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FINRA Enforcement: Oppenheimer to Pay $3.75M for Failure to Rein In Broker

By Marlene Y. Satter

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FINRA hit Oppenheimer & Co. with a $2.5 million fine, as well as $1.25 million in restitution, for its failures regarding former broker Mark Hotton, who was barred from the industry in 2013.

Among other recent enforcement actions, the agency censured and fined Ameriprise Financial in Minneapolis and suspended a rep for changing customer contact notes after the customer lodged a complaint. It also censured and fined two other firms on supervisory failures, one for a broad range of issues and the other related to the sales of nontraditional ETFs.

Oppenheimer & Co. to Pay Nearly $4 Million for Failure to Rein In Broker

FINRA has fined Oppenheimer & Co. Inc. $2.5 million, as well as ordering the firm to pay restitution to clients of $1.25 million, after it failed to supervise Mark Hotton, a former Oppenheimer broker who stole money from his customers and excessively traded their brokerage accounts. FINRA permanently barred Mark Hotton from the securities industry in August 2013.

It’s not the first time that Oppenheimer has been in the hot seat. At the end of January the firm was fined $20 million for penny stock and anti-money laundering violations, although the SEC cut it some slack on those charges, waiving sanctions over protests from some of its own commissioners as well as Rep. Maxine Waters, D-Calif. All told, Oppenheimer has been the target of at least 30 regulatory actions since 2005.

But Hotton has sunk them in all kinds of hot water. Oppenheimer has already paid more than $6 million to resolve customer arbitration claims related to its supervision of Hotton. FINRA ordered this latest $1.25 million in restitution to 22 additional customers who suffered losses but had not filed arbitration claims.

This time, the firm has been taken to task over its failure to keep tabs on Hotton — even before it hired him. The former broker was subject to 12 reportable events, including criminal charges and seven customer complaints. The firm also failed to increase supervision of Hotton despite learning, shortly after he joined the firm, that his business partners had sued him for defrauding them out of several million dollars.

Additionally, FINRA says, Oppenheimer failed to respond to “red flags” in correspondence and wire transfer requests demonstrating that Hotton was wiring funds from Oppenheimer customer accounts to entities that he owned or controlled. This allowed Hotton to transfer more than $2.9 million from those customers’ accounts. Finally, Oppenheimer failed to adequately supervise Hotton’s trading of his customers’ accounts despite the fact Oppenheimer’s surveillance analysts detected Hotton was trading the accounts at presumptively excessive levels.

In addition to the issues surrounding Hotton, FINRA also found that Oppenheimer failed to make more than 300 required filings to FINRA about some of its brokers in a timely manner. On average, these filings were 238 days late; and thus, the investing public and other broker-dealers were not timely made aware of serious allegations made against Oppenheimer’s registered representatives, including Hotton. Also, during the course of FINRA’s investigation, Oppenheimer repeatedly failed to provide timely responses to FINRA requests for information and documents.

Oppenheimer has settled the matter without admitting or denying the charges, although it did consent to the entry of FINRA’s findings.

Ameriprise Rep Hid Customer Complaint

Ameriprise Financial Services Inc. in Minneapolis was censured and fined $100,000 by FINRA, and David Bradley Tysk was fined $50,000 and suspended for three months, after the agency found that Tysk altered computer notes of customer contacts after the customer complained about the suitability of a recommendation.

Not only did Tysk ignore document-retention policies by altering his notes, he hid the alterations instead of notifying the firm when he provided a copy of the notes to be produced in discovery during an arbitration proceeding. The customer was suspicious of the notes and requested further discovery to determine whether the notes had been altered after he lodged his complaint with the firm. The firm and Tysk opposed the requests.

It wasn’t until he was in a meeting to prepare for the arbitration hearing that Tysk told the firm he’d changed the notes — but then the firm kept quiet about it. It asked Tysk to go through his computer and find evidence of his changes, but it did not take any actions itself to find earlier versions of the notes.

It also failed to produce an exception report during discovery, which it was required to do. Just before the hearing, the firm found a relevant exception report, something it should have provided months earlier. It did turn the report over to the customer as soon as it could.

At the conclusion of the arbitration hearing, the firm and Tysk were sanctioned for violating arbitration discovery rules. Tysk appealed to the National Adjudicatory Council (NAC).

Foothill Securities, Shipp Censured, Fined by FINRA

Santa Clara, California-based Foothill Securities Inc. was censured by FINRA and fined $235,000, $25,000 of which was joint and several with Stephen Guy Shipp Jr., the firm’s chief compliance officer — who was also suspended for three months — and the firm was required to bring in an independent consultant to evaluate the firm’s supervisory policies, systems and procedures, both written and unwritten.

That came as a result of FINRA’s findings that the firm did not have an adequate supervisory system and written supervisory procedures (WSPs) to monitor its securities business; it failed to follow the supervisory system and WSPs that it did have; and it also failed to establish and enforce policies and procedures that would adequately supervise the firm’s securities business. According to FINRA, the firm, acting through Shipp, relied heavily on an inadequate proprietary data system (STRIPES) for the supervision of its registered representatives and their securities activities and transactions. The system’s capture of trading information was neither consistently accurate or complete, and while the firm knew this, it still primarily relied on STRIPES for, among other reviews, trading activity reviews of its registered representatives.

Among other things, the firm — through Shipp — permitted nine of its dual Office of Supervisory Jurisdiction (OSJ) or “OSJ-to-OSJ” branch offices to have two producing managers supervise each other’s activities, which is prohibited. The firm, and Shipp, also racked up an impressive list of other supervisory failures that covered everything from inadequately supervised producing managers to failure to supervise a representative’s public radio and TV appearances. In addition, it failed to correct problems that it did find.

Shipp and the firm neither admitted nor denied the findings, but consented to the sanctions.

Firm Censured, Fined by FINRA on Nontraditional ETF Sales

Feltl & Co. of Minneapolis was censured by FINRA, fined $225,000, and ordered to pay $13,678.37 in restitution to customers after the agency found it lacked an adequate supervisory system, including WSPs, to oversee compliance in sales of leveraged or inverse exchange-traded funds (nontraditional ETFs).

According to the agency, not only did the firm and its reps fail to exercise due diligence in investigating nontraditional ETFs — despite specific FINRA guidance — before recommending them to customers, it failed to provide reps with adequate training concerning them and did not monitor nontraditional ETF activity in customer accounts. It also recommended those ETFs to hundreds of retail customers without reasonably believing that they were suitable for those customers.

The firm neither admitted nor denied the findings but consented to the sanctions.

— Check out FINRA Enforcement: I-Bank Hid Client’s Criminal Record From Investors on ThinkAdvisor.

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