Regulatory Audits & Investigations

Former Caldwell Broker, Richard Adams, Barred by FINRA for Churning Customer Accounts

August 14, 2015 | Malecki Law Team

Per Financial Industry Regulatory Authority’s (FINRA) announcement this week, a former registered representative of Caldwell International Securities Corp., Richard Adams aka Rasheed Aree Adams, has been barred permanently from the securities industry for churning customer accounts, other securities violations, and failure to report many unsatisfied judgments and liens on his U4 Registration Form as stipulated in FINRA rules. In addition to Caldwell, he was also previously registered with PHD Capital and E1 Asset Management Inc. from 2002 to 2011.

FINRA’s investigation revealed that Adams excessively traded the accounts of two customers, between July 2013 and June 2014, resulting in profits and commissions in the excess of $57,000 for himself while resulting in losses amounting to over $37,000 for customers. The findings stated that as a result Adams willfully violated section 10(B) of the Securities Exchange Act of 1934 and rule 10B-5, willfully failed to amend Form U4, and failed to provide documents requested by FINRA. Adams neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Richard Adams is no stranger to regulatory and legal proceedings and has a reported history of customer disputes and violations. According to the CRD 13 judgement/liens, 5 customer disputes, 2 investigations and 1 regulatory disclosures have been reported against him. In 2001 there were allegations of unsuitability, unauthorized trading, and churning made against him while he was employed at The Golden Lender Financial Group, Inc, and this customer dispute was finally settled for $10,000. Currently, there is a pending FINRA investigation against Adams for potential violation of FINRA rules 2010 and 2111, and willful violations of Article V, section 2 from 2014.

Aegis Capital Fined By FINRA; Senior Management Suspended

August 4, 2015 | Malecki Law Team

FINRA has announced that it has fined Aegis Capital Corp. $950,000 for sales of unregistered penny stocks and anti-money laundering violations. According to FINRA, this fine was also related to supervisory failures within the firm.

The firm was not the only one that FINRA appears to have come down hard upon. Reports show that Charles D. Smulevitz and Kevin C. McKenna, who each served as the firm’s Chief Compliance and AML Compliance Offices were given 30-day and 60-day principal suspensions and fined $5,000 and $10,000, respectively, per FINRA. Aegis’ president, Robert Eide, was also reportedly given a “time-out” in the form of a 15-day suspension for failing to disclosed more than a half-million dollars in outstanding liens, in violation of FINRA rules.

FINRA reportedly found that from April of 2009 through June of 2011, Aegis liquidated almost 4 billion shares of penny stocks which were neither properly registered nor exempted from registration with the US Securities and Exchanges Commission. According to FINRA, Aegis committed these violations in spite of a multitude of “red flags” or warning signs that something was amiss.

I’m FINRA Licensed and Under Internal Investigation: What Should I Do?

July 23, 2015 | Malecki Law Team

“My broker dealer wants me to meet with its lawyers.” This is the start of a FINRA registered representative’s worst nightmare.

Your heart is pounding and your head starts to race. “Why me?” “What do they want to know?” “What could I have done?” “Are they going to ask me about the XYZ account?” “I’m sure that I did everything right and by the book, didn’t I?”

If you did do something that may have been a violation of the law, FINRA Rules, or the firm’s manual, you will likely begin to think about the potential punishment (fine, suspension, termination) even before you hang up the phone or close the door to your office. Once an investigation into your conduct starts, you are not able to leave with a “voluntary” termination, but at best would be “permitted to resign during a firm investigation.”

SEC Charges Malcolm Segal Of Running Ponzi Scheme From His Pennsylvania Office

July 1, 2015 | Malecki Law Team

The Securities and Exchange Commission (SEC) announced today that is has formally charged Malcolm Segal with running a Ponzi scheme and stealing investor money from his office in Pennsylvania. According to his BrokerCheck Report, Mr. Segal was formerly a registered stockbroker with Aegis Capital Corp. and Cumberland Advisors. Mr. Segal reportedly was a partner in J&M Financial and the president of National CD Sales.

According to the SEC, Mr. Segal allegedly sold what he called certificates of deposit (CDs) to his brokerage customers under the false pretense that he could get them a higher rate of interest than was then available through banks. Mr. Segal allegedly represented to his victims that his CDs were FDIC insured and risk-free. Mr. Segal reportedly defrauded at least fifty investors out of roughly $15.5 million.

As his scheme was unravelling, Mr. Segal allegedly began to steal from his customers’ brokerage accounts by falsifying fraudulent paperwork such as letters of authorization. This fake paperwork reportedly allowed Mr. Segal to withdraw funds from his customers’ accounts without them knowing. Ultimately, in July 2014, the scheme collapsed completely. Mr. Segal has since been barred from the securities industry by the Financial Industry Regulatory Authority.

Broker Dealer Financial Services Corp. Fined By FINRA Over Nontraditional ETF Sales and Improper Supervision

May 21, 2015 | Malecki Law Team

Broker Dealer Financial Services Corp. (BDFS) based out of West Des Moines, Iowa just learned the hard way that nontraditional Exchange Traded Funds (ETFs) are risky, speculative investments and are not appropriate for all investors.

The Financial Industry Regulatory Authority (FINRA) recently fined BDFS $75,000 for 1. failing to properly supervise the sale of leveraged ETFs to its customers, 2. not properly training its sales force about the appropriate use of leveraged ETFs in customer accounts, and 3. not adequately supervising nontraditional ETF activity in customer accounts.

According the Letter of Acceptance, Waiver, and Consent, from March of 2009 to April of 2012, BDFS “recommended nontraditional ETFs to more than 200 customers” without “a reasonable basis for believing that the nontraditional ETF transactions it recommended were suitable for any investor.” BDFS’s ETF related misconduct was said to have violated NASD Rules 2310 and 3010 along with FINRA Rules 2010 and 2111.

FINRA Bars Former Wells Fargo Broker Nicholas Hansen Harper

May 15, 2015 | Malecki Law Team

The Financial Industry Regulatory Authority (FINRA) has permanently barred Nicholas Hansen Harper. Harper worked in Wells Fargo’s Topeka, Kansas branch office from 1997 through 2013 according to his BrokerCheck Report.

Per the Letter of Acceptance Waiver and Consent filed with FINRA, Harper resigned from Wells Fargo on August 7, 2013, shortly after the firm’s compliance department began to review trading in the accounts of certain of his customers. The timing of Harper’s resignation can only serve to raise suspicions.

Presumably suspicious of Harper, in March of 2015, FINRA requested Harper provide testimony to FINRA investigators pursuant to Rule 8210. More than one month after the request was issues, FINRA staff spoke to Harper’s attorney, who purportedly indicated that Harper would not be appearing before FINRA to provide testimony at any time.

FINRA Looks To Come Down Harder On Brokers And Firms Making Unsuitable Recommendations to Customers

May 13, 2015 | Malecki Law Team

What should happen to a financial advisor (FA) if they provide unsuitable and inappropriate investment advice to their clients?

First, if the unsuitable advice given to a customer caused losses to that customer’s account, the customer has the option to sue the FA in FINRA arbitration. Investors can recover some or all of their losses due to the bad advice – usually against the firm that the FA worked for in a failure to supervise case. Arbitration is common for aggrieved investors, and this law firm has successfully represented numerous investors who have been the victims of unsuitable investment advice from an FA.

But what about punishing the broker, so he or she doesn’t do it again to someone else? Can they go to jail? If not, what does happens?

JP Morgan Investigated By SEC and Other Authorities Over Sale of Proprietary Products

May 8, 2015 | Malecki Law Team

Is it okay for a broker-dealer to use bonuses and other incentives to encourage its financial advisors to steer customers into “in house” and proprietary funds that may not be right for them just to generate more fees for the firm? Or does this practice improperly (and illegally) incentivize the financial advisor to betray his customer’s trust for his and his firm’s benefit – thereby compromising the integrity of the relationship?

The SEC is asking just those types of questions about the practices of JP Morgan, according to recent reports. Per InvestmentNews, the SEC and other regulators have subpoenaed and otherwise inquired of JP Morgan about the firm’s sales practices. Specifically, the reports indicate that the focus seems to be on conflicts of interest related to the sales of mutual funds and other proprietary products to customers. The SEC is reportedly looking into whether JP Morgan breached duties to its customers and/or applicable laws by unfairly and/or illegally marketing its in house investment products.

The sale of in-house proprietary products can be a very lucrative business for large “wire houses” as they are known in the industry. Wire houses include such familiar names as JP Morgan, Merrill Lynch, Citigroup, Wells Fargo, etc. By performing all of the structuring, issuing, lending and selling for their proprietary funds internally, a wire house is able to capture all of the associated fees, commissions and charges. Therefore, it is important that regulators review the sales of such in house products, to make sure they are being sold fairly and legally to customers.

LPL Financial Settles Supervisory Failure Charges with FINRA for $11.7 Million

May 6, 2015 | Malecki Law Team

LPL Financial agreed to pay more than $11 million to settle charges in connection with a Financial Industry Regulatory Authority (FINRA) investigation into the firm, as recently reported in the Wall Street Journal. According to the Letter of Acceptance Waiver and Consent filed with FINRA, LPL Financial was alleged to have supervisory failures, related to non-traditional products such as exchange traded funds (ETFs), variable annuities, and non-traded real estate investment trusts (REITs).

LPL allegedly failed to deliver over 14 million trade confirmations in addition to failing to properly monitor and report trades. Of the amount collected, $1.7 million is reportedly restitution for customers, while LPL Financial was fined an additional $10 million.

Vigilant supervision over the sale of non-traditional investments is especially important because public customers are typically unfamiliar with the products being sold to them. In addition, many non-traditional products have higher commissions (meaning a bigger incentive for a broker to sell such products) than their more traditional counterparts.

What is an 8210 Request and What Do I Do If I Get One?

April 29, 2015 | Malecki Law Team

Back in February, I wrote a piece on what to do when you get an SEC subpoena. SEC subpoenas are only part of the securities regulatory landscape. While the SEC can and will subpoena anyone – registered or unregistered – who is potentially the target of or may have helpful information related to an SEC investigation, FINRA registered representatives are additionally subject to FINRA inquiries via FINRA Rule 8210.

FINRA Rule 8210 allows FINRA investigators to essentially “subpoena” a person – i.e., require that they testify on the record and/or compel them to produce documents – without actually ever getting a subpoena. Instead, FINRA uses what is commonly (and not surprisingly) referred to as an “8210 Request.”

8210 Requests are similar to SEC subpoenas in their function, but differ slightly in practice. FINRA investigators will regularly tell parties that FINRA is not the government, but merely a private member organization. Why is that significant? Some may say that it’s significant because FINRA cannot actually “require” someone to come testify under a threat of contempt or jailtime; that your response is, in a way, “voluntary.”