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Regulation and Compliance > Federal Regulation > FINRA

Enforcement: Father, Son Paid for Fraud Defense by Bilking Native Americans: SEC

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Among recent enforcement actions by the Securities and Exchange Commission were charges against a father and son and five of their associates in a scheme to defraud investors with phony Native American tribal bonds.

In addition, the Financial Industry Regulatory Authority has censured Stephens Inc. and fined the firm $900,000 for inadequate supervision of “flash” emails sent by research analysts, and censured and fined Securities America $250,000 after finding the firm allowed sales of notes for an unregistered limited partnership investment without having done adequate due diligence.

SEC Charges Father, Son, 5 Others With Bilking Native American Tribe

Jason Galanis, who has a checkered history with the SEC; his father, John Galanis; and five others were charged by the SEC with defrauding investors in sham Native American tribal bonds so they could steal millions of dollars in proceeds for their own extravagant expenses and criminal defense costs.

The younger Galanis, who faced stock fraud charges last year along with his father, had also been embroiled in an accounting fraud case in 2005 thanks to his holdings of Penthouse International stock. In this case, he and his father persuaded a Native American tribal corporation affiliated with the Wakpamni District of the Oglala Sioux Nation to issue limited recourse bonds that the father-and-son duo had already structured. Galanis then acquired two investment advisory firms and installed officers to arrange the purchase of $43 million in bonds using clients’ funds.

But instead of investing the bond proceeds, as promised, in annuities to benefit the tribal corporation and generate sufficient income to repay bondholders, the money wound up in a bank account in Florida belonging to a company controlled by Jason Galanis and his associates.

Among their alleged misuses of the misappropriated funds were luxury purchases at such retailers as Valentino, Yves Saint Laurent, Barneys, Prada and Gucci. Investor money also was diverted to pay attorneys representing Jason and John Galanis in a criminal case brought parallel to the SEC’s stock fraud charges last year.

Also charged were Devon Archer of Brooklyn, New York; Bevan Cooney of Incline Village, Nevada; Hugh Dunkerley of Huntington Beach, California and Paris, France; Gary Hirst of Lake Mary, Florida; and Michelle Morton of Colonia, New Jersey. They’re charged with violations of the antifraud provisions of the federal securities laws and related rules.

The SEC seeks disgorgement plus interest and penalties, as well as permanent injunctions. In addition, the agency seeks officer-and-director bars against Jason Galanis, Archer, Dunkerley and Morton.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York has announced criminal charges against the same seven individuals. The SEC’s investigation is continuing.

FINRA Fines Stephens Inc. $900,000 on ‘Flash’ Emails From Analysts

FINRA has censured Stephens Inc. of Little Rock, Arkansas, and fined the firm $900,000 on findings that it inadequately supervised firmwide internal “flash” emails sent by its research analysts to convey information about companies and industries the firm covered. Those failures created the risk that the flash emails could potentially include material nonpublic information that might be misused by sales and trading personnel.

Stephens’ firmwide flash email program was designed as an expeditious way for research analysts to share publicly available news and insights regarding covered companies with its sales and trading personnel for discussion with firm customers interested in those companies. (Newswires such as Reuters and Dow Jones provide similar services.)

However, FINRA found that from at least August 2013 through January 2016, Stephens did not adequately supervise the content and dissemination of the flash emails, and that it failed to have and enforce adequate written supervisory procedures concerning trading in connection with the emails.

FINRA also found instances of firm personnel forwarding flash emails marked “internal use only” to customers, or cutting and pasting the text of an internal-use email into a separate communication sent to a customer. In at least one instance, FINRA also found that content from an unapproved draft research report had been cut and pasted into a flash email. These practices were contrary to firm policy, but FINRA found the firm had no effective method to detect or prevent them.

Stephens neither admitted nor denied the charges, but consented to entry of FINRA’s findings.

The firm was told to cease distributing flash emails and was also ordered to conduct a comprehensive review of its policies, procedures and training in the research area. FINRA Censures, Fines Securities America on Due Diligence Failures

Securities America was censured by FINRA and fined $250,000 after the agency found that the firm allowed sales of notes for an unregistered limited partnership investment without having done adequate due diligence.

According to FINRA, Securities America allowed one of its representatives to sell preferred notes of an unregistered limited partnership investment without the firm first conducting adequate due diligence regarding this product.

Shortly after the representative’s association with the firm, he began seeking its approval of the preferred notes to the fund’s investors. The firm told the representative it was awaiting an independent third-party due diligence report before granting approval, but it agreed anyway to allow the representative to offer the notes for sale to existing investors.

The approval was limited to existing customers who already held the investment to be converted; nonetheless, the firm conducted no meaningful due diligence on the notes before giving approval to the representative, in violation of its WSPs.

As a result, the firm was not aware of, and did not investigate, numerous red flags about the ongoing financial viability of the fund. Within four months, the representative’s branch office converted just over $8 million of existing interests to the preferred notes, which required additional capital contributions from customers of just over $2.5 million. Thereafter, the fund began making late payments to preferred note holders, and eventually stopped making payments altogether.

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

— Check out Enforcement: The ‘Brown Bag Man’ and the Insider Trading Techie on ThinkAdvisor.


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