Among recent enforcement actions, the Financial Industry Regulatory Authority fined Wedbush Securities $1 million for incomplete and inaccurate blue sheet submissions to both FINRA and the Securities and Exchange Commission. Also, the agency fined Kovack Securities for failures on unit investment trusts.
In addition, the SEC has settled with a company that violated whistleblower protection laws, charged a stockbroker and his friend with insider trading, and charged an investment advisor with lying about assets under management and stealing from a client.
SEC Charges Advisor With Lying About AUM, Stealing from Client
The SEC has charged Nicholas Mitsakos and his investment advisory firm Matrix Capital Markets with fraud after it said they pretended to manage millions of dollars in assets and then stole money from the first client who invested with them based on those lies.
According to the agency, Mitsakos and his firm, a state-registered investment advisor in California, solicited investors in a purported hedge fund while marketing themselves as experienced money managers with a highly successful track record. They claimed millions of dollars in assets under management when they actually had no client assets at all.
In addition, they made up a hypothetical portfolio of investments earning 20 to 66% in annual returns and passed it off to investors as real trading. When Mitsakos and Matrix Capital Markets were given $2 million in client assets to manage in September 2015, they proceeded to steal approximately $800,000 from that client and used most of it to pay for unauthorized personal and business expenses.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York has announced criminal charges against Mitsakos. The SEC’s investigation is continuing.
FINRA Fines Wedbush Securities $1 Million on Blue Sheet Failures
Wedbush Securities Inc. has been fined $1 million by FINRA in a final decision following the firm’s withdrawal of its appeal of an Office of Hearing Officers (OHO) decision.
According to the agency, the firm submitted incomplete and inaccurate blue sheets to the SEC and FINRA, in willful violation of Section 17(a) of the Exchange Act and Rules 17a-4(j) and 17a-25 and FINRA Rule 2010. The faulty submissions to both agencies stemmed from the firm’s failure to have a system or supervision for review and quality control of its blue sheets.
The firm also failed to have an audit system that provided for accountability regarding the input of records; in addition, it had no audit system in place to provide accountability for the information entered into its blue sheets. It didn’t know about the defects in its blue sheet submissions because it lacked a system to audit blue sheet entries for accountability.
Senior compliance personnel did not have procedures to check blue sheet entries before submission, nor was there any regular quarterly review of blue sheets after submission. The firm also failed to have a supervisory system for blue sheet submission, nor did it establish, maintain or enforce written supervisory procedures to keep its blue sheets in compliance.
Kovack Securities Fined on UIT Discount Failures
FINRA has censured Kovack Securities Inc. and fined the firm $125,000, as well as ordering it to pay $119,319.27 in restitution to customers, on findings that the firm failed to identify and apply sales charge discounts to certain customers’ eligible purchases of unit investment trusts, which resulted in customers paying excessive sales charges. Instead of having a supervisory system to make sure that customers were given appropriate sales charge discounts on all eligible UIT purchases, the firm relied primarily on its registered representatives to make sure those discounts were applied — despite not effectively training representatives and their supervisors to identify and apply those discounts.
The firm neither admitted nor denied the charges but consented to the sanctions and has made restitution.
SEC Fines Building Products Company Over Anti-Whistleblower Policy
Atlanta-based building products distributor BlueLinx is settling with the SEC on charges that the company violated securities laws by using severance agreements that required outgoing employees to waive their rights to monetary recovery, should they file a charge or complaint with the SEC or other federal agencies.
According to the agency, BlueLinx added the monetary recovery prohibition to all of its severance agreements in mid-2013, nearly two years after the SEC’s adoption of Rule 21F-17 that prohibits any action to impede someone from communicating with the SEC about possible securities law violations. BlueLinx’s restrictive language forced employees leaving the company to waive possible whistleblower awards or risk losing their severance payments and other post-employment benefits.
BlueLinx consented to the SEC’s cease-and-desist order without admitting or denying the findings. In addition to paying a penalty of $265,000, the company has also agreed to amend its severance agreements to make clear that employees may report possible securities law violations to the SEC and other federal agencies without BlueLinx’s prior approval and without having to forfeit any resulting whistleblower award.
The company will also make reasonable efforts to contact former employees who had executed severance agreements after August 12, 2011, to notify them that BlueLinx does not prohibit former employees from providing information to the SEC staff or from accepting SEC whistleblower awards.
BlueLinx has also agreed to certify to Enforcement Division staffers that it has complied with its undertakings.
“Companies simply cannot undercut a key tenet of our whistleblower program by requiring employees to forego potential whistleblower awards in order to receive their severance payments,” Jane Norberg, acting chief of the SEC’s Office of the Whistleblower, said in a statement.
SEC Charges Stockbroker and Friend with Insider Trading
The SEC has charged stockbroker Paul Rampoldi and his friend William Scott Blythe III with insider trading after it said they schemed to profit in advance of two major announcements by a pharmaceutical company.
According to the agency, Rampoldi coordinated the insider trading with two other brokers at his firm, as well as with a then-IT executive at Ardea Biosciences. The Ardea employee tipped one of the brokers ahead of the company’s announcement of an agreement to license a cancer drug, then tipped him again prior to the company’s acquisition by AstraZeneca PLC. The SEC charged the other two brokers and the Ardea employee last year.
The SEC said that Rampoldi and Bythe made approximately $90,000 by trading ahead of those announcements, after hearing about them via one of the brokers who learned it from the other after being tipped by the IT executive. To keep the compliance department at Rampoldi’s firm from finding out, it was decided that Blythe would fund the purchase of Ardea call option contracts in his brokerage account at a different brokerage firm. Then he and the other brokers would split the profits.
In a parallel action, the U. S. Attorney’s Office for the Southern District of California brought criminal charges against Rampoldi and Blythe.