FINRA Securities Fraud Roundup: Guggenheim Securities Fined $800K For Failure to Supervise CDO Traders, Brokerage Firm Managing TIC Securities Doesn’t Have to Arbitrate Investor Claims, & Investor Award in Morgan Keegan Funds is Upheld

FINRA is fining Guggenheim Securities, LLC $800,000 for allegedly not supervising two collateralized debt obligation traders accused of hiding a trading loss. The traders are Alexander Rekeda and Timothy Day. Rekeda, who is the financial firm’s ex-CDO Desk head, has to pay $50,000 and is suspended for a year. Day’s fine is $20,000 and he received a four month suspension. By settling, none of the parties are denying or admitting to the FINRA securities charges.

Due to a failed trade, the CDO Desk at Guggenheim acquired a €5,000,000 junk-rated tranche of a CLO in October 2008. When the desk was unable to sell the position, Rekeda and Day convinced a hedged fund client to buy the collateralized loan obligation for $950,000 more than it had initially agreed to pay by misrepresenting the CLA. FINRA said that to conceal the CLO position’s trading loss, the two traders gave the customer order tickets that upped the CLO position’s price and lowered the price of other positions. Day, allegedly at Rekeda’s order, is accused of lying to the client when the latter asked about the price modifications by saying that the CLO position had a third-party seller that had settled the trade at a higher price and wanted the customer to pay this rate. The client agreed, and, in exchange, Day and Rekeda said that they would compensate the customer via other transactions, including waiving the fees owed related to resecuritization transactions, adjusting the prices on several other CLO trades, and providing a payment in cash. No records, however, indicate that these transactions were related to the CLO overpayment.

In other FINRA securities news, the U.S. Court of Appeals for the Eighth Circuit has affirmed a district court’s ruling that a broker-dealer that acted as the managing broker-dealer in a Tenant in Common securities cannot be compelled to arbitrate claims filed by investors of the failed enterprise. In Berthel Fisher & Co. Financial Services Inc. v. Larmon, Judge Michael Melloy agreed that for the SRO’s purposes, the investors are not the financial firm’s “customers.”

The FINRA securities case stems from a ’07 and ’08 securities offering involving investors that bought TIC securities that were issued by Minnesota limited liability companies. Berthel Fisher & Co. Financial Services Inc. acted as the managing broker-dealer that put together a number of FINRA-registered brokerages, the Selling Group Members, that offered the securities to their clients, including these investors. However, the court said that per Fleet Boston Robertson Stephens Inc. v. Innovex Inc., a relationship doesn’t exist between Berthel and the Investors despite the latter’s contention that the brokerage firm failed to conduct proper due diligence on the offerings. Rather, held the 8th circuit, a customer is defined as one with a business relationship with a FINRA member that directly involves brokerage/investment services.

Meantime, in the U.S. District Court for Northern District of Alabama, investors who were involved in the now failed Morgan Keegan investment funds were pleased to hear that the FINRA arbitration award they were granted in their derivatives case has been affirmed. The plaintiffs accused Morgan Keegan & Co. Inc. of misleading them to the point that they agreed to get involved in high-risk investment funds despite their conservative goals. The funds lost over 90% of their value and the investors alleged breach of fiduciary duty, Alabama Securities Act violations, rule violations, and other tort law causes of action.

After the arbitration panel chose to issue an award to the investors, Morgan Keegan sought to have it vacated by claiming that the FINRA panel went beyond its powers by considering derivatives claims and granting an award on the grounds of alleged wrongdoing by nonmembers and nonparties. The district court, however, disagreed, saying that there is enough evidence to find that the arbitrators did not exceed their authority in deciding to hear the investors’ claims.

FINRA Fines Guggenheim Securities $800,000 for Failing to Supervise CDO Traders; Two Traders Sanctioned for Efforts to Hide Loss, FINRA, October 11, 2012

Berthel Fisher & Co. Financial Services Inc. v. Larmon (PDF)

Butterworth v. Morgan Keegan & Co. Inc.


More Blog Posts:

Institutional Investor Securities Roundup: Biremis, Corp. Settles Securities Violation Charges with Industry Bar, FINRA Contacts Broker-Dealers About Conflicts of Interest Via Sweeps Letters, & Regulators Examine Financial Market Infrastructures, Institutional Investor Securities Blog, August 8, 2012

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities, Institutional Investor Securities Blog, May 8, 2012

Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court, Stockbroker Fraud Blog, September 13, 2012