Articles Posted in Broker Misconduct

SEC Awards Whistleblower $4.1M
A company insider who notified the US Securities Exchange Commission about a “widespread, multi-year securities law violation” involving the employer, is getting a $4.1M whistleblower award. The individual, who is a foreign national employed abroad, also provided information and help during the regulator’s probe. Further details about the case have been kept confidential so as to protect the confidentiality and anonymity of the whistleblower.

This is the third whistleblower award issued this month by the SEC. The regulator awarded two other people $8M each for their help in another successful enforcement action.

To date, the SEC whistleblower program has awarded 50 whistleblowers over $179M.

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Craig Scott Capital, LLC Loses FINRA Membership After Its Representatives Are Accused of Excessive Trading
The Financial Industry Regulatory Authority has expelled Craig Scott Capital, LLC over finding that three of the firm’s registered representatives allegedly engaged in excessive trading in the accounts of customers. The self-regulatory organization said that the charges imposed on customers, including markdowns, markups, and commissions, were not in line with the latter’s financial states and goals.

Now, FINRA is holding Craig Scott Capital accountable for the excessive trading, which it described as churning. This type of excessive trading involves making trades in a customer’s account in order to earn a commission.

FINRA is also accusing the firm of not putting into place and enforcing a “reasonable supervisory system” to prevent excessive trading and failing to properly supervise the registered representatives involved in the alleged wrongdoing so these behaviors could have been prevented. The regulator accused Craig Scott’s owners of not taking reasonable action even though they detected the red flags indicating that excessive trading might be taking place.

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FINRA Fines Ex-Morgan Stanley Broker, Issues 15-Day Suspension

The Financial Industry Regulatory Authority has fined an ex-Morgan Stanley (MS) broker $10K and ordered him to serve a 15-day suspension after he allegedly tried to resolve a client’s complaint without the firm’s consent. The regulator is charging Lewis H. Robinson, who now works with BB & T Securities in Florida, with violating Rule 2010. The rule mandates that brokers satisfy “high standards” as they pertain to commercial honor and principles of trade.

According to FINRA, Robinson wrote $12,203 in checks to resolve three complaints made by the client. Advisor Hub reports that Robinson said that he notified Morgan Stanley as soon as the client noticed that the account was overcharged a higher commission rate than what had been agreed upon but that the firm refused to give a refund because the allegedly mistaken excess fee was charged too long ago.

In a settlement with the Financial Industry Regulatory Authority, a number of Cetera Financial Group brokerage firms have agreed to collectively pay $3.3M for not properly supervising whether mutual fund sales charge waivers were applied correctly clients at charitable organizations and in retirement plans. The firms that have settled include Cetera Financial Specialists, Cetera Investment Services, Summit Brokerage Services, First Allied Securities, and Girard Securities.

The $3.3M is how much these clients were excessively charged plus interest for the mutual funds that they bought from July 2009 to July 2017. According to the self-regulatory organization, the brokerage firms either: charged front-end sales charges to charitable organization and retirement plan customers that bought A shares in mutual funds even though they were eligible to have these fees waived or sold them class C/B shares while charging them back-end sales charges and “higher ongoing fees and expenses.”

FINRA accused the Cetera firms of not reasonably supervising the way the sales charges waivers were applied to the mutual fund sales and leaving it up to financial advisers to decide whether the waivers should be applied. The SRO also contends that the broker-dealers did not maintain written policies and procedures that were adequate enough to help financial advisers in making such determinations.

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Massachusetts Secretary of the Commonwealth William Galvin is probing whether there are brokers who are getting paid kickbacks by exchanges in return for investor trades. The investigation comes in the wake of an op-ed article published in The New York Times last month alleging that there are financial representatives who have been sending orders to specific exchanges for these kickbacks, referred to as “rebates,” even if it means poorer results for their institutional investors.

The op-ed was written by Yale Law Professor Jonathan Macey and Yale University Chief Investment Officer David Swensen. Already, the state regulator has sent inquiry letters to Morgan Stanley & Co. (MS), E*TRADE Securities, Charles Schwab & Co. (SCHW), and Fidelity Brokerage Services LLC.

According to the article, because of these “rebates,” brokers are frequently selecting less favorable trades for their institutional investors clients to use these exchanges. If this is true, then it would be distressing considering that institutional brokers are legally bound to make trades on the exchange that has the terms that are most favorable for a client. Failure to do so could be grounds for a securities case. Meantime, it is supposed to be up to the exchanges, all 12 of them, to compete to provide the best trading opportunities.

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BNP Paribas will pay the New York Department of Financial Services (DFS) $350M to settle a probe into allegations that it was involved in currency rigging in the bank’s foreign exchange business. In a statement, the French bank said that it “deeply regrets” the misconduct, which took place between ’07 and ’13.

The DFS said that over a dozen BNP Paribas sales people and traders in NY as well as other trading hubs rigged forex rates and took part in other illegal activities. BNP Paribas traders worked in online chat rooms with traders from competing companies, making fake trades and improperly sharing customer information that should have stayed confidential. Members of the bank’s sales team are also accused of misleading customers regarding prices.

Among the alleged misconduct cited by the DFS is that of a BNP Paribas trader in NY who is accused of not only rigging different currencies but also of executing bogus trades overnight to move rates and then frequently cancelling the trades within seconds of making them. In another example cited, one of the bank’s traders in Japan allegedly improperly disclosed customer information involving yen trading with several competitor traders.

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Ex-Jefferies Trader Will Go to Prison for Mortgage-Backed Securities Fraud After All
Jesse Litvak, the ex-Jefferies (JEF) managing director, has once again been sentenced to two years in prison. Litvak was found guilty of mortgage-backed securities fraud in 2014 and sentenced to two years behind bars. The conviction at the time was for multiple securities fraud charges and for making false statements, as well as for defrauding TARP.

Claiming that expert witnesses hadn’t been able to testify for him, Litvak was able to get that sentence tossed. However, the US government continued to go after him and he was found guilty on one fraud count. Now, he has again been sentenced to two years in prions.

Litvak also must pay $2M because he lied about bond prices to a customer. (The earlier conviction had come with a $1.75M fine.) According to U.S. District Judge Janet C. Hall, Litvak’s victims only invested because he lied to them.

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Ex-Merrill Lynch Broker Pleads Guilty to Bank Fraud
Jeffrey Kluge, a longtime Merrill Lynch broker, has pleaded guilty to defrauding two banks of more than $8.7M. His bank fraud ran from 2001 through November 2016.

Kluge’s plea agreement said that he fabricated account statements under Merrill Lynch’s name and pledged fake collateral to the banks so he could set up multi-million dollar credit lines. For instance, in 2001 he was able to get a $150K credit line with Alliance Bank in Minnesota by telling the financial institution that he had enough municipal bond funds as collateral. In fake account statements he sent the bank as evidence of these bond holdings, Kluge concealed from Alliance Bank that he had already promised the assets in the accounts for loans from the firm.

In 2007, Kluge was able to get a $1M credit line from Platinum Bank, which is also in Minnesota. He defrauded Platinum Bank in similar fashion.

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To settle charges over a high-pressure sales contest involving its financial advisers and brokerage clients, Morgan Stanley (MS) will pay $1 million to Massachusetts Secretary of the Commonwealth William Galvin. By settling, the firm did not deny or admit to the charges. It must, however, reassess its sales contest policies and notify the state of what is included in them, as well as what changes it might make in the wake of this review.

It was last year that Galvin charged the broker-dealer for cross selling and encouraging wealthy clients to borrow against their brokerage accounts. He also accused senior Morgan Stanley staff of knowing about the contest, determining that it violated the firm’s own internal policies (in addition to Massachusetts securities rules), but yet allowing the contest to continue for a few more months. It was only then that the firm’s Compliance and Risk decided that the contest was “impermissible.”

The program, which also involved a similar contest in Rhode Island, ran between ’14 and ’15. 30 financial advisers at five Morgan Stanley offices participated. The financial representatives are accused of persuading investors to set up new lending accounts. The broker-dealer purportedly rewarded them with bigger “business development allowances” when their efforts were successful. Advisers were given $1K for every 10 loan accounts that were opened, $3K for every 20 accounts, and $5K for every 30 accounts.

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Ex-Oppenheimer Stockbroker Pleads Guilty in Insider Trading Case
David Hobson, an ex-Oppenheimer Holdings (OPY) investment adviser, was sentenced to six months behind bars for insider trading using information provided to him by a friend who was employed with Pfizer Inc. at the time.

Hobson pleaded guilty to the criminal charges against him. He was ordered to forfeit over $385K. His friend, Michael Maciocio, reached a plea deal with prosecutors for his part last year.

Hobson started insider trading in 2008 while employed at RBC Capital Markets and he continued with his illicit activities at Oppenheimer. He was Maciocio’s stockbroker.

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