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Regulation and Compliance > Federal Regulation > FINRA

Enforcement: FINRA Bars Broker for Market Manipulation

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Among recent enforcement actions by the Securities and Exchange Commission were charges against the former financial operations principal of a bank for misuse of “plug” entries and a settlement with VimpelCom Ltd. over allegations it bribed an Uzbek official.

In addition, FINRA barred one broker, suspended and fined his supervisor and sanctioned another broker in a case of market manipulation.

FINRA Bars Broker for Market Manipulation

The Financial Industry Regulatory Authority has barred broker George Johnson from the securities industry for manipulating the market price and trading volume for the common stock of IceWEB Inc.

FINRA also sanctioned Christopher Wynne, Johnson’s supervisor, suspending him for two years in all capacities, barring him in a principal capacity, and fining him $25,000. Joseph Mahalick, another broker who worked with Johnson and Wynne, was suspended for six months and fined $20,000 for falsifying firm records and has been barred from the securities industry in a separate action. Johnson, Wynne and Mahalick all worked for Meyers Associates L.P. in that firm’s Chicago branch office during the time period of the misconduct.

According to the agency, over an eight-day period, Johnson manipulated the market for IWEB by recommending that some of his customers buy at increasingly higher and artificially inflated prices while also recommending his other customers sell their shares, frequently matching trades between the customers.

Among Johnson’s motives for manipulating the stock was his desire to get business from the issuer, for which he would anticipate receiving compensation in connection with a future private offering. Johnson coordinated a campaign with a stock promoter to attempt to increase the stock’s share price to a level that would allow for the exercise of certain warrants.

Johnson and Wynne sent customers IWEB sales materials that omitted information concerning material conflicts of interest and material risks concerning IWEB’s business, and contained misleading, exaggerated and unwarranted information. Johnson also disclosed confidential information to potential purchasers concerning another offering.

In addition to the IWEB scheme, FINRA found that Johnson committed fraud by recommending that some of his customers buy shares of another penny stock without telling them he was liquidating his own personal positions of the stock from his own brokerage accounts.

To cover up Johnson’s violations, Johnson, Mahalick and Wynne agreed to enter false information on more than 100 order memoranda, indicating that Wynne or Mahalick was responsible for the account or transactions instead of Johnson.

Johnson, Wynne and Mahalick neither admitted nor denied the charges but agreed to the sanctions.

SEC Charges Former Bank Officer on ‘Plug’ Entries

The SEC has charged Jason Maiher, the former chief financial officer and financial and operations principal of KeyBanc Capital Market Inc., with misusing “plug” entries to reconcile general ledger balance sheet information with back-office system information.

According to the agency, from some time before January 2011 through January 2012, Maiher directed that unsubstantiated or “plug” entries be made to one or more accounts in KBCM’s general ledger, in order to complete KBCM’s monthly close-the-books process. The amount of the plug entries varied over time.

Those plug entries caused KBCM to overstate assets and income in its fiscal year 2010 financial statements, which were included in its fiscal year 2010 annual audited report filed with the SEC in February 2011. Maiher signed off on the report, affirming that the accompanying financial statements were “true and correct.” The plug entries also caused the inclusion of inaccurate financial information in KBCM’s monthly FOCUS reports, filed with FINRA and subsequently furnished to the SEC, for some point prior to January 2011 through January 2012. In 2012, KBCM filed amended FOCUS Reports.

In its annual audited report for the year ended Dec. 31, 2011, KBCM disclosed that its prior period financial statements (for fiscal year 2010) included unsubstantiated assets of $13,679,000 ($8,591,000 net of taxes) and omitted liabilities of $4,305,000 ($2,701,000 net of taxes). KBCM’s writeoff of the unsubstantiated assets and accrual of the unrecorded liabilities resulted in restated net income of $3,136,000, a 78% reduction versus the previously reported $14,428,000, and restated shareholder’s equity of $316,796,000, an $11,292,000 reduction, from the previously reported $328,088,000.

In November of 2011, KBCM hired a new CFO, who found the discrepancies and notified company management. In May of 2012, Maiher was terminated for “involvement in inaccurate entries in the firm’s general ledger, failure to ensure substantiating documentation relating to those entries and failure to ensure appropriate segregation of duties.”

VimpelCom to Pay $795 Million in Bribery Case

The SEC, along with the Department of Justice and Dutch regulators, have announced a settlement with telecommunications provider VimpelCom Ltd. that requires the company to pay more than $795 million to resolve its violations of the Foreign Corrupt Practices Act (FCPA) to win business in Uzbekistan.

According to the agency, VimpelCom offered and paid bribes to an Uzbek government official related to the president of Uzbekistan as the company entered the Uzbek telecommunications market and sought government-issued licenses, frequencies, channels and number blocks. At least $114 million in bribe payments were funneled through an entity affiliated with the Uzbek official, and approximately half a million dollars in bribes were disguised as charitable donations made to charities directly affiliated with the Uzbek official.

The settlement requires VimpelCom to pay $167.5 million to the SEC, $230.1 million to the DOJ and $397.5 million to Dutch regulators. The company must retain an independent corporate monitor for at least three years.

The SEC’s investigation is continuing.

— Check out Deutsche Bank Analyst Kept Some Doubts to Himself on ThinkAdvisor.


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