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Regulation and Compliance > Federal Regulation > FINRA

FINRA Enforcement: I-Bank Hid Client’s Criminal Record From Investors

By Marlene Y. Satter

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The president of Brookville Capital Partners was barred for fraud and the firm ordered to make full restitution to its customers after the Financial Industry Regulatory Authority found they had been defrauded in a private placement offering.

Among other recent actions taken by FINRA were the censure of Merrill Lynch and Merrill Lynch Professional Clearing Corp. and a fine for the two of more than $7 million on large option position reporting failures; the censure and fine of Clearview Correspondent Services for aggregation failures; and the censure and fine of Citigroup Global Markets for failure to deliver ETF prospectuses to customers.

Investment Firm Hid Client’s Criminal Record From Investors: FINRA

FINRA has barred Anthony Lodati, president of the wealth management firm and investment bank Brookville Capital Partners, from the securities industry. It has also fined the firm $500,000 for fraud and ordered it to make full restitution of more than $1 million to customers that the agency said were defrauded in connection with sales of a private placement offering.

According to FINRA, the private placement offering, called Wilshire Capital Partners Group LLC, was one through which investors were told they would have an indirect interest in pre-initial public offering shares of Fisker Automotive. The conduct took place from January 2011 to October 2011.

During the time Brookville solicited customers to invest in the offering, Lodati learned that Wilshire’s CEO and managing director, John Mattera, had a significant criminal and regulatory background. Instead of disclosing that, among other things, Mattera had been sanctioned by the SEC in 2010 for securities fraud and convicted of a felony in Florida in 2003, Lodati and Brookville purposely hid both Mattera’s background and his involvement with Wilshire, and continued to solicit its customers to invest.

Brookville sold more than $1 million worth of interests in Wilshire to 29 customers. Brookville received more than $104,000 in commissions for the sales.

Brookville and Lodati neither admitted nor denied the charges, but consented to the sanctions.

FINRA Censures, Fines Citigroup Global Markets on ETF Prospectus Failures

FINRA censured Citigroup Global Markets and fined the firm $3 million for failing to deliver prospectuses on certain ETFs to customers.

The firm neither admitted nor denied the findings that it failed to deliver prospectuses for approximately 255,000 customer purchases of approximately 160 ETFs during a three-month period for which the firm self-reported the failure. From 2009 through April 2011, it is estimated that the firm may have failed to deliver prospectuses for over 1.5 million purchases of ETFs by its customers.

The firm was also found to have failed to design and implement a supervisory system adequate to achieve compliance regarding ETF prospectus delivery. The firm’s decentralized supervisory system meant that, although the firm found some failures in 2009, it failed to identify deficiencies in its process and to realize the scope of the problem. As a result it failed to deal with the matter manually in a timely manner.

The firm did not appropriately respond to “red flags” about delivery failures. Although it found isolated failures in 2009, it wasn’t until 2010 that it realized how broad the issue was and found the deficiencies in its supervision. FINRA Censures, Fines Merrill Lynch Millions on Options Reporting Failures

FINRA has censured Merrill Lynch and Merrill Lynch Professional Clearing Corp. and fined the two firms millions over large options positions reporting (LOPR) failures.

Merrill was censured and fined $5,796,000, of which $1,040,000 shall be paid to FINRA. Merrill Lynch Professional Clearing Corp. was censured and fined $1,454,000, of which $260,000 shall be paid to FINRA. The balance of the firms’ fines will be paid to BOX Options Exchange LLC, NASDAQ OMX BX, Inc., and NASDAQ OMX PHLX, pursuant to separate settlement agreements.

Without admitting or denying FINRA’s findings, both firms consented to the measures after the agency found that, as a result of deficiencies in the firms’ systems and procedures with respect to reporting positions to the LOPR system, they failed to include reportable positions in their LOPR submissions and also included inaccurate data in those submissions.

FINRA said the firms did not report positions with respect to accounts acting in concert with others that together had amassed an aggregate position of 200 or more option contracts on the same side of the market covering the same underlying security. Merrill reported in-concert positions, but did not identify them as acting in concert.

The firms reported some positions to the LOPR system with incorrect account types and some with incorrect addresses. In its LOPR submissions, Merrill aggregated positions having weekly expirations with positions having monthly expirations. Its customers exceeded position limits for one security for 98 consecutive days, a second security for 12 days, a third security for 11 consecutive days and a fourth security for 44 nonconsecutive days. In addition, in its proprietary accounts, the firm exceeded a position limit in one security for 11 consecutive days and in a second security for 13 nonconsecutive days.

The clearing unit reported positions inaccurately sometimes by overreporting positions as in concert or underreporting in-concert positions. It improperly deleted positions from the LOPR system on the Friday before expiration, reported positions to the system with incorrect clearing numbers and failed to update one reported position after a corporate action.

Both firms failed to establish adequate systems of supervision, including systems of follow-up and review, to achieve compliance with LOPR system position reporting rules. As a result, both firms failed to detect violations when they occurred, leaving them in most cases to be found via FINRA reviews.

Clearview Censured, Fined by FINRA for Aggregation Failures

Clearview Correspondent Services LLC, now known as BB&T Securities LLC, was censured by FINRA and fined $1 million for failure to properly aggregate positions for accounts that were acting in concert under the common control of specific registered representatives/investment advisors within the firm.

The firm neither admitted nor denied findings that it failed to report positions to the LOPR system and failed to properly aggregate positions for accounts that were acting in concert under the common control of an unregistered third party outside the firm.

As a result, it failed to report positions to the LOPR and to report positions in a timely manner. It also failed to establish and maintain a supervisory system that would achieve compliance.

— Check out Forced Arbitration Clauses Harm Consumers: CFPB on ThinkAdvisor.

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