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FINRA Bars and Fines Rep for Taking Money From a Client: Enforcement

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Kyle Patrick Harrington, a former registered representative at Aurora Capital, was barred from association with any member of the Financial Industry Regulatory Authority in all capacities. He was also ordered to pay $105,000, plus interest, in restitution to his member firm and ordered to pay disgorgement of $190,974, plus interest, to FINRA.

According to FINRA’s disciplinary actions report for February, Harrington converted customer funds, intentionally causing the customer to wire nearly $20,000 of her funds into his account.

The findings stated that Harrington took the funds for his own use, without the customer’s authorization, and never returned them.

According to FINRA, Harrington then attempted to obstruct FINRA’s investigation into his conversion by contacting the customer and asking her to sign a false document stating that she had stayed at his vacation rental property.

Harrington also engaged in private securities transactions, for which he was compensated, without giving prior notice to or receiving prior written approval from his firm and without the firm’s supervision, according to the findings.

FINRA found that Harrington made misstatements and provided false documents to his firm in connection with its investigation into whether he had engaged in outside business activities.

Harrington intentionally misrepresented the nature of payments he received and deposited into his bank accounts as rental income and a payment from his former broker-dealer, FINRA said. In fact, the payments were for the purchase of stock in Harrington’s outside business.

According to FINRA, Harrington knowingly caused falsified rental contracts to be sent to his firm in order to conceal the true purpose of the funds he had received. FINRA also found that Harrington provided false and misleading documents and information to FINRA in connection with its investigation of the private securities transactions and the conversion.

FINRA Fines Cetera IBD for Failing to Respond to Mutual Fund Red Flags

Cetera Advisor Networks, an independent broker-dealer unit of Cetera, was censured, fined $700,000 and ordered to pay $691,755, plus interest, in restitution to customers, according to FINRA’s disciplinary actions report for February.

Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to respond reasonably to red flags of unsuitable mutual fund switching and unsuitable stock trading intended to conceal the switching by one of its registered representatives.

The findings stated that the firm detected evidence of the representative’s unsuitable trading through annual audits and electronic trade reports. However, according to FINRA, it did not take any disciplinary action against the representative whose unsuitable trading caused nearly $700,000 in customer losses.

The findings also stated that the firm failed to have a reasonable system in place overseeing the representative’s designated supervisors.

“The firm permitted an individual outside of the licensed supervisory chain to direct the designated supervisors on matters relating to the representative’s supervision,” FINRA said in its report. “Furthermore, as the sales manager’s compensation was based in part on the profitability of the branch, and thus on the representatives’ commissions, the sales manager had a financial incentive not to restrict his production.”

The firm must also certify to FINRA that it has established and implemented policies, procedures and internal controls reasonably designed to address and remediate the issues identified.

SEC Charges BD and Transfer Agent in Microcap Shell Factory Fraud

The Securities and Exchange Commission announced charges against a broker-dealer, a transfer agent, and three individuals for their roles in the creation of over a dozen undisclosed “blank check companies from 2009 to 2014.

In its complaint, the SEC alleges that broker-dealer Spartan Securities Group and transfer agent Island Capital Management, which does business as Island Stock Transfer, helped create and sell at least 19 purportedly legitimate public companies that were in fact shams.

The complaint alleges that Spartan Securities filed fraudulent applications with FINRA to publicly list the companies’ common stock and ultimately enable the shares to become free-trading and available to public investors.

The complaint also alleges that Spartan Securities’ principals — Carl Dilley and Micah Eldred — signed the false applications even though they knew or at least were reckless that the companies were fake, and David Lopez failed to investigate red flags raised by FINRA or even familiarize himself with the companies.

The SEC further alleges that Island Stock Transfer and Dilley facilitated the public sale of the stock of at least 12 of the sham companies through the bulk issuance and transfer of the “free-trading” securities.

Company Settles Unregistered ICO Charges After Self-Reporting to SEC

The SEC charged Gladius Network LLC with conducting an unregistered initial coin offering, which the company self-reported to the SEC.

According to the SEC’s order, Gladius conducted an ICO in late 2017, after the SEC had warned in its DAO Report of Investigation that ICOs can be securities offerings.

Gladius, a Washington, D.C.-based company, raised approximately $12.7 million in digital assets to finance its plan to develop a network for renting spare computer bandwidth to defend against cyberattacks and enhance delivery speed.

Gladius did not register its ICO under the federal securities laws, and the ICO did not qualify for an exemption from registration requirements.

Gladius self-reported to the SEC’s enforcement staff in summer 2018, expressed an interest in taking prompt remedial steps, and cooperated with the investigation. The SEC did not impose a penalty because the company self-reported the conduct, agreed to compensate investors, and will register the tokens as a class of securities.

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