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. AXA Supervisory Issues
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.”