The Financial Industry Regulatory Authority and the Securities and Exchange Commission recently took action against a number of firms for everything from fraud to supervisory failure that in some cases cost the firms dearly.
FINRA Fines Guggenheim Securities $800,000, Sanctions Two Traders
FINRA announced that it has fined Guggenheim Securities, LLC of New York $800,000 for failing to supervise two collateralized debt obligation traders who engaged in activities to hide a trading loss. FINRA also sanctioned the two traders; Alexander Rekeda, the former head of Guggenheim’s CDO desk, was suspended for one year and fined $50,000, and Timothy Day, a trader on Guggenheim’s CDO desk, was suspended for four months and fined $20,000.
In October 2008, according to FINRA, as the result of a failed trade, Guggenheim’s CDO desk acquired a €5,000,000 ($6.469 million) junk-rated tranche of a collateralized loan obligation. After unsuccessful attempts by Guggenheim’s CDO desk to sell the position, Rekeda and Day persuaded a hedge fund customer to purchase the CLO for $950,000 more than it had previously agreed to pay by falsely presenting the CLO as part of a package of securities a third party offered for sale.
FINRA found that the traders tried to hide the trading loss on the CLO position by providing the customer with order tickets that increased the price for the CLO position and decreased the price of the other positions that were part of the transaction. When the customer inquired about the pricing adjustments, Day, at Rekeda’s direction, lied and said a third-party seller of the CLO position had already settled the trade at a higher price and requested the customer pay the higher price.
The customer agreed to overpay for the CLO and in return, Day and Rekeda agreed to compensate the customer through other transactions, including pricing adjustments on six other CLO trades, a waiver of fees the customer owed in connection with resecuritization transactions, and a cash payment to the customer. The records created to document the transactions did not indicate any connection to the overpayment for the CLO.
FINRA found Guggenheim failed to conduct adequate review of the CDO desk’s trades, documentation concerning transactions by traders on the desk, and the traders’ email communications. Guggenheim, Rekeda, and Day neither admitted nor denied the charges, but concluded the settlement by consenting to the entry of FINRA’s findings. As part of the settlement, Guggenheim must retain an independent consultant to review and make recommendations concerning the adequacy of its supervisory procedures.
FINRA Fines, Censures BrokersXpress on Reporting Failures
BrokersXpress LLC was censured by FINRA and fined $60,000, and without admission or denial, consented to the sanctions and entry of findings that, for nearly two years, it effected municipal securities transactions on a riskless principal or agency basis, and failed to submit required reports to the Municipal Securities Rulemaking Board for both the trades it effected with other dealers and the trades it effected with its customers.
According to the findings, the firm failed to properly submit some reports of trades it effected with customers, in that some were submitted to the MSRB that reflected that the trades were effected by the firm’s affiliated dealer, when the firm itself effected the trades. Also, some reports of trades were not submitted at all. Many that were submitted to the MSRB were inaccurate or deficient. The firm also improperly reported corporate bond trades to the MSRB. Of the 257 transactions the firm effected during this period, confirmations sent to customers for 121 of them were inaccurate because they stated that the bonds were “traded flat” or were in default, when the bonds were not in default. Other failures were also part of the findings.
BrokersXpress had been acquired by Charles Schwab & Co. as part of OptionsXpress Holdings, which it acquired in 2011. However, in May of this year Schwab announced that it would be closing BrokersXpress, saying that it “was difficult to integrate because BrokersXpress does not meet our core business needs.” Spokesman Susan Forman said at the time that the company would provide the requisite 90-day notification process for affiliated advisors and clients.
A Schwab spokesperson told AdvisorOne on Oct. 12 that “BrokersXpress is no longer operational” and that the BD’s “last day of trading and supporting advisors/end clients was September 4, 2012.”
Parent OptionsXpress had previously been hit with two SEC actions, the first for an alleged abusive naked short-selling scheme and the second involving its trading arm, OX Trading LLC, which was charged with continuing to trade after delisting from the Chicago Board Options Exchange and deregistering with the SEC, apparently to avoid an audit. Forman had said in May that closure of BrokersXpress had nothing to do with either case.
United Planners Censured, Fined over Supervisory Failure on VAs
United Planners Financial Services of America, based in Scottsdale, Ariz., and its principal, Douglas Hall of Phoenix, were censured and fined by FINRA over supervisory failures on variable annuity sales.
Without admitting or denying the findings, Hall and his firm consented to sanctions that included a $200,000 fine for the firm and a $15,000 fine for Hall after FINRA found that that the firm failed to have in place a supervisory system for compliance over VA transactions of field Office of Supervisory Jurisdiction supervisors. The firm permitted these supervisors to self-approve their own VA sales, and the post-transaction review system, also inadequate, delegated to a principal the responsibility for reviewing and approving VA sales, without providing guidance, procedures and tools or auditing.
Also, the firm neither evaluated nor trained properly the person who was assigned to the home-office OSJ supervisor position. Procedures that were defined, for a weekly review of the blotter, for, among other things, suitability and switching, and a compliance department audit of all OSJ locations, were not carried out adequately. Hall was responsible for monitoring compliance, and failed to do so.
Edward Jones & Co. Fined, Censured Over Customer Account
Edward Jones & Co., L.P. was censured and fined $95,000 and consented, without admitting or denying the findings, to entry of FINRA findings that it failed to adequately review activity in a customer account that resulted in lost funds.