The following information was obtained on FINRA’s website under “Disciplinary and Other FINRA Actions, July, 2013,” by Soreide Law Group, a Securities Arbitration Law Firm, (888) 760-6552.
Morgan Keegan & Company, Inc. (CRD #4161, Memphis, Tennessee)
was censured and fined $60,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that its Small Business Administration (SBA) Desk purchased U.S. government-guaranteed small business loans from small regional banks throughout the United States. After purchasing the loans, the SBA Desk pooled together loans with similar qualities, securitized them into SBA pools, and ultimately sold them to institutional customers. The demand for SBA pools began to decline. As a result, the SBA Desk inventory levels increased significantly and remained above the firm’s allowable levels. The findings stated that the firm confronted the head trader about the excessive SBA Desk inventory levels and instructed him to sell a number of positions. Instead, the head trader manipulated SBA Desk inventory levels so that they appeared to be lower than they actually were (and thus in compliance with the firm’s allowable inventory levels). Consequently, the head trader entered fictitious SBA pool trades totaling approximately $82 million.
FINRA’s findings also stated that as a result of the fictitious trades, the firm believed that the SBA loan levels had decreased by a total of $75 million. In addition to effecting the false trades, the head trader also repeatedly manipulated forward the settlement dates. As the settlement date for each fictitious order approached, the head trader moved forward the settlement date by 30 days to allow himself more time to sell the SBA pools, triggering the creation of cancel and correct tickets for the trades for several consecutive months. When confronted with the findings, the head trader admitted his misconduct and the firm terminated the head trader immediately. The findings also included that the firm’s supervisory systems and WSPs for government loans, including SBA pools, were inadequate to prevent the head trader’s fictitious trading. Among other things, the firm did not have a process to monitor SBA loans that were aged (more than 120 days old). While the firm’s WSPs outlined a process to review aged inventory related to all other securities, they did not include a process to review aged and unsettled SBA pools.
In addition, the firm did not have a process to confirm and compare ex-clearing transactions, such as sales of SBA pools, or controls in place to review cancelled or modified transactions for reasonableness. The firm’s risk management structure did not adequately address the distinct duties of the front and back offices, in that the back office personnel who handled the administration of trades reported directly to the head trader. This structure caused the delay in the firm’s detection of the head trader’s misconduct. FINRA found that the firm also inadequately addressed the marking of the SBA Desk inventory positions because the WSPs required that SBA pools be marked on a monthly basis, as opposed to a daily basis. The firm did not have WSPs that adequately prevented the head trader from approving his own transactions without additional supervisory oversight, and allowed the firm to detect and prevent the head trader’s fictitious trading of SBA pools.
(FINRA Case #2009018062602)
This ends the information obtained on FINRA’s website.
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