SEC, FINRA Enforcement Roundup: Schwab's BrokersXpress Hit With Another Fine

FINRA found that that the customer’s account was the subject of heightened scrutiny by the firm because, among other things, international wire activity was detected in the account; the activity involved wires of more than a million dollars and the account became subject to a grand jury subpoena and an investigation by law enforcement.

Despite heightened scrutiny on the account, a branch office assistant was able to convert $167,249 from that customer’s account by using forged letters of authorization to effect wire transfers out of the account without permission or authority. The improper transfers, with the exception of two, were each for less than $10,000 and occurred several times per month.

FINRA also found that the funds were wired to an outside bank account belonging to the assistant’s relative, who was not associated with the customer or his accounts. Despite the heightened scrutiny, inquiries by law enforcement and the size and frequency of the wire activity to a third-party account, the firm failed to perform an adequate account activity review and failed to respond to red flags that would have alerted it to the misconduct. FINRA found that the firm promptly reimbursed the customer for the losses.

Firms Censured, Fined Over Subprime Loans in Income Mutual Fund

Fidelity Brokerage Services, LLC and Fidelity Investments Institutional Services Co., Inc., both of Smithfield, R.I., were censured and fined $375,000, jointly and severally, by FINRA. Without admission or denial, both firms consented to the sanctions and to the entry of findings related to a mutual fund determined to be unsuitable for conservative investors seeking to preserve capital.

According to FINRA’s findings, the firms marketed, sold and/or wholesaled shares in an income mutual fund and, in connection with that, created advertising, training and/or wholesaling materials for that fund that were provided to public customers, retail sales firms, used internally or used for institutional purposes within the selling intermediaries. The fund, however, included securities backed by, among other things, subprime mortgages and credit card and auto loan receivables.

After the subprime crisis began, the fund’s net asset value started to fall, and it was obvious that it was no longer suitable for investors trying to preserve capital. However, instead of doing a timely update of their sales materials to reflect the fund’s change in suitability, and to accurately depict how the fund was affected by the subprime crisis, or ceasing to distribute them, the firms continued to use materials that were unbalanced to begin with and contained unqualified promises of positive future performance. The materials were misleading, contained unwarranted statements and failed to provide a sound basis by which to evaluate the fund’s nature, holdings and risks.

FINRA found that not only did Fidelity Investments continue to distribute certain of these materials to selling intermediaries, but procedures the firms had in place to review and approve sales materials were not reasonably designed to achieve and monitor compliance with applicable laws, regulations and rules.

RBC Capital Markets Censured, Fined for Account Reconciliation Failures

FINRA censured and fined RBC Capital Markets, LLC $250,000 for violations resulting from difficulties in reconciling accounts after a merger. Without admitting or denying the findings, RBC consented to the sanctions and to the entry of findings that it failed to successfully resolve problems stemming from a merger combining the institutional firm with its affiliated retail firm, and a back-office system conversion.

According to the findings, after the merger and conversion, the firm experienced difficulties in reconciling its accounts. This resulted in customer reserve, net capital, recordkeeping and supervisory violations. The firm failed to prepare an accurate customer reserve formula, made a late deposit to its customer reserve account resulting in an eight-minute hindsight deficiency of approximately $317 million, and made some late withdrawals from customer reserve and proprietary accounts of introducing brokers (PAIB accounts).

The firm also failed to take net capital charges of approximately $366 million for aged debits in some accounts. This amount reduced the firm’s excess net capital from approximately $627 million to $260 million, but did not result in a deficiency. FINRA found that in connection with the customer reserve and net capital violations, there were numerous other inaccuracies and failures.

SEC Charges Hedge Fund Managers With Defrauding Investors

The SEC announced that it has separately charged a pair of hedge fund managers and their firms with lying to investors about how they were handling the money invested in their respective hedge funds.

In one case, the SEC alleges that San Francisco-based hedge fund manager Hausmann-Alain Banet and his firm Lion Capital Management stole more than a half-million dollars from a retired schoolteacher who thought she was investing her retirement savings in Banet’s hedge fund. In the other case, the SEC charged Chicago-based hedge fund managers Norman Goldstein and Laurie Gatherum and their firm GEI Financial Services with fraudulently siphoning at least $147,000 in excessive fees and capital withdrawals from a hedge fund they managed.

According to the SEC’s complaint filed against Banet and Lion Capital Management in federal court in San Francisco, Banet led the teacher to believe that his hedge fund would invest in the stock market using a long/short equity investing strategy. Instead, Banet used the teacher’s investment of $550,000 to pay his own personal and business expenses, including his home mortgage, office rent, and staff salaries. He also provided phony account statements showing nonexistent investment gains and listing an independent administrator that performed no actual work for the fund.

In a parallel action, the U.S. Attorney’s Office for the Northern District of California also announced criminal charges against Banet.

According to the SEC’s complaint against Goldstein, Gatherum, and GEI Financial Services filed in federal court in Chicago, investors in the hedge fund were not told that its adviser removed various performance hurdles when calculating fees. Furthermore, inappropriate capital withdrawals were made from the fund. Goldstein, Gatherum, and their firm disclosed to advisory clients that Illinois regulators had stripped Goldstein of his securities registrations in 2011, barring him from providing investment advisory services in the state. Goldstein nevertheless continued to make all investment decisions on behalf of clients, and he and Gatherum caused GEI Financial Services to violate compliance rules applicable to SEC-registered investment advisers.