SEC Charges Advisor in $1.4 Million Fraud Scheme: Enforcement

Because of the firm’s deficient supervisory system, one of the firm’s registered representatives made material misrepresentations to elderly customers regarding the limitations on the ability, upon death, of their estates to redeem their 20-year brokered CDs at par value. The elderly customers or their estates suffered losses of approximately $75,000 because they were unable to fully redeem the brokered CDs and had to sell the brokered CDs on the secondary market. The firm subsequently remediated these customers’ losses.

FINRA’s findings stated that in particular, the firm failed to take reasonable steps to ensure that its registered representatives or fixed income desk employees received or had meaningful access to issuer-prepared disclosure documents prior to their sales of these products.

In response to FINRA Notice to Members 02-69, the firm prepared and delivered to customers who purchased brokered CDs a generic CD disclosure statement that described the general risks and characteristics of brokered CDs. The firm, however, did not consistently provide its customers, prior to or at the time of sale, with issuer-prepared disclosure documents, despite the firm’s obligation to do so under its selling agreements with the brokered CD issuers, and did not otherwise have a process to disclose fully all material risks and features of the brokered CDs to customers.

SEC Charges CEO in Penny Stock Fraud Scheme

The SEC charged the CEO of a Chicago-area penny stock company with making false and misleading statements in the company’s SEC filings and press releases and with manipulating the company’s stock.

The SEC’s complaint against Andrew Kandalepas, the CEO of Wellness Center USA Inc., alleges that Kandalepas took $450,000 in unauthorized withdrawals from the company and then concealed his actions by causing Wellness to characterize his withdrawals as salary, prepayments or loans in false and misleading Forms 10-K and 10-Q. The complaint further alleges that Kandalepas caused the company to issue false and misleading press releases touting nonexistent sales of medical devices by a Wellness subsidiary.

According to the complaint, Kandalepas also manipulated the market for Wellness stock through secret trading in a friend’s brokerage account and pocketed more than $130,000 from his secret trading. According to the complaint, Kandalepas coordinated trading with Matthew T. Mushlin, who Kandalepas hired as an unregistered broker to solicit investments in Wellness through private placement agreements.

The SEC is seeking a permanent injunction, disgorgement including prejudgment interest, a civil penalty, an officer-and-director bar, and a penny stock bar.

SEC Fines Advisor for Misleading Advertisements

The SEC censured and fined an investment advisor and its principal for misleading advertisements that utilized hypothetical backtested performance.

According to the SEC, the advisor continually updated its models but failed to fully disclose that the models’ outperformance resulted from these post-hoc revisions. The SEC alleges that the respondents revised the models to specifically account for unforeseen events such as market movements.

The SEC charged the firm and the principal, who also acted as the chief compliance officer, with engaging in manipulative practices and for failing to implement a reasonable compliance program.

As part of the settlement, the firm agreed to retain a dedicated chief compliance officer and an outside compliance consultant.