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.
Among recent enforcement actions, the SEC went after the city of Victorville, Calif., as well as its underwriter and others for defrauding municipal bond investors. In addition, FINRA took action against firms for fraud and other violations, including one firm’s intimidation of its own staff in its quest to protect its illegal actions.
Victorville, Underwriter, Others Charged by SEC With Fraud
The city of Victorville,Calif., a city official, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & De Dios (KND), the underwriter of the Airport Authority’s bonds, found themselves the target of SEC action with charges that they defrauded investors by inflating valuations of property securing an April 2008 municipal bond offering.
Keith Metzler, Victorville’s assistant city manager and its former director of economic development; J. Jeffrey Kinsell, owner of KND, and Janees Williams, vice president of KND, were responsible for false and misleading statements that were made in the Airport Authority’s 2008 bond offering, the SEC said. KND was also charged with working through a related party and misusing more than $2.7 million of bond proceeds to keep itself afloat.
The Airport Authority, controlled by the city of Victorville, set out to perform several redevelopment projects that included construction of four airplane hangars on a former Air Force base. It financed the projects by issuing tax increment bonds, which are solely secured by and repaid from property-tax increases attributable to increases in the assessed value of property in the redevelopment project area.
But by April 2008, the Airport Authority had to refinance part of that debt by issuing more bonds. Metzler, Williams and Kinsell used a valuation for the hangars that, at $65 million, was more than double what the county assessor had determined they were worth. That valuation helped to drive the principal amount of the new bond issue, and gave the Airport Authority the wherewithal to issue a lot more bonds and bring in more money than a true valuation would have provided. Not only that, but it meant that investors were duped about the value of the bonds they were buying.
To further complicate matters, Kinsell and KND, along with another of his companies, used more than $2.7 million intended for the building of the hangars for his own purposes. He came up with the scheme after allegations surfaced that the contractor building the hangars might have taken some of the bond proceeds for personal expenses. Kinsell stepped in to “manage” the construction of the hangars, although he had no experience to do so, through his company KND Affiliates.
Kinsell and KND Affiliates skimmed off more than $2.7 million in bogus oversight and management fees from the $60 million the company was loaned for the project, the SEC said. They also hid the fees from the Airport Authority, and from auditors as well.
The SEC seeks the return of ill-gotten gains with prejudgment interest and financial penalties, as well as the return of ill-gotten gains from relief defendant KND Holdings, the parent company of KND.
FINRA Charges John Thomas Financial With Fraud and Intimidation
John Thomas Financial (JTF) of New York and Anastasios “Tommy” Belesis, its CEO, have been charged with fraud in connection with the sale of America West Resources' (AWSR) common stock and intimidation of registered representatives. The two have also been charged with numerous market violations, including trading ahead and failing to provide best execution for customer orders. Others named in the complaint are Michele Misiti, branch office manager; John Ward, trader; Joseph Castellano, chief compliance officer; and Ronald Vincent Cantalupo, regional managing director.
JTF participated in private financings of AWSR, and as a result, it and many of its customers owned AWSR stock. When on Feb. 23, 2012, the price of AWSR common stock spiked, JTF took advantage of the opportunity to sell the majority of its proprietary position in the stock—a total of 855,000 shares—and received more than $1 million in proceeds.
The stock, which at the time was thinly traded on the OTC Bulletin Board, had opened on Feb. 23 at 28 cents per share, but during the course of the day it rose more than 600% to peak at $1.80 per share before falling back down to close at $1.29. In its complaint, FINRA said that JTF at the height of the price spike received at least 15 customer orders to sell more than one million shares. It only executed one of these on that date, with JTF and Belesis preventing the execution of the others till the next day, days later or permanently.
The firm and Belesis are accused by FINRA of lying to both its own registered reps and to its customers through Misiti and Castellano about why the orders were not executed, blaming it on the firm’s clearing systems, on not enough demand to execute, or on nonexistent restrictions under the Securities Act of 1933.
They also tried to hide execution failures by “losing” customer order tickets and forging replacements for six of them that were dated the day after the price spike. They lied to FINRA as well about Belesis and his involvement in the scheme.
Registered representatives who were forthright enough to disagree with the firm’s business practices were threatened by JTF, Belesis, Castellano and Cantalupo, not just with the possibility of ruined reputations and careers via doctored records, but also with physical violence (they were threatened with being “run over”), harassment and assault, FINRA said.
Leonard & Co. Fined, Censured by FINRA on Unsuitable Recommendations
Troy, Mich.-based Leonard & Co. was fined $250,000 and censured by FINRA for its actions during a two-year period when it carried out numerous inverse floater collateralized mortgage obligation (CMO) transactions to retail customers without having reasonable grounds for believing that the recommendations were suitable.
The firm neither admitted nor denied findings that it not only had done so, but had failed to have WSPs that addressed the suitability of inverse floater CMOs. Representatives had not been provided with information during their training that would allow them to make suitability determinations for customers or to distinguish among different inverse floater CMOs.
No one carried out research to make these determinations, nor were naïve customers who did not have sufficient market savvy to understand what they were being offered protected against the risks presented by these transactions.
Read FINRA Charges John Thomas Financial, CEO in Penny Stock Scam on AdvisorOne.