Enforcement Roundup: Investors Win $900,000 in FINRA Arb Over Nontraded REITs

Barclays hit for electronic record storage failures; SEC fines Instinet for improper soft-dollar payments

Holidays or not, enforcement actions still took place as the Department of Labor went after PBI Bank, suing to recover losses caused to the Miller’s Health Systems employee stock ownership plan, and the Financial Industry Regulatory Authority fined Barclays Bank $3.75 million for failures to preserve its electronic files and communications.

In addition, FINRA arbitrators awarded more than $900,000 to two trusts and one individual who were sold nontraded REITs.

The Securities and Exchange Commission was also busy, charging Instinet LLC with ignoring red flags and forking over more than $400,000 in soft dollars.

FINRA Arbitrators Award Investors $900,000 on Nontraded REIT Sales

Three investors — two trusts and one individual — were awarded more than $900,000 altogether by a FINRA arbitration panel after it found two Tampa, Fla.-based companies in violation of securities laws regarding the sale of nontraded REITs.

Sterling Enterprises Group Inc. and Retirement Securities Inc. sold two nontraded REITs offered by Inland American Real Estate Trust Inc. — Inland Western Real Estate Investment Trust and Inland American Real Estate Investment Trust — to Kristopher Brownlow, the individual, and to the Derek Mason Trust and the Martha Mason Trust. All three lost money on the deals.

Jeffrey Coleman of the Coleman Law Firm in Clearwater represented the investors before the FINRA dispute resolution panel. His firm issued a statement saying that Inland Real Estate Trust is one of the country's biggest nontraded REITs, with real estate assets totaling more than $11 billion.

Retirement Securities, according to FINRA, did not make an appearance; Sterling was represented by its president, Alyn Towne III. Neither company responded to the charges before the panel, which then awarded Brownlow $47,552; the Derek Mason Trust $719, 971; and the Martha Mason Trust $133,154.

As of Dec. 17, Sterling was no longer registered with FINRA, and Retirement Securities has not been registered with the agency since 2006.


FINRA Fines Barclays $3.75M Over Electronic Record Storage

FINRA announced that it has fined Barclays Capital Inc. $3.75 million for systemic failures to preserve electronic records and certain emails and instant messages in the manner required for at least 10 years.

While federal securities laws and FINRA rules require that business-related electronic records be kept in non-rewritable, non-erasable format (also referred to as "Write-Once, Read-Many" or "WORM" format) to prevent alteration, FINRA found that from at least 2002 to 2012, Barclays failed to do so.

Instead, many of its required electronic books and records — including order and trade ticket data, trade confirmations, blotters, account records and other similar records — were not only not held in WORM format, but the problem was so widespread, permeating all of the firm's business areas, that Barclays was unable to determine whether all of its electronic books and records were maintained in an unaltered condition.

FINRA also found that from May 2007 to May 2010, Barclays not only failed to properly retain certain attachments to Bloomberg emails, it also failed to properly retain approximately 3.3 million Bloomberg instant messages from October 2008 to May 2010. This not only violated FINRA, SEC and National Association of Securities Dealers rules and regulations but also adversely impacted Barclays' ability to respond to requests for electronic communications in regulatory and civil matters.

Finally, FINRA said that Barclays failed to establish and maintain both system and written procedures that would achieve compliance with SEC, NASD and FINRA rules and regulations, and it also failed to identify and fix deficiencies related to those requirements in a timely manner.

Barclays neither admitted nor denied FINRA's findings, but consented to their entry.

 

Instinet Sanctioned by SEC on Red-Flag Soft-Dollar Payments

New York-based brokerage firm Instinet Inc. was sanctioned by the SEC and has agreed to pay more than $800,000 to settle charges that the firm paid more than $400,000 in soft dollars despite red flags indicating that to do so was improper.

While such payments — credits or rebates from a brokerage firm on commissions clients pay to advisors for trades — are allowed if they are properly disclosed, and can be used to pay for such expenses as brokerage and research services that benefit clients, in Instinet's case this was not so.

San Diego-based investment advisory firm J.S. Oliver Capital Management, which received the soft dollars, was separately charged by the SEC, along with its president, Ian Mausner, for misuse of those funds.

Instinet ignored several red flags as it paid out inappropriate soft dollars from January 2009 to July 2010.

One of those was an altered employment agreement for Mausner's ex-wife, who had failed to do any work for J.S. Oliver after 2006, but who nonetheless received $329,000 from Instinet.

Another was a request midway through 2009 for soft dollars to pay for a 50% rent increase, from $10,000 per month to $15,000 per month, for J.S. Oliver offices — which were not only located in Mausner's home, but had already been paid at the lower rate by Instinet.

A third was the submission of two requested soft-dollar payments for Mausner's travel to New York, cited as related to evaluating “potential investment opportunities.” In actuality the money was for maintenance, taxes and fees on Mausner’s personal timeshare in New York City. Despite copies of timeshare bills that were clearly in Mausner’s name indicating the payments would be for his own financial benefit, Instinet approved the soft-dollar payments totaling more than $40,000.

Instinet agreed to pay a penalty of $375,000, disgorgement of $378,673.76, and prejudgment interest of $59,607.66. The firm also must engage an independent compliance consultant to review its policies, procedures and practices related to soft-dollar payments. Without admitting or denying the SEC’s findings, Instinet also consented to a censure and a cease-and-desist order.

PBI Bank Sued by DOL for ESOP Losses

The U.S. Department of Labor has filed suit against PBI Bank Inc., and seeks to remove it as trustee of the Miller's Health Systems Inc. employee stock ownership plan for its actions resulting in losses for the participants.

According to DOL, the bank, as trustee of the plan, authorized the purchase of company stock for $40 million, which far exceeded the stock's fair market value. PBI Bank then approved financing for the deal at an excessive interest rate. Miller’s Health is a Warsaw-based company that manages long-term care and assisted-living facilities.

The Chicago regional office of the DOL’s Employee Benefits Security Administration focused on a September 2007 stock purchase. At the time of the purchase, Miller’s Health managed 31 long-term care facilities under the name of Miller’s Mary Manor and 10 assisted living facilities under the name Miller’s Senior Living. Miller’s Health also operated Theracare Inc., an Indiana corporation, which primarily provided physical and occupational therapy and speech-language pathology to residents in Miller’s Health facilities.

The agency's investigation determined that, as a result of the way the transaction was designed and because of the fiduciary breaches of PBI, the stock purchase was not for the primary benefit of participants and did not promote employee ownership in Miller’s Health. In its suit, DOL is not only seeking to require PBI to restore all losses suffered by the ESOP, plus interest, but also to remove PBI as trustee as a fiduciary and service provider of the plan and to permanently bar it from serving in either of those capacities to ERISA-covered plans in the future.

As of Sept. 30, 2012, the ESOP had 2,939 participants and assets of $12.85 million.

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Check out Advisors Brace for More Exams in 2014; DOL ‘Game Changer’ on Horizon on ThinkAdvisor.

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