More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) issued enforcement actions recently for inadequate measures against Ponzi schemes, fund misappropriation, inappropriate sales materials for ETFs and penny stock pumping. Two of the actions were focused on the same registered representative.
Customer Ponzi Scheme at Raymond James
Raymond James Financial Services was censured and fined $400,000 and has agreed to undertake a review of its anti-money laundering policies, systems, procedures and training after FINRA found that it failed to implement procedures to detect suspicious transactions in the accounts of a customer who used his brokerage accounts at the firm to conduct a Ponzi scheme. The scheme resulted in losses of approximately $17.8 million to the individuals who provided funds to him.
The findings also stated that the firm failed to devote adequate resources to its AML program, failed to adequately investigate suspicious activity in the customer’s accounts, failed to implement its AML program to adequately consider numerous red flags related to the customer’s accounts, and failed to conduct adequate due diligence or monitoring of the customer’s accounts. Without admitting or denying FINRA’s findings, the firm has agreed to the sanctions and the requirement for review, and will certify within 90 days of its acceptance that its procedures are reasonably designed to achieve compliance with FINRA Rule 3310.
In a statement, the company said, “Raymond James Financial Services has agreed, without admitting or denying FINRA's allegations, to resolve this matter by paying a fine and certifying that its anti-money laundering procedures are adequate. The activities of the client in question were detected by the firm's monitoring systems, but FINRA alleged our investigation was inadequate. None of the client's illegal activities involved anyone associated with Raymond James Financial Services, including his financial advisor. The firm's anti-money laundering program has been enhanced significantly since the client's activities were uncovered in July 2007, and we are pleased to have this matter resolved.”
ETF Sales Literature Included Back Testing
SEI Investments Distribution Co. was censured and fined $225,000 on FINRA findings that it reviewed and approved advertising and sales literature for ETFs that depicted the performance history of certain indexes without disclosing that it included back-tested index performance history, which was unwarranted because it purported to indicate that the index had a performance history that was longer than the actual existence of the index.
In addition, the findings stated that the firm’s registered principals reviewed and approved presentations relating to certain hedge funds and private equity funds that did not comply with the content standards of NASD Rule 2210. However, the presentations contained data that was unclear, in some cases outdated or exaggerated, and did not provide a sound basis for some statements. Supervisory procedures were found to be ineffective with regard to the review of the sales materials. The firm consented to the findings and sanctions without admitting or denying the findings.
SEI declined to comment.
In two separate actions, AXA Advisors was censured and fined a total of $150,000. In the first, a fine of $100,000 was assessed over FINRA findings that it failed to supervise reasonably a former registered representative, Kenneth Neely, and failed to respond adequately to red flags concerning his scheme to misappropriate customer funds.
The representative had been the subject of customer complaints, including arbitrations, concerning his business practices at prior employers, and during an audit a spreadsheet was found with a payment schedule for clients he had induced to participate in a fraudulent investment scheme. FINRA found that the company had accepted the representative’s unlikely explanation for the spreadsheet and took no further action. AXA consented to the findings without admitting or denying them, and consented to the censure and fine.
The firm commented in a statement, “AXA Advisors terminated Mr. Neely's employment upon learning of his fraudulent activity and cooperated fully with the authorities throughout their investigation. This was an isolated incident involving one representative and six customers with investor losses of $56,000. Our customers' interests come first, and we have compensated our customers, making them whole."
In the second action, the firm was censured and fined $50,000 on findings that it had placed a registered representative, Thomas Michael Kinser, on heightened supervision when he registered with the firm because he owed $42,000 to creditors. However, despite that, the representative was able to misappropriate approximately $122,000 from a customer’s account, after arranging for that account to be transferred from the representative’s prior firm and listing his own office address and phone number as belonging to the client.
The electronic suitability review system failed to detect the irregularities, and the representative was able to request redemptions from the customer’s account without customer authorization. When the deception was discovered, the customer was reimbursed for the misappropriated funds. AXA consented to the findings, censure and fine without admitting or denying the findings.
In a statement, the firm said, “We discovered the fraud through our internal audit process and promptly terminated Mr. Kinser. Our investigation determined that Mr. Kinser's activities were limited to a single account. We have provided full restitution to the client, and cooperated fully with authorities."
Same Representative, Different Firm
In the case of the same registered representative, Kenneth Neely, over whom AXA was fined, Stifel, Nicolaus & Co. was censured, fined $350,000 and ordered to pay restitution to affected customers in an amount not to exceed $250,000, plus interest. It was also instructed to submit to FINRA a proposed plan of how it will compensate affected customers within 30 days of its acceptance of the sanctions.
The firm consented to the findings and sanctions without admitting or denying the findings. It did not respond by press time to a request for comment.
Civil, Criminal Charges Filed by SEC on Penny Stocks
The SEC is seeking financial penalties and disgorgement of ill-gotten gains plus prejudgment interest, as well as permanent injunctions against all the defendants in charges filed recently in the alleged promotion schemes for penny stock companies.
In addition, the agency is seeking penny stock bars against each of the officers and promoters, as well as officer-and-director bars against some participants in what it said were various stock schemes in which bribes and kickbacks were paid to hype microcap stocks and illegally generate stock sales.
The companies charged in the schemes are:
- Angel Acquisition Corp. (AGEL) based inCarson City, Nev., and Carlsbad, Calif.(now known as Biogeron Inc.)
- President and CFO Harold Steven Bonenberger of Carlsbad.
- Clean Coal Technologies Inc. (CCTC) based in New York City.
- President and CEO Douglas D. Hague of Boca Raton, Fla.
- Cotton & Western Mining Inc. (CWRN) based in Humble, Texas.
- President and CEO Robert L. Cotton of Houston.
- Delivery Technology Solutions Inc. (DTSL) based in Boca Raton.
- CEO and Chairman Ryan F. Coblin of Boca Raton.
- Optimized Transportation Management Inc. (OPTZ) based in San Antonio
- CEO Kevin P. Brennan of Pittsburgh.
- OPTZ stock promoter Marc S. Page of Tiburon, Calif.
- OPTZ stock promoter Donald G. Huggins of St. Petersburg, Fla.
- Sure Trace Security Corp. (SSTY) based in Philadelphia.
- Chairman and former president Michael M. Cimino of Philadelphia.
- President Joseph J. Repko of Hobe Sound, Fla.
- US Farms Inc. (USFM) based in San Diego and Fallbrook, Calif.
- President and CEO Yan K. Skwara of San Diego.
- Wound Management Technologies Inc. (WNDM) based in Fort Worth,Texas, and Fort Lauderdale, Fla.
- President, CEO, and Chairman Scott Haire of Fort Worth and Coral Springs, Fla.
In addition, Matthew A. Connor, who lives in Amherst, Va., was charged with participating in a fraudulent scheme to hype the stock of KCM Holding Corp., a penny stock company charged in the SEC’s series of penny stock enforcement actions in June 2011.
Some of the schemes involved the payment of undisclosed kickbacks to a pension fund manager in exchange for the fund’s purchase of restricted shares of stock in the various microcap companies. Others involved an undisclosed bribe that was to be paid to a stockbroker who agreed to purchase a microcap company’s stock in the open market for his customers’ discretionary accounts.
The SEC’s litigation will be led by C. Ian Anderson, Edward D. McCutcheon, and James M. Carlson. In addition, the U.S. Attorney’s Office announced criminal charges against the same individuals facing SEC civil charges.