Securities Lawyer Blog | Victim of Fraud?

TAG | CMOs

Apr/12

9

David Lerner Associates Fined $3.7M by FINRA

Comments off · Posted by Securities Lawyer in FINRA

In an April 4th., 2012, article from InvestmentNews.com, Liz Skinner writes that brokerage firm David Lerner Associates Inc. was ordered to pay more than $3.7 million in fines and restitution for overcharging retail customers on sales of more than 1,500 municipal bonds and 1,700 collateralized-mortgage-obligation transactions.

The Financial Industry Regulatory Authority Inc. (FINRA) hearing panel found the Long Island-based firm charged excessive markups on the transactions from January 2005 through January 2007, resulting in customers’ incurring “unfairly high prices” and lower yields than they should have received. This panel also suspended the firm’s head trader, William Mason, from the securities industry for six months and fined him $200,000.

Mason and David Lerner Associates plan to appeal the decision, said Joseph Pickard, the firm’s general counsel. He said Finra’s ruling “is simply wrong” and ignores “the relevant facts and fails to follow the law.” He also stated that Finra didn’t challenge “the other 95% of the transactions which occurred during the same period.”

“The hearing panel decision reflects Finra’s attempt to unfairly seize funds from a broker-dealer by making allegations which are simply not based on facts, recognized industry standards or current law,” Mr. Pickard said in a statement.

According to Finra, David Lerner Associates continued with its unfair pricing practices even after receiving a letter of caution about its markups following a 2004 exam and after receiving Wells notices about the issue in July 2009. The panel said it took this history, including that the firm “has not taken any corrective measures to improve their fixed income markups policies and practices” into consideration when setting the sanctions.

The Finra panel contends that the firm’s trades “reflected a pattern of intentional excessive markups” in investments that were available at “significantly lower prices” than the firm charged. The investments themselves were rated investment-grade or above, it said.

This decision, which resolves charges Finra brought in May 2010, includes a $2.3 million fine and restitution to affected customers of $1.4 million, plus interest.

“Finra takes offense when it or the [Securities and Exchange Commission] has spotted the conduct and provided warnings in the past,” said Andrew Stoltmann, a plaintiff’s attorney who represents about 15 claimants in other legal actions against David Lerner Associates.

Skinner writes that this decision is not the end of the brokerage’s disciplinary dealings with Finra. In a separate case filed in May 2011, the industry regulator alleged that David Lerner Associates sold $300 million worth of Apple real estate investment trusts to unsophisticated investors without considering whether they were suitable to clients. The firm denies the allegations.

In January, Finra amended the complaint against the firm to allege that it and founder David Lerner himself continued to pitch nontraded REITs improperly through at least November 2011.

In the decision issued April 4th., the panel said markups on the muni bonds ranged from 3.01% to 5.78% and markups charged on the CMOs ranged from 4.02% to 12.39%.

The InvestmentNews.com article adds that this markup was charged whether the customer bought as much of the CMO as $225,000 or as little as $8,000. Finra rules require that markups be fair and reasonable, taking into account all relevant factors, such as the amount of money involved in a transaction and the availability of the security in the marketplace.

This firm’s supervisory system for these products also was inadequate and it failed to establish and maintain procedures to monitor the fairness of pricing of munis and CMOs, the panel decision stated.

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you or a family member have sustained investment losses due to your stock broker or financial advisor’s recommendations, call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552, or visit our website at: www.securitieslawyer.com.

 
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

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Mar/12

21

BROOKSTREET CEO ORDERED BY JUDGE TO PAY $10 MILLION PENALTY IN SEC CASE

Comments off · Posted by Securities Lawyer in FINRA

THE FOLLOWING ARTICLE WAS OBTAINED FROM THE SEC’S WEBSITE:

“On March 1, 2012, a federal judge ordered the former CEO of Brookstreet Securities Corp. to pay a maximum $10 million penalty in a securities fraud case related to the financial crisis.

In December of 2009, the U.S. Securities and Exchange Commission filed a civil injunctive action against Brookstreet Securities Corp. and Stanley C. Brooks, charging them with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals. Brookstreet and Brooks developed a program through which the firm’s registered representatives sold particularly risky and illiquid types of Collateralized Mortgage Obligations (CMOs) to more than 1,000 seniors, retirees, and others for whom the securities were unsuitable. Brookstreet and Brooks continued to promote and sell the risky CMOs even after Brooks received numerous warnings that these were dangerous investments that could become worthless overnight. The fraud resulted in severe investor losses and eventually caused the firm to collapse.

On February 23, 2012, the Honorable David O. Carter entered an order granting summary judgment in favor of the Securities and Exchange Commission. He found Brookstreet and Brooks liable for violating Section 10(b) of the Securities Exchange Act of 1934 as well as Rule 10b-5. On March 1, 2012, the court entered a final judgment and ordered the financial penalty sought by the Securities and Exchange Commission. In addition to the $10,010,000 penalty, Brooks was ordered to pay $110,713.31 in disgorgement and prejudgment interest. The court’s judgment also enjoins both Brookstreet and Brooks from violating Section 10(b) of the Exchange Act as well as Rule 10b-5.”

THIS ENDS THE SEC’S ARTICLE.

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you or a family member have sustained investment losses due to your stock broker or financial advisor’s recommendations, call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552, or visit our website at: www.securitieslawyer.com.

 
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

 

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Mar/12

6

Miami Brokerage Fined $125,000 by FINRA

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The following information was obtained on FINRA’s website’s ‘Disciplinary Actions, February 2012.”
 
Bulltick Securities, LLC (CRD #132092, Miami, Florida)
 
submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $125,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it made transaction-based payments to a non-registered foreign asset manager (foreign finder) whose activities required registration.
 
The findings stated that the firm’s sole business entailed executing securities transactions on behalf of Latin American customers foreign finders referred to the firm. The foreign finders were not registered with FINRA. In making referral payments, the firm relied on NASD Rule 1060, which allows member firms to pay transaction-based compensation to non-registered foreign finders (without requiring those entities/individuals to register) based upon the business of customers they direct to the firm provided that certain specified conditions are satisfied.
 
The findings also stated that a non-registered foreign finder referred customer accounts to the firm that generated gross commissions of approximately $600,000 through the unsolicited, short-term trading of collateralized mortgage obligations (CMOs). The firm paid the non-registered foreign finder approximately $400,000 in net commissions from this amount. The findings also included that the firm’s relationship with the non-registered foreign finder failed to satisfy the requirement of NASD Rule 1060. After the non-registered foreign finder referred the foreign customers to the firm, the securities trades in those accounts were managed by a non-registered affiliate of the foreign finder who was not a foreign asset manager.
 
FINRA found that the affiliate’s office manager or president would provide the firm with the daily trading instructions for the non-registered foreign finder’s referred account but never obtained evidence confirming that the affiliate was authorized to effect securities transactions in the referred accounts. Additionally, the firm paid the non-registered foreign finder approximately $82,000 for transactions in a United States citizen’s account.
 
FINRA also found that the firm did not evaluate whether the affiliate’s role in the transactions required the affiliate or the non-registered foreign finder to register in the United States as a broker-dealer. The firm’s confirmations for transactions in the referred accounts failed to state that it was paying a referral or finder’s fee. The CMO trading decision and strategy in the referred accounts were directed in part by the customer, who was purportedly a consultant with the affiliate.
 
Also, FINRA determined that the customer opened an account in his name with the firm and shortly after he had voluntarily resigned from a FINRA member firm. The firm maintained the customer’s account along with the nonregistered foreign finder’s referred accounts of foreign customers (sharing the same account number prefix). The customer had a disciplinary history at the time he opened his firm account.
 
Moreover, FINRA found that the firm was aware of this and, in opening the customer’s account, the firm tasked a registered principal with providing heightened supervision over the customer’s account. Although the firm implemented monthly principal reviews by the principal of the activity in the customer’s account, this procedure was insufficient. The firm learned about the SEC action against the customer shortly after it was filed. Nevertheless, the customer’s account remained open and continued to trade.
 
Furthermore, FINRA found that the customer routinely engaged in cross-trades of CMOs with other non-registered foreign finder’s referred accounts. In many instances, the customer would purchase the CMOs for his account from another broker-dealer and re-sell the positions at substantially higher prices to other of the non-registered foreign finder customers. As a result of the differences in the prices of the cross-trades, the customer profited on the majority of the CMO transactions in the referred accounts. The customer’s account made a profit of approximately $1.83 million.
 
The findings also stated that the firm did not reject any trades in the customer’s account until it cancelled an order to sell a CMO position from the customer’s accounts to other non-registered foreign finder’s referred accounts because the execution prices for the purchases were different. The firm later terminated its relationship with the non-registered foreign finder but never conducted a review of the CMO transactions in the referred accounts to determine if there were other transactions with discrepancies.
 
The findings also included that the firm had a written anti-money laundering (AML)
compliance program (AMLCP) that covered, among other things, monitoring for, detecting and reporting of suspicious activities. The firm’s procedures specified that its designated principal (its AML compliance officer (AMLCO)) and others would determine whether a particular account or transaction must be reported based upon a lengthy list of red flags of possible misconduct. FINRA found that the firm failed to monitor for, detect and appropriately investigate suspicious transactions the customer conducted and, if appropriate, file a suspicious activity report (SAR), despite multiple red flags related to these transactions. The red flags, each of which corresponded to a red flag identified in the firm’s procedures, included, among other things the short-term trading activity of CMO securities conducted through the customer’s account, which was generally inconsistent with the long-term investment horizon associated with such investments; the customer’s disciplinary history with the SEC; the volume of cross-trades involving the customer and the non-registered foreign finder’s referred accounts, which appeared to have no business purpose other than to enrich the customer; the fact that the pricing of the customer’s cross-trades differed from the prices the firm received from its clearing firm for the same securities; the differences in prices on the cross-trades involving the customer’s account and the profits the customer obtained; and transactions involving disparate pricing in the customer’s cross-trade involving other of the non-registered foreign finder-referred accounts, which occurred over the course of one month. FINRA also found that the firm failed to develop and implement a reasonably designed AMLCP because its procedures did not address the AML risks presented by certain aspects of its foreign finder business and CMO trading.
 
FINRA also determined that the firm failed to establish and maintain a supervisory system, and establish, maintain and enforce WSPs, reasonably designed to achieve compliance with applicable rules and regulations relating to its foreign finder business and the CMO transactions and trading activity in the referred accounts. The firm principal responsible for supervising the securities activity in the non-registered foreign finder’s referred accounts did not have any experience prior to joining the firm regarding CMOs, which rendered his monthly review of the customer’s account and implementation of heightened supervision inadequate.
 
Additionally, FINRA found that the firm failed to establish WSPs pertaining to CMOs. The firm’s WSPs did not address how it would obtain, monitor and conduct due diligence on pricing for these securities. Furthermore, FINRA found that the firm failed to establish a system or WSPs that addressed the payment of transaction-based compensation to foreign finders made pursuant to NASD Rule 1060 and related registration issues, and failed to ensure that its relationships with the foreign finders satisfied the criteria of NASD Rule 1060 for payment of transaction-based compensation to those entities. The findings also stated that the firm failed to enforce its WSPs requiring it to obtain trading authorization for third-party transactions.
(FINRA Case #2009015969501)
 
The information from FINRA’s website has ended.
 
Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, has represented clients nationwide.
For a free consultation with an attorney, please call 888-760-6552, or visit our website at: www.securitieslawyer.com.

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Sep/11

24

Northern Trust Securities, Inc. Fined $600,000 by FINRA for Inadequate Supervision of Sales of Collateralized Mortgage Obligations (CMOs) and Some High-Volume Securities Trades

Comments off · Posted by Securities Lawyer in FINRA

WASHINGTON —On FINRA’s website, it was announced that the Financial Industry Regulatory Authority (FINRA) has fined Northern Trust Securities $600,000 for deficiencies in supervising sales of collateralized mortgage obligations (CMOs) and failure to have adequate systems in place to monitor certain high-volume securities trades.

The article said that FINRA found from October 2006 through October 2009, Northern Trust failed to monitor customer accounts for potentially unsuitable levels of concentration in CMOs, in large part because it used an exception reporting system that failed to capture or analyze substantial portions of the firm’s business, including all CMO transactions, certain trades of 10,000 equity shares or more, and certain trades of 250 or more of fixed-income bonds. FINRA found that from January 2007 to June 2008, 43.5 percent of the firm’s business was excluded from review.

FINRA Executive Vice President and Chief of Enforcement, Brad Bennett said, “Northern Trust’s deficient systems and procedures allowed more than 40 percent of its transactions to proceed without review, which in turn left vulnerable investors exposed to the risk of losing all or a substantial portion of their principal through potential over-concentration in CMOs.”

Additionally, FINRA said that the absence of systems to monitor equity trades of over 10,000 shares or fixed income trades of over 250 bonds also resulted in a failure to review these trades for suitability, concentration, excessive trading, excessive mark-ups or commissions, or for trading in restricted stocks.

In concluding this settlement, Northern Trust neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. This information was obtained from FINRA’s website.

Securities Attorney, Lars Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you or a family member feel you have sustained a stock/securities loss through Northern Trust Securities, Inc., call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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