SEC, FINRA Enforcement Roundup: Former Billion-Dollar Hedge Fund Advisory Firm, Execs Slapped

Merrill Lynch Fined, Censured over Unsuitable Recommendations

FINRA censured Merrill Lynch, Pierce, Fenner & Smith and fined the firm $400,000, which includes the disgorgement of commissions received of $47,190.03, as well as requiring it to pay $130,718, plus interest, in restitution to customers. Without admitting or denying the findings, the firm consented to the entry of findings that, through a registered representative, it recommended that customers engage in a pattern of unsuitable short-term closed-end fund (CEF) and unit investment trust (UIT) trading.

According to the findings, most of the short-term transactions involved CEFs purchased at IPOs, with customer sales charges built into the offering price. Even though CEFs and UITs generally were intended as longer-term investments, the registered representative recommended some customers sell their entire positions as soon as two months after purchase. Many of the transactions involved switching, with the customer gaining little or no economic benefit from the exchange.

The firm, through the representative, made these recommendations to purchase and sell CEFs and UITs on a short-term basis without reasonable grounds to believe the recommendations were suitable for the customers, who as a result incurred unnecessary sales charges and suffered losses of approximately $360,000 while the firm and the representative earned gross commissions of more than $47,000. The representative also made unsuitable recommendations that customers open margin accounts and use margin to buy and sell securities. These customers paid in aggregate over $70,000 in margin interest.

FINRA found that the firm failed to detect that the representative was engaging in a pattern of unsuitable short-term trading of CEFs and UITs and unsuitable transactions on margin; it also failed to respond adequately to exception reports and information suggesting the representative’s pattern of unsuitable use of margin. The firm did not speak with any customers about the short-term trading or margin activity until they began to complain. In some cases, the firm relied upon the broker’s self-serving explanations for the transactions without conducting further investigation. FINRA also found additional supervisory failures. Natixis Fined, Censured over WSPs

Natixis Securities Americas LLC, formerly Natixis Bleichroeder LLC, was censured by FINRA, fined $300,000 and required to revise its written supervisory procedures (WSPs). Without admitting or denying the findings, the firm consented to the entry of findings that it had fail-to-deliver positions at a registered clearing agency in equity securities that resulted from short sales and long sales, and did not close the fail-to-deliver positions by purchasing securities of like kind and quantity within the time frame SEC rules prescribed.

The findings stated that the firm had fail-to-deliver positions at a registered clearing agency in equity securities that were attributable to market-making activities, and did not close out the positions with appropriate purchases within the time SEC rules prescribed. In instances involving equity securities, the firm accepted short sale orders from other persons, or effected short sales for its own accounts, without first borrowing the securities, or entering into a bona fide arrangement to borrow the securities, and it had fail-to-deliver positions at a registered clearing agency in such securities that had not been closed out in accordance with the provisions of SEC rules.

In addition, FINRA found numerous reporting errors in a range of categories, failures in order execution and the exercise of diligence in the area of pricing for its customers, as well as delivery failures. FINRA also found that the firm effected short sales in the publicly traded securities of financial firms that had been banned by SEC Emergency Order #34-58592. Finally, the findings also found failures in the firm’s supervisory system. FINRA Expels EKN Financial Services for Defying SEC Order, More

FINRA announced that it has expelled EKN Financial Services. of Melville, N.Y., for numerous compliance violations and for allowing its CEO, Anthony Ottimo, to act as a supervisor after being barred from acting in that capacity by the SEC in June 2008. FINRA barred Ottimo from the securities industry and barred the firm’s former president, Thomas Giugliano, from acting in a principal capacity, suspended him from the securities industry for one year and fined him $150,000. EKN, through Ottimo and Giugliano, also violated numerous NASD/FINRA and SEC rules and federal securities laws, including antimoney laundering (AML) violations, net capital deficiencies and widespread reporting failures.

FINRA found that from 2008 through 2011, Ottimo acted in a supervisory role despite an SEC order barring him from doing so, and acted as CEO despite not being registered as a principal. During that time, EKN and Giugliano repeatedly misrepresented to FINRA that Ottimo was no longer acting as EKN’s CEO, as a principal or as a supervisor. In 2011, EKN lied to FINRA examiners, reporting that since 2008, it had “never filled” the CEO position when, in fact, FINRA’s investigation revealed that EKN’s own documents indicated that from 2008 through 2011, Ottimo was listed as EKN’s CEO and was operating in that capacity. As CEO, Ottimo supervised other EKN personnel, negotiated and executed agreements, controlled its finances, retained signatory authority over its bank accounts, and represented himself as EKN’s CEO to its clearing firm and other third parties.

In addition, FINRA found that EKN, Ottimo and Giugliano, who was aware of EKN and Ottimo’s regulatory violations, committed numerous anti-money-laundering violations, including failing to establish an adequate AML compliance program to detect and report suspicious activity. For instance, EKN customers attempted to inject several hundred million dollars of bogus bonds into the U.S.financial system, but the firm failed to detect “red flags” suggesting possible suspicious activity.

Moreover, EKN failed to meet minimum net capital requirements during certain periods from September 2008 to November 2010, and also prepared inaccurate net capital computations, failed to accurately report its net capital deficiencies to the SEC and FINRA, and failed to accurately record expenses and liabilities in its books and records. EKN also failed to report to FINRA, which would have made this information publicly available through FINRA BrokerCheck, that Ottimo and Giugliano each had hundreds of thousands of dollars in unsatisfied judgments and liens.

In settling this matter, EKN, Ottimo and Giugliano neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.