February 22, 2012

BROKER DEALER ENTERS INTO AWC CONCERNING EMAIL RETENTION

May 25, 2010 By

On May 11, 2010, Piper Jaffray & Co. (the “Firm”) submitted a Letter of Acceptance, Waiver and Consent (AWC) for violation relating to the Firm’s retention of emails. The Firm was fined $700,000 for its failure to retain 4.3 million emails from November 2002 to December 2008. FINRA noted among other things that “Piper Jaffray failed to disclose that it was not making complete production of its emails due to intermittent problems with its systems – potentially preventing production of crucial evidence of improper conduct by the firm and its employees.”

In a press release, FINRA further stated:

“FINRA discovered Piper Jaffray’s continuing email retention deficiencies when its investigators requested all emails sent or received by a former firm employee suspected of misconduct. The firm provided a CD-ROM purportedly containing all of the employee’s emails, on both his firm and Bloomberg email accounts. When reviewing the CD-ROM’s contents, however, FINRA discovered that one particular email was not produced that investigators had already obtained in hard copy form – an email whose contents sparked an internal investigation that led to the employee’s termination, and formed the basis for a FINRA enforcement action against the employee. Only after further inquiries about that missing email did the firm finally inform FINRA of the intermittent email retention and retrieval issues it had been experiencing firmwide since the November 2002 action.”

Filed Under: Brokers, Compliance, FINRA Arbitration Tagged With: , , , , ,

JUDGE RAKOFF DISMISSES CASE AGAINST FINRA OVER MERGER OF NASD AND NYSE

March 3, 2010 By

On March 1, 2010, District Judge Rakoff issued an opinion in two federal cases concerning alleged misrepresentations in the solicitation of NASD shareholder votes necessary for the consolidation of the NASD and NYSE and formation of FINRA. In both cases, the defendants filed motions to dismiss arguing, among other things, that they were entitled to absolute immunity. In his opinion, Judge Rakoff agreed with the defendants stating:

Pursuant to the Securities Exchange Act of 1934 , 15 U. S .C. §§ 78a-7800 , the United States Securities and Exchange Commission is authorized to delegate certain regulatory functions to SROs, which are therefore considered ‘quasi-governmental’ bodies…. As a result , SROs and their offi cers are absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions.

Judge Rakoff concluded that “[i]t is patent that the consolidation that transferred NASD’s and NYSE’s regulatory powers to the resulting FINRA is, on its face, an exercise of the SROs’ delegated regulatory functions and thus entitled to absolute immunity.”

Standard Investment Chartered v. NASD, No. 07 Civ. 2014 (JSR) and Benchmark Financial Services, No. 08 Civ. 11193 (JSR) (S.D.N.Y. Mar. 1, 2010).

Filed Under: Brokers, FINRA Arbitration, Mergers & Acquistions, SEC Tagged With: , , , , , , , , , , , , , , , , , , , ,

STATE STREET BANK AND TRUST SETTLES WITH SEC OVER MORTGAGE-BACKED SECURITIES

February 5, 2010 By

On February 4, 2010, State Street Bank and Trust Company entered into a settlement with the Securities and Exchange Commission without admitting or denying the findings of the SEC in the settlement Order. During the subprime mortgage crisis the SEC found that State Street engaged in a course of business that misled investors about the extent of subprime mortgage-backed securities held in certain unregistered funds under its management.

As a result of State Street’s conduct, investors in State Street’s funds lost hundreds of millions of dollars during the subprime market meltdown in mid-2007.

State Street offered investments in certain collective trust funds to institutional investors, including pension funds, employee retirement plans, and charities. These funds included two substantially identical funds – referred to together as the Limited Duration Bond Fund (the “Fund”) – made available to different categories of investors. Other actively-managed bond funds and a commodity futures index fund managed by State Street (“the related funds”) also invested in the Fund. State Street established the Fund in 2002 and marketed the Fund by saying it utilized an “enhanced cash” investment strategy that was an alternative to a money market fund for certain types of investors. By 2007, however, the Fund was almost entirely invested in or exposed to subprime residential mortgage-backed securities (“subprime investments”). Nonetheless, State Street continued to describe the Fund to prospective and current investors as having better sector diversification than a typical money market fund, while failing to disclose the extent of its exposure to subprime investments.

When the subprime market collapsed in mid-2007, many investors in the Fund and the related funds were unaware that the Fund had such significant exposure to subprime investments. In fact, the Fund’s offering materials, such as quarterly fact sheets, presentations to current and prospective investors, and responses to investors’ requests for proposal, contained misleading statements and/or omitted material information about the Fund’s exposure to subprime investments and use of leverage. As a result, many investors either had no idea that the Fund held subprime investments and used leverage, or believed that the Fund had very modest exposure to subprime investments and used little or no leverage.

See the SEC Press Release here.

Filed Under: Brokers, Exchange Act, SEC, Securites Fraud Tagged With: , , , , , , , , ,

WHAT CONSTITUTES “SUBSTANTIAL EVIDENCE” TO SUPPORT AN SEC FINDING OF A FALSE STATEMENT IN A FORM U-4

August 31, 2009 By

In a recent decision, Toth v. S.E.C., No. 03-12739 (3d Cir. Apr. 6, 2009), the United States Third Circuit Court of Appeals considered what constitutes substantial evidence to support a finding by the Securities and Exchange Commission.

In this matter, FINRA (formerly, NASD) brought a disciplinary proceeding against a registered representative for incorrectly stating on his Form U-4 that he had not been “named in any pending investment-related civil matter.” (A Form U-4 is the Uniform Application for Securities Industry Registration or Transfer. Representatives of broker-dealers, investment advisers, or issuers of securities must use this form to become registered in the appropriate jurisdictions and/or SROs.) In fact, the registered representative had been named as a defendant in a civil securities fraud action brought by the New Jersey Bureau of Securities.

At a hearing this matter, the firm’s majority owner testified that the registered representative never told him about the New Jersey action. The registered representative and his witness testified that they had told him so.

On August 9, 2006, a NASD Hearing Panel issued a written decision sustaining the charge and suspending the representative’s license for one year. The Panel found that: (1) the representative knew that he was required to disclose the New Jersey action on the Form U-4; (2) the representative discussed with firm’s majority owner what to include on the Form U-4 but failed to disclose the New Jersey action; and (3) the representative failed to review and sign the Form U-4 either before or after firm’s majority owner filed it despite firm’s majority owner’s efforts to get him to do so. The National Adjudicatory Council and the Securities and Exchange Commission affirmed the findings of the Hearing Panel.

On a petition to the Third Circuit, the registered representative argued that the factual finding by the Hearing Panel that he had not told the firm’s majority owner about the New Jersey action was in error and unsupported by substantial evidence.

In rejecting this argument, the Third Circuit noted that “the evidence on which the SEC relied need not be ‘compelling’ to survive review. Instead, it need only be substantial—i.e., evidence that ‘a reasonable mind might accept as adequate to support a conclusion.’” (citation omitted).

Here, the firm’s majority owner’s testimony was supported by the parties’ correspondence. The court also rejected the contention that an isolated mistaken recollection about where the meeting had taken place by the firm’s majority owner was “the kind of minor discrepancy that does not require the rejection of a witness’s testimony.” Moreover, the testimony of the registered representative and his witness was suspect because the witness failed to disclose his own involvement in the New Jersey action in a Form U-4, neither could recall the details regarding their alleged discussion of the New Jersey action, and that the only documents sent by the registered representative regarding his employment disclosed certain arbitrations but not the New Jersey action.

The Court concluded, “Our review of the record confirms that [the firm’s majority owner] testimony, together with documentary evidence such as the correspondence between [the registered representative] and [the firm’s majority owner], was more than adequate to support the SEC’s ruling.”

Filed Under: Brokers, Compliance, FINRA Arbitration, SEC Tagged With: , , , , , , , , , , , , , , , , , , , , ,

FINRA’s NATIONAL ADJUDICATORY COUNCIL (NAC) INCREASES SUSPENSION OVER APPROVAL OF FALSIFIED DOCUMENTS

August 29, 2009 By

On August 25, 2009, the National Adjudicatory Council (“NAC”), the national committee that reviews initial decisions rendered in FINRA disciplinary matters, reviewed a matter in which a Hearing Panel found that the respondent approved the falsification of IRA adoption agreements , in violation of NASD Rule 2110. Rule 2110 requires that member firms observe high standards of commercial honor and just and equitable principles of trade.

In determining his sanction, the Hearing Panel had concluded that misconduct was serious, not egregious. In reaching this conclusion, the Hearing Panel emphasized that the concealment of the falsification was attributable to several firm officers, that the respondents misconduct was negligent, not reckless or intentional, and that the nature of the documents supported lower sanctions.

On appeal, the NAC reversed this finding.

First, the NAC found that the FINRA Sanction Guidelines (“Guidelines”) for the forgery and falsification of documents were applicable to the alleged misconduct and that the Guidelines for the forgery and falsification of records recommend a fine of $5,000 to $l00,000. The Guidelines also recommend that the adjudicator consider a suspension in any and all capacities for up to two years, when mitigating factors exist. In egregious cases, the Guidelines recommend considering a bar. The specific principal considerations to determine sanctions for this violation are “the nature of the documents forged or falsified, and whether the respondent had a good-faith, but mistaken, belief of express or implied authority.”

Second, with these principals in mind, the NAC stated:

Based on [his] entire course of conduct, we conclude that his violation was egregious. Although [his] stand alone approval of the falsification may not have risen to the level of egregious misconduct, his attempted concealment of the misconduct, coupled with his outright disregard of the compliance officer’s advice, push his actions into what is egregious under the circumstances presented. Accordingly, we increase the duration of [his] suspension as a principal from six months to one year.

In the Matter of Dep’t. of Enforcement v. Vines, Complaint No. 2006005565401 (NAC Aug. 25, 2009).

Filed Under: Brokers, Disciplinary Actions Tagged With: , , , , , , , , , , , , , , , , , , , , ,

FINRA’S NOTICE TO FIRMS THAT “INVERSE AND LEVERAGED ETFs THAT RESET DAILY TYPICALY ARE UNSUITABLE FOR RETAIL INVESTORS WHO PLAN TO HOLD THEM FOR LONGER THAN ONE TRADING SESSION”

August 3, 2009 By

On June 11, 2009, FINRA issued Regulatory Notice 09-31 regarding “Non-Traditional ETFs” stating:

Exchange-traded funds (ETFs) that offer leverage or that are designed to perform inversely to the index or benchmark they track—or both—are growing in number and popularity. While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatilemarkets.

This Notice reminds firms of their sales practice obligations in connection with leveraged and inverse ETFs. In particular, recommendations to customers must be suitable and based on a full understanding of the terms and features of the product recommended; sales materials related to leveraged and inverse ETFs must be fair and accurate; and firms must have adequate supervisory procedures in place to ensure that these obligations are met.

Filed Under: Brokers, Compliance, ETF, Failure to Supervise, FINRA Arbitration, Suitability Tagged With: , , , , , , , , , , , , ,