Fisher also failed to train its staff on individual state suitability standards, which is part of the suitability review, for certain alternative investment sales. FINRA also found that from April 2009 to April 2012, Berthel Fisher did not have a reasonable basis for certain sales of leveraged and inverse ETFs. The firm did not adequately research or review non-traditional ETFs before allowing its registered representatives to recommend them to customers, and failed to provide training to its sales force regarding these products. The firm also failed to monitor the holding periods of these investments by customers, resulting in some instances in customer losses.

e. LPL Financial LLC (2011027170901) (March 2014)

FINRA fined LPL Financial LLC $950,000 for supervisory deficiencies related to the sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures and other illiquid pass-through investments. As part of the sanction, LPL must also conduct a comprehensive review of its policies, systems, procedures and training, and remedy the failures.

Many alternative investments, such as REITs, set forth concentration limits for investors in their offering documents. In addition, certain states have imposed concentration limits for investors in alternative investments. LPL also established its own concentration guidelines for alternative investments. However, FINRA found that from January 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of alternative investments that violated these concentration limits. At first, LPL used a manual process to review whether an investment complied with suitability requirements, relying on information that was at times outdated and inaccurate. The firm later implemented an automated system for review, but that database contained flawed programming and was not updated in a timely manner to accurately reflect suitability standards. LPL also did not adequately train its supervisory staff to analyze state suitability standards as part of their suitability reviews of alternative investments.

f. Wells Fargo (2008014350501) (June 2013) and Banc of America (2008014763601) (June 2013)

FINRA fined the two firms a total of $2.15 million and ordered the firms to pay more than $3 million in restitution to customers for losses incurred from unsuitable sales of floating-rate bank loan funds. FINRA ordered Wells Fargo Advisors, LLC, as successor for Wells Fargo Investments, LLC, to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customers. FINRA ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated, as successor for Banc of America Investment Services, Inc., to pay a fine of $900,000 and to reimburse approximately $1.1 million in losses to 214 customers.


Floating-rate bank loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid. FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds. The customers were seeking to preserve principal, or had conservative risk tolerances, and brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for the customers. FINRA also found that the firms failed to train their sales forces regarding the unique risks and characteristics of the funds, and failed to reasonably supervise the sales of floating-rate bank loan funds.

g. Morgan Stanley & Co. (2008015963801) (Jan. 2012)

FINRA fine Morgan Stanley $600,000 for failing to have a reasonable supervisory system and procedures in place to notify supervisors whether structured product purchases complied with the firm’s internal guidelines related to concentration (the size of an investment in relation to the customer’s liquid net worth) and minimum net worth. A sampling of structured product transactions revealed at least 14 unsuitable transactions for 8 customers. Prior to settlement with FINRA (and as stated in the AWC) the firm entered into settlements with these customers.

h. Merrill Lynch (2010022011901) (May 2012)

From approximately January 1, 2006 through March 1, 2009, Merrill Lynch failed to have a reasonable supervisory system that would flag for supervisors on an automated exception basis potentially unsuitable concentration levels in structured products in customer accounts, in violation of NASD Conduct Rules 3010 and 2110, for the time period from January 1, 2006 to December 14, 2008, and NASD Conduct Rule 3010 and FINRA Rule 2010, for the time period from December 15, 2008 to March 1, 2009.

F. Research Reports and Material Non-Public Information

1. Toys”R”Us IPO FINRA fined 10 firms a total of $43.5 million for allowing their equity research analysts to solicit investment banking business and for offering favorable research coverage in connection with the 2010 planned initial public offering of Toys"R"Us. FINRA fined the following firms.

Barclays Capital Inc. – $5 million Citigroup Global Markets Inc. – $ 5million Credit Suisse Securities (USA), LLC – $5 million Goldman, Sachs & Co. – $5 million JP Morgan Securities LLC – $5 million Deutsche Bank Securities Inc. – $4 million Merrill Lynch, Pierce, Fenner & Smith Inc. – $4 million Morgan Stanley & Co., LLC – $4 million


Wells Fargo Securities, LLC – $4 million Needham & Company LLC – $2.5 million

In April 2010, Toys"R"Us and its private equity owners (sponsors) invited these 10 firms to compete for a role in Toys"R"Us' planned IPO. FINRA found that each of the 10 firms used its equity research analyst as part of its solicitation for a role in the IPO. Specifically, Toys"R"Us asked equity research analysts from each of the 10 firms to make separate presentations to Toys"R"Us' management and sponsors for the purpose of ensuring that the analysts' views on key issues, including valuation factors, were aligned with the views expressed by the firms' investment bankers. Each firm understood that the performance of their analysts at the presentations would be a key factor in determining whether the firm received an underwriting role in the IPO. These presentations took place during the solicitation period on May 5, 2010. As detailed in the settlement documents, each of the firms implicitly or explicitly at these meetings or in follow-up communications offered favorable research coverage in return for a role in the IPO. For example, certain analysts voiced a positive outlook on the company and its potential IPO during their May 5 presentations. All of the firms except for Needham provided the valuation to Toys"R"Us and its sponsors, which sought the combined view of research and investment banking on key valuation factors. Throughout the course of the solicitation period, Toys"R"Us made clear to the firms that the purpose of these requests was to vet the analyst's views to determine their consistency with the valuation provided by its investment bankers. In addition, FINRA found that six of the 10 firms — Barclays, Citigroup, Credit Suisse, Goldman Sachs, JP Morgan and Needham — had inadequate supervisory procedures related to research analyst participation in investment banking pitches. Toys"R"Us and its sponsors offered each of the 10 firms various roles in the IPO but it eventually decided not to proceed with the offering.

2. Citigroup Global Markets, Inc. (2013036054901) (November 2014) FINRA fined Citigroup Global Markets, Inc. $15 million for failing to adequately supervise communications between its equity research analysts and its clients and Citigroup sales and trading staff, and for permitting one of its analysts to participate indirectly in two road shows promoting IPOs to investors. FINRA found that from January 2005 to February 2014, Citigroup failed to meet its supervisory obligations regarding the potential selective dissemination of non-public research to clients and sales and trading staff. During this period, Citigroup issued approximately 100 internal warnings concerning communications by equity research analysts. However, when Citigroup detected violations involving selective dissemination and client communications, there were lengthy delays before the firm disciplined the research analysts and the disciplinary measures lacked the severity necessary to deter repeat violations of Citigroup policies. One example of Citigroup's failure to supervise certain communications by its equity research analysts involved "idea dinners" hosted by Citigroup equity research analysts that were also attended by some of Citigroup's institutional clients and sales and trading personnel. At these dinners, Citigroup research analysts discussed stock picks, which, in some instances, were inconsistent with the analysts' published research. Despite the risk of improper communications at these events, Citigroup did


not adequately monitor analyst communications or provide analysts with adequate guidance concerning the boundaries of permissible communications. In another example, FINRA found that an analyst employed by a Citigroup affiliate in Taiwan selectively disseminated research information concerning Apple Inc. to certain clients, which was then selectively disseminated to additional clients by a Citigroup equity sales employee. Moreover, FINRA found that, in 2011, a Citigroup senior equity research analyst assisted two companies in preparing presentations for investment banking road shows. Between 2011 and 2013, Citigroup did not expressly prohibit equity research analysts from assisting issuers in the preparation of road show presentation materials. 3. Kenneth Ronald Allen (2012033432301) (July 2014) FINRA barred Kenneth Ronald Allen, a former equity trader at First New York Securities L.L.C., from the securities industry for trading Japanese securities on the basis of material, non-publicized information that he received from a corporate insider. FINRA's investigation found that in September 2010, Allen placed orders using a firm proprietary trading account from New York City to short sell shares of Tokyo Electric Power Company Inc. (TEPCO), which is listed on the Tokyo Stock Exchange. Allen created a short position in TEPCO shares while he was in possession of material, non-publicized information that TEPCO was close to announcing a secondary public offering of its securities. Allen obtained the material, non-publicized information from a consultant whose source was a Tokyo-based employee of Nomura Securities Co. Ltd., a large Japanese broker-dealer, which underwrote the TEPCO offering. After receiving the inside information, Allen traded in TEPCO shares between September 15, 2010, and September 28, 2010. TEPCO publicly announced the secondary offering on September 29, 2010, and the market price for its shares declined. Allen covered the short position after the announcement, realizing a profit of approximately $206,000. FINRA found that Allen's conduct violated FINRA Rules to observe high standards of commercial honor and just and equitable principles of trade.


4. David Gutman/John Tyndall (2012033227402) (Gutman – Dec. 2013)

(Tyndall – Jan. 2014)

FINRA barred David Michael Gutman, a Vice President in the conflicts office of J.P. Morgan Securities, LLC, and Christopher John Tyndall, a former registered representative at Meyers Associates, L.P., from the securities industry for their roles in an insider trading scheme. Gutman and Tyndall were longtime close personal friends. FINRA's investigation found that Gutman improperly shared material, non-public information with Tyndall during conversations that took place between March 2006 to October 2007 regarding at least 15 pending corporate merger and acquisition transactions. Gutman learned about the pending merger transactions through his work in J.P. Morgan's conflicts office, which reviews all investment banking transactions for potential conflicts of interest for the firm. Tyndall then used the information to trade ahead of at least six of the corporate announcements using personal and family accounts over nearly a two-year period, and also recommended the stocks to his customers and friends. Gutman consented to the entry of FINRA's findings that he violated NASD Rule 2110 in failing to comply with his obligation to observe high standards of commercial honor and just and equitable principles of trade. Tyndall consented to the entry of FINRA's findings that he violated NASD Rules 2110 and 2120, and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder for his role in the scheme.

5. Goldman, Sachs & Co. (2009019301201) (April 2012)

FINRA fined Goldman, Sachs & Co. $22 million for failing to supervise equity research analyst communications with traders and clients and for failing to adequately monitor trading in advance of published research changes to detect and prevent possible information breaches by its research analysts. The Securities and Exchange Commission (SEC) today announced a related settlement with Goldman. Pursuant to the settlements, Goldman will pay $11 million each to FINRA and the SEC.

In 2006, Goldman established a business process known as "trading huddles" to

allow research analysts to meet on a weekly basis to share trading ideas with the firm's traders, who interfaced with clients and, on occasion, equity salespersons. Analysts would also discuss specific securities during trading huddles while they were considering changing the published research rating or the conviction list status of the security. Clients were not restricted from participating directly in the trading huddles and had access to the huddle information through research analysts' calls to certain of the firm's high priority clients. These calls included discussions of the analysts' "most interesting and actionable ideas."

Trading huddles created the significant risk that analysts would disclose material non-

public information, including, among other things, previews of ratings changes or changes to conviction list status. Despite this risk, Goldman did not have adequate controls in place to monitor communications in trading huddles and by analysts after the huddles.

Goldman did not adequately review discussions in the trading huddles to determine

whether an equity research analyst may have previewed an upcoming ratings


change. For example, an analyst said of a particular company in a trading huddle in 2008 that "we expect companies with consumer and small business exposure to be under pressure in the current environment, including [the company]." The next day, the analyst sought and received approval to downgrade the company from "neutral" to "sell," and to add the stock to Goldman's conviction sell list. Goldman published an equity research report making these changes that same day. Goldman also failed to establish an adequate system to monitor for possible trading in advance of research rating or conviction list changes in employee or proprietary trading, institutional customer, or market-making and client-facilitation accounts. Accordingly, Goldman failed to identify and adequately investigate increased trading in proprietary accounts in advance of the addition of securities to the firm's conviction list, certain transactions effected in an account in advance of changes in published research that warranted review based on their size or profitability and/or atypical trading for that account, and certain spikes in trading volume that immediately preceded the addition of stocks to the firm's conviction list.

G. Trade Execution and Pricing

1. John Thomas Financial (2012033467301) (January 2015):

A FINRA hearing panel expelled John Thomas Financial (JTF), of New York, NY, and barred its Chief Executive Officer, Anastasios "Tommy" Belesis, from the securities industry for violations in connection with the sale of America West Resources, Inc. (AWSR) common stock, including trading ahead of customers' orders, recordkeeping violations, violating just and equitable principles of trade, and for providing false testimony. The panel also jointly and severally ordered JTF and Belesis to pay $1,047,288, plus interest, to customers. Additionally, JTF and Belesis were suspended for two years and jointly and severally fined $100,000, and JTF's Chief Compliance Officer Joseph Castellano was suspended for one year and fined $50,000, for harassing and intimidating registered representatives. The panel dismissed charges alleging fraud, best execution violations, failure to follow customer orders, making misrepresentations to customers and failure to supervise. Charges were also dismissed against Ronald Cantalupo, Regional Managing Director; Michele Misiti, Branch Office Manager; and John Ward, trader. The ruling resolves charges brought by FINRA's Department of Enforcement in April 2013. On Feb. 23, 2012, the price of AWSR common stock spiked approximately 600 percent, opening at 28 cents per share, peaking at $1.80 per share and eventually closing the day at $1.29 per share. That same day, JTF sold 855,000 shares, the majority of its proprietary position in AWSR, reaping proceeds of more than $1 million. The panel found that JTF and Belesis traded ahead of 14 JTF customers who tried to sell their positions in AWSR, and had profited while customers who had tried to sell AWSR stock had been unable to do so. The decision noted, however, that JTF did not intentionally hold customer orders but instead, JTF brokers tried to enter the orders but were unsuccessful in their attempts. FINRA's rule requires the firm to execute those orders at the same or better price than the firm obtained for itself. In


failing to cancel and rebill the proprietary trades, the panel decided JTF and Belesis violated the just and equitable principles of trade rule. The panel also found that JTF and Belesis failed to keep and maintain records of at least 14 customer orders to sell AWSR received on Feb. 23, 2012. According to the decision, "Belesis testified that he was 'not familiar' with the recordkeeping requirements, and claimed that he was unfamiliar even with the fundamental requirement that the firm preserve order tickets for three years." The panel noted that it did not find Belesis' claims of ignorance credible given the length and breadth of his experience in the securities industry, and inferred that "JTF and Belesis either concealed or destroyed those order tickets." The panel also concluded that JTF, Belesis and Castellano intimidated and harassed representatives who resigned by filing false Forms U5 indicating that the firm had a reasonable basis for investigating these individuals for serious misconduct, when this was not the case. A Form U5 is filed by a securities firm with FINRA when an individual is terminated. Information from the Form U5 is publicly disclosed through BrokerCheck, so providing false information undermines the integrity of the system. Moreover, the panel found that Belesis' threat to withhold a former representative's commission check unless he signed an amended employment contract and affidavit was coercive. In addition, the decision noted that Belesis provided false testimony to FINRA.

2. State Trust Investments (2010023001602) (June 2013)

StateTrust Investments, Inc. was fined $1.045 million and FINRA sanctioned the firm's head trader, Jose Luis Turnes, for charging excessive markups and markdowns in corporate bond transactions. In particular, 85 of the transactions operated as a fraud or deceit upon the customers. FINRA also ordered StateTrust to pay more than $353,000 in restitution, plus interest, to customers who received unfair prices. In addition, Turnes was suspended for six months and fined $75,000. In a related April 2012 action, Jeffrey Cimbal, StateTrust's Chief Compliance Officer, was fined $20,000 and suspended for five months in a principal capacity for failing to supervise Turnes. FINRA found that StateTrust charged excessive markups/markdowns to customers in a total of 563 transactions. In 227 instances, the markups or markdowns exceeded 5 percent. In 85 of those instances, StateTrust, acting through Turnes, charged excessive markups and markdowns, ranging from 8 percent to over 23 percent away from the prevailing market price, which operated as a fraud or deceit upon the customers. In each of the 85 instances, StateTrust either bought bonds from its bank or insurance affiliate and then sold the bonds to customers at a price that was 8 percent or more away from the prevailing market; or bought bonds from customers at prices that were 8 percent or more below the prevailing market, and then sold them to its bank or insurance affiliate at a slight markup. During that period, Turnes was also the chairman and largest indirect shareholder of the bank and its insurance affiliates.

H. Regulation SHO

In a short sale, the seller sells a security it does not own. When it is time to deliver the security, the short seller either purchases or borrows the security in order to make the delivery. Reg SHO requires a broker or dealer to have reasonable grounds to believe that the security could be borrowed and available for delivery before accepting or


affecting a short sale order. Requiring firms to obtain and document this "locate" information before the short sale is entered reduces the number of potential failures to deliver in equity securities. In addition, Reg SHO requires a broker or dealer to mark sales of equity securities as long or short.

1. Merrill Lynch Professional Clearing Corp. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (20100229712) (October 2014)

FINRA censured and fined Merrill Lynch Professional Clearing Corp. (Merrill Lynch PRO) $3.5 million for violating Regulation SHO, an SEC rule that established a regulatory framework to govern short sales and prevent abusive naked short selling. FINRA also censured and fined its affiliated broker-dealer, Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), $2.5 million for failing to establish, maintain and enforce supervisory systems and procedures related to Regulation SHO and other areas.

In addition to curtailing naked short selling, among other things, Regulation SHO also aims to reduce the number of instances in which sellers fail to timely deliver securities. Regulation SHO requires a firm to timely "close out" any fail-to-deliver positions by borrowing or purchasing securities of like kind and quantity. Additionally, Reg SHO permits firms to reasonably allocate fail-to-deliver positions to its broker-dealer clients that caused or contributed to the firm's fail-to-deliver position. FINRA found that from September 2008 through July 2012, Merrill Lynch PRO did not take any action to close out certain fail-to-deliver positions, and did not have systems and procedures in place to address the close-out requirements of Regulation SHO for the majority of that period. FINRA also found that from September 2008 through March 2011, Merrill Lynch's supervisory systems and procedures were inadequate and improperly permitted the firm to allocate fail-to-deliver positions to the firm's broker-dealer clients based solely on each client's short position without regard to which clients caused or contributed to Merrill Lynch's fail-to-deliver position.

2. Newedge USA LLC (20090186944) (July 2013)

Newedge failed to establish, maintain and enforce adequate supervisory systems and procedures that were reasonably designed to achieve compliance with 17 C.F.R. Part 242 (Regulation SHO). In addition, by accepting customer's short sale orders without a reasonable basis to believe the securities could be borrowed, Newedge directly violated Rule 203(b) of Regulation SHO. The Firm also violated Rules 200(f) and 200(g) of Regulation SHO, in that the Firm could not determine its net position for appropriate sell order marking in a given security Firm-wide, and could not reasonably determine whether sell orders entered by clients were accurately marked. Newedge further failed to establish, maintain, and enforce adequate supervisory procedures, and a reasonable system of follow-up and review, that were reasonably designed to achieve compliance with the July and September 2008 Emergency Orders issued by the Securities and Exchange Commission pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934, and violated Section 12(k)(4) of the Exchange Act by entering short sale orders on the NYSE in covered financial institutions in violation of the September 2008 Emergency Order.

I. Supervisory Systems


1. Supervision of Discounts and Waivers

a. Merrill Lynch, Pierce, Fenner & Smith, Inc. (2011029999301) (June 2014)

FINRA fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $8 million for failing to waive mutual fund sales charges for certain charities and retirement accounts. FINRA also ordered Merrill Lynch to pay $24.4 million in restitution to affected customers, in addition to $64.8 million the firm has already repaid to disadvantaged investors. Mutual funds offer several classes of shares, each with different sales charges and fees. Typically, Class A shares have lower fees than Class B and C shares, but charge customers an initial sales charge. Many mutual funds waive their upfront sales charges for retirement accounts and some waive these charges for charities. Most of the mutual funds available on Merrill Lynch's retail platform offered such waivers to retirement plan accounts and disclosed those waivers in their prospectuses. However, at various times since at least January 2006, Merrill Lynch did not waive the sales charges for affected customers when it offered Class A shares. As a result, approximately 41,000 small business retirement plan accounts, and approximately 6,800 charities and 403(b) retirement accounts available to ministers and employees of public schools, either paid sales charges when purchasing Class A shares, or purchased other share classes that unnecessarily subjected them to higher ongoing fees and expenses. Merrill Lynch learned in 2006 that its small business retirement plan customers were overpaying, but continued to sell them more costly shares and failed to report the issue to FINRA for more than five years. Merrill Lynch's written supervisory procedures provided little information or guidance on mutual fund sales charge waivers. Even after the firm learned that it was not providing sales charge waivers to eligible accounts, Merrill Lynch relied on its financial advisors to waive the charges, but failed to adequately supervise the sale of these products or properly train or notify its financial advisors about lower-cost alternatives.

b. UVEST (2009016347101) (April 2012)

The firm ordered to pay a $230,000 fine plus an undertaking to pay approximately $44,000 in restitution to customers. It also consented to findings that it, among other things, violated:

FINRA Rule 2010 and NASD Rules 2110 and 3010(a) and (b) when, between July 9, 2007 and September 20, 2009, it failed to apply “breakpoint” and “rollover and exchange” discounts (collectively “sales charge discounts”) to eligible customer purchases of Unit Investment Trusts. Also between July 9, 2007 and September 20, 2009, UVEST failed to establish, maintain and enforce an adequate supervisory system and WSPs reasonably designed to achieve compliance with its obligation to identify and ensure customers received sales charge discounts on all eligible UIT purchases. FINRA Rule 2010, NASD Rule 2110 and 3010(a) and (b) when, between July 9, 2007 and September 20, 2009, UVEST customers purchased UITs in 3,194 brokerage accounts, and UVEST failed to


establish, maintain and enforce an adequate supervisory system and WSPs reasonably designed to achieve compliance with its obligation to provide UIT prospectuses to customers.

c. Pruco Securities, LLC (2011029046101) (Dec. 2012)

Ordered to pay more than $10.7 million in restitution, plus interest, to customers who placed mutual fund orders with Pruco via facsimile or mail, and received an inferior price for their shares. FINRA also fined Pruco $550,000 for its pricing errors and for failing to have an adequate supervisory system and written procedures in this area.

d. Merrill Lynch (2008014187701) (June 2012)

FINRA fined Merrill Lynch $2.8 million for supervisory failures that resulted in overcharging customers $32 million in unwarranted fees, and for failing to provide certain required trade notices. Merrill Lynch has provided $32 million in remediation, plus interest, to the affected customers. FINRA found that from April 2003 to December 2011, Merrill Lynch failed to have an adequate supervisory system to ensure that customers in certain investment advisory programs were billed in accordance with contract and disclosure documents. As a result, the firm overcharged nearly 95,000 customer accounts fees of more than $32 million. Merrill Lynch has since returned the unwarranted fees, with interest, to the affected customers. Merrill Lynch also failed to provide timely trade confirmations to customers in certain advisory programs due to computer programming errors. From July 2006 to Nov. 2010, Merrill Lynch failed to send customers trade confirmations for more than 10.6 million trades in over 230,000 customer accounts. In addition, Merrill Lynch failed to properly identify whether it acted as an agent or principal on trade confirmations and account statements relating to at least 7.5 million mutual fund purchase transactions. At various times, Merrill Lynch also failed to deliver certain proxy and voting materials, margin risk disclosure statements and business continuity plans.

2. Consolidated Reporting Systems

a. H. Beck, Inc. (2012031552601), LaSalle St. Securities, LLC (2013035055101) and J.P. Turner & Company, LLC (2013036404301) (March 2015)

FINRA sanctioned three firms – H. Beck, Inc., LaSalle St. Securities, LLC, and J.P. Turner & Company, LLC – with fines of $425,000, $175,000 and $100,000, respectively, for inadequate supervision of consolidated reports provided to customers and other violations. A consolidated report is a single document that combines information regarding most or all of a customer's financial holdings, regardless of where those assets are held. Consolidated reports supplement, but do not replace official customer account statements required by FINRA rules and disseminated through a separate process. FINRA Regulatory Notice 10-19


reminds firms that consolidated reports must be clear, accurate and not misleading, and if not rigorously supervised, they can raise a number of regulatory concerns, including the potential for communicating inaccurate, confusing or misleading information to customers, lapses in supervisory controls, and the use of these reports for fraudulent or unethical purposes. The Notice also stresses that if a firm is unable to adequately supervise the use of the reports, it must prohibit their dissemination and take steps to ensure that registered representatives comply with the prohibition. During the course of routine examinations of the firms, FINRA found that numerous registered representatives of the firms prepared and disseminated consolidated reports to customers either without adequate review or any prior review by a principal. H. Beck and J.P. Turner did not have any written procedures specifically addressing the use and supervision of consolidated reports. While LaSalle St. Securities had written procedures related to consolidated reports, it failed to enforce the procedures and did not provide proper training to its representatives regarding their use. Across each firm, many registered representatives utilized consolidated report systems that allowed them to enter customized values for accounts or investments held away from the firm yet the firms' procedures did not provide safeguards, such as requiring supporting data, to verify accuracy.

b. Triad Advisors (2011025792001) and Securities America (2010025742201) (March 2014)

FINRA sanctioned and fined two firms — Triad Advisors and Securities America — $650,000 and $625,000, respectively, for failing to supervise the use of consolidated reporting systems resulting in statements with inaccurate valuations being sent to customers, and for failing to retain the consolidated reports in accordance with securities laws. In addition, Triad was ordered to pay $375,000 in restitution. Both Triad Advisors and Securities America had a consolidated report system that permitted their representatives to create consolidated reports, allowing them to enter customized asset values for accounts held away from the firm and to provide the reports to customers. For more than two years, Triad and Securities America failed to supervise hundreds of brokers, some of whom were creating and sending false and inaccurate consolidated reports to customers. Many of these consolidated reports contained inflated values for investments, some of which were in default or receivership. Moreover, at Triad, a number of consolidated reports sent to customers reflected fictitious promissory notes or other fictitious assets, which enabled two representatives to conceal their misconduct. Triad has paid restitution to some of the affected customers and FINRA has ordered Triad to pay restitution to the remaining affected customers.

3. E-Mail Retention and Review

a. Barclays Capital Inc. (201102667901) (Dec. 2013)

FINRA fined Barclays Capital Inc. $3.75 million for systemic failures to preserve electronic records and certain emails and instant messages in the manner required for a period of at least 10 years.


Federal securities laws and FINRA rules require that business-related electronic records be kept in non-rewritable, non-erasable format (also referred to as "Write-Once, Read-Many" or "WORM" format) to prevent alteration. The SEC has stated that these requirements are an essential part of the investor protection function because a firm's books and records are the "primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards." FINRA found that from at least 2002 to 2012, Barclays failed to preserve many of its required electronic books and records—including order and trade ticket data, trade confirmations, blotters, account records and other similar records—in WORM format. The issues were widespread and included all of the firm's business areas, thus, Barclays was unable to determine whether all of its electronic books and records were maintained in an unaltered condition. FINRA also found that from May 2007 to May 2010, Barclays failed to properly retain certain attachments to Bloomberg emails, and additionally failed to properly retain approximately 3.3 million Bloomberg instant messages from October 2008 to May 2010. In addition to violating FINRA, SEC and NASD rules and regulations, this adversely impacted Barclay's ability to respond to requests for electronic communications in regulatory and civil matters. Finally, Barclays failed to establish and maintain an adequate system and written procedures reasonably designed to achieve compliance with SEC, NASD, and FINRA rules and regulations, as well as to timely detect and remedy deficiencies related to those requirements.

b. LPL Financial (2012032218001) (May 2013)

FINRA fined LPL Financial LLC (LPL) $7.5 million for 35 separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails. Additionally, LPL made material misstatements to FINRA during its investigation of the firm's email failures. LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce email. As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its email systems, which became increasingly complex and unwieldy for LPL to manage and monitor effectively. The firm was well aware of its email systems failures and the overwhelming complexity of its systems. Consequently, FINRA found that from 2007 to 2013, LPL's email review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture email, supervise its representatives and respond to regulatory requests. Because of LPL's numerous deficiencies in retaining and surveilling emails, it failed to produce all requested email to certain federal and state regulators, and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration


proceedings, as required. In addition, LPL made material misstatements to FINRA concerning its failure to supervise 28 million DBA emails. In a January 2012 letter to FINRA, LPL inaccurately stated that the issue had been discovered in June 2011 even though certain LPL personnel had information that would have uncovered the issue as early as 2008. Moreover, the letter stated that there weren't any "red flags" suggesting any issues with DBA email accounts when, in fact, there were numerous red flags related to the supervision of DBA emails that were known to many LPL employees. In addition, LPL likely failed to provide emails to certain arbitration claimants and private litigants. LPL agreed to notify eligible claimants and deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures. Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that the firm failed to provide them. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.

c. ING (2012031270301) (May 2013)

FINRA fined five affiliates of ING $1.2 million for failing to retain or review millions of emails for periods ranging from two months to more than six years. The five firms, indirect subsidiaries of ING Groep N.V., are Directed Services, LLC; ING America Equities, Inc.; ING Financial Advisers, LLC; ING Financial Partners, Inc.; and ING Investment Advisors, LLC. FINRA found that the firms failed to properly configure hundreds of employee email accounts to ensure that the emails sent to and from those accounts were retained and reviewed at various times between 2004 and 2012. In addition, four of the firms failed to set up systems to retain certain types of emails, such as emails using alternative email addresses, emails sent to distribution lists, emails received as blind carbon copies, encrypted emails and "cloud" email (emails sent through third-party systems). As a result of these failures, emails sent to and from hundreds of employees and associated persons were not retained; and because the emails were not retained, they were not subject to supervisory review. FINRA found that the firms violated the recordkeeping provisions of the federal securities laws and FINRA rules, and supervisory requirements under FINRA rules. In addition, four of the firms failed to review millions of emails that the firms' email review software had flagged for supervisory review. At various times between January 2005 and May 2011, nearly six million emails flagged for review went unreviewed by supervisory principals because the email review software was not properly configured.


FINRA also ordered the firms to conduct a comprehensive review of their systems for the capture, retention and review of email, and to subsequently certify that they have established procedures reasonably designed to address and correct the violations.

4. Customer Protection

a. Pershing LLC (2012032772701) (December 2014)

FINRA fined Pershing LLC $3 million for violating the Customer Protection Rule and for related supervisory failures. The Securities and Exchange Commission (SEC) rule creates requirements to protect customers' funds and securities from broker-dealer misuse and requires that assets be available for distribution in the event of the broker-dealer's insolvency. The SEC Customer Protection Rule is intended to protect customers' funds held by their broker-dealers and to prohibit broker-dealers from using customer funds and securities to finance any part of their business unrelated to servicing securities customers. The rule requires the broker-dealer that maintains custody of customer securities and cash to comply with two requirements – to obtain and maintain physical possession or control over customers' fully paid and excess margin securities; and to maintain a reserve of cash or qualified securities in an account at a bank at least equal in value to the net cash the broker-dealer owes to customers. FINRA found that from November 2010 to August 2011, Pershing failed to maintain adequate reserves to meet its reserve deposit requirements with reserve deficiencies ranging from approximately $4 million to $220 million. From July 2010 through September 2011, Pershing also failed to promptly obtain and later maintain physical possession or control of certain customers' fully paid and excess margin securities. During that period, the firm's failures caused 47 new possession or control deficits, and an increase in a significant number of existing possession or control deficits. These failures exposed customer funds and securities to risk. In addition, Pershing's supervisory systems and procedures were inadequate and the firm failed to implement a system to review and approve procedural changes with material impact to the requirements of the Customer Protection Rule. Those deficiencies resulted in inaccuracies in the firm's FOCUS reports between July 30, 2010 and Aug. 31, 2011.

b. Deutsche Bank Securities, Inc. (2010023559301) (Dec. 2013)

Under DBSI's enhanced lending program, which involves mostly hedge fund customers, the firm arranges for its London affiliate, Deutsche Bank AG London (DBL), to lend cash and securities to DBSI's customers. FINRA's 2009 examination of the firm uncovered a number of serious problems in connection with this program. For example, the firm's books reflected that it owed $9.4 billion to its affiliate, but neither the firm nor FINRA examiners


could readily determine which portions of that debt were attributable to the customers' enhanced lending activity, and which were attributable to DBL's own proprietary trading. The lack of transparency in DBSI's books and records meant the firm was unable to readily monitor the accounts originating out of the enhanced lending business. FINRA also found that there were instances where DBSI made inaccurate calculations that resulted in the firm overstating its capital or failing to set aside enough funds in its customer reserve account to appropriately protect customer securities. For example, DBSI incorrectly classified certain enhanced lending stock loans; when it reclassified them in April 2010, DBL was obligated to pay a margin call of $3.1 billion. DBSI improperly computed its payable balance, thus reducing the firm's reported liabilities and inaccurately overstating the firm's net capital. Separately, in March 2010, the firm incorrectly computed its customer reserve formula. As a result, the firm's customer reserve fund was deficient by $700 million to $1.6 billion during March 2010. DBSI agreed to a $6.5 million fine.

J. Other Technology Failures

1. Inaccurate Blue Sheet Data (2013036917401; 2013037230001; 2013037904801; 201203493401) (June 2014)

FINRA fined Barclays Capital Inc.; Goldman, Sachs & Co.; and Merrill Lynch, Pierce, Fenner & Smith, Inc., $1 million each for failing to provide complete and accurate information about trades performed by the firms and their customers, commonly known as "blue sheet" data, to FINRA, the SEC and other regulators. In addition, FINRA issued a complaint against Wedbush Securities, Inc., for failing to submit complete and accurate blue sheets. Blue sheets provide regulators with detailed information about trades performed by a firm and its customers, including the security's name, date traded, price, transaction size and parties involved. Regulators use the data to identify trading anomalies and investigate potential insider trading or other market manipulations. Federal securities laws and FINRA rules require firms to provide this information to FINRA and other regulators electronically upon request. FINRA found the firms' violations included submissions that failed to include some customer names and contact information, failed to include some transactions, contained incorrect name and contact information for some customers, or contained inaccurate details of the transactions. The violations arose from problems with the firms' electronic systems used to compile and produce blue sheet data. FINRA also found that the firms failed to have in place adequate audit systems providing for accountability of their blue sheet submissions. FINRA ordered the firms to certify that they have conducted a comprehensive review of their systems related to blue sheet submissions, and to certify that they have established procedures reasonably designed to address and correct the violations. Each firm has a prior regulatory history involving the submission of inaccurate blue sheet data.


K. Cyber security/Regulation S-P

SEC and FINRA rules require every broker-dealer to adopt written policies and procedures that address safeguards for the protection of customer records and information. We are looking at firms that do not have adequate Reg S-P policies or have had breaches in security and have not responded appropriately to the breach.

1. Samuel Delshaul Shoemaker (2011030666301) (Oct. 2013) (Default decision)

While employed as a personal banker by a FINRA member firm, Respondent Samuel Delshaul Shoemaker abused his position by siphoning personal confidential information of three bank customers to an accomplice who used the information to fraudulently create debit cards for the customers' accounts. Shoemaker then used the cards to shop and obtain cash for his accomplice. When confronted by a bank investigator, Shoemaker confessed. When FINRA requested him to provide information and testimony, however, he chose not to respond at all. For fraudulently misappropriating customer funds, in violation of.FINRA Rule 2010, and completely failing to provide information and testimony, in violation of FINRA Rules 8210 and 2010, Respondent Samuel Delshaul Shoemaker is barred from associating with any FINRA member firm in any capacity.

Documents

Enforcement: Case Studies Wednesday, May 27 …...Enforcement: Case Studies Wednesday, May 27 1:45 p.m. – 3:00 p.m. Speaker Outline FINRA Department of Enforcement: 2015 Enforcement