Articles Posted in Arbitration Rulings

Raymond James Financial to Pay Fine to FINRA Over Email Communications
The Financial Industry Regulatory Authority has fined Raymond James Financial Services (RJF) $2M for not maintaining supervisory systems and procedures that were “reasonably designed” enough to oversee emails. The firm settled the case but without denying or admitting to the charges. It also agreed to a risk-based retrospective review of past emails for potential violations.

FINRA examined Raymond James’ email system “during a nine-year review period.” According to the self-regulatory organization, the system had significant flaws that allowed email communications to not undergo “meaningful review.” As a result, “unreasonable risk” was created that could have allowed for “certain misconduct” to go undetected. Also, the firm did not assign enough resources or staff to the team tasked with evaluating emails that had been flagged by the system, even as the number of flagged correspondence grew in volume.

FINRA said that Raymond James “unreasonably excluded” certain personnel who worked on customer brokerage accounts from “email surveillance.” The SRO claims that the emails of 300 registered representatives who were employed in branches with their own email servers were not subject to the “lexicon” of phrases and words for detecting emails that might merit review for potentially suspect conduct.

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Former LPL Broker is Barred For Not Disclosing Private Securities Sales
The Financial Industry Regulatory Authority announced a bar against Leslie Koonce, an ex-LPL (LPLA) broker. According to the self-regulatory organization, Koonce lied when he failed to disclose that he had engaged in private securities sales. Koonce allegedly pitched a private company’s convertible promissory notes to at least 30 potential investors.

FINRA contends that not only did Koonce help facilitate the transfer of $175K to at least three LPL customers so they could invest in the private securities, but also, he invested $50K of his own funds. All the while, said the SRO, Koonce failed to notify LPL in writing of his involvement in these transactions. When he filed out compliance questionnaires twice in 2012, Koonce denied any involvement in these types of transactions.

LPL fired Koonce in 2015. He later went to work with Cetera and then EK Riley Investments. The ex-broker no longer works in the securities industry.

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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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In the securities arbitration claim brought by a wine mogul against Fidelity Brokerage Services, a Financial Industry Regulatory panel may not have ordered the financial firm to pay claimant Peter Deutsch compensation but that doesn’t mean the panelists believe that the broker-dealer placed its former client’s interests before its own.

Deutsch’s family’s company, Deutsch Family Wine & Spirits, markets Yellow Tail and Beaujolais Nouveau wines. He is accusing Fidelity of not handling his account properly when he bet on Chinese shares. He claims that this cost him up to $436M. Deutsch contends that he believed Fidelity unit Fidelity Family Office when it told him his best interests were the firm’s priority but they then allegedly proceeded to ignore what he wanted and lent out shares belonging to him. The brokerage unit also stopped Deutsch’s trading in China Medical Technology shares when it prevented him from buying an additional 50 million stock shares. Now he claims that this foiled his attempt to gain a controlling stake in the company.

Ruling on Deutsch’s bid for damages last month, the arbitrators turned down that request “in its entirety” on the grounds that they believe he would have lost money anyways even if Fidelity had dealt with his account differently. The panel agreed with the firm in that calculating damages could not be done in a way that wasn’t based on hypotheticals. The arbitrators didn’t weigh in on his claim that the broker-dealer acted inappropriately by lending his shares to short-sellers.

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Ex-Investment Adviser Loses Arbitration Claim Over Gold Exchange-Traded Fund
Ex-financial adviser Dawn Bennett is on the losing end of a $1M securities arbitration claim brought by a former client who claims that she recommended he invest in a gold exchange-traded fund. Steven Santagati brought his ETF securities case to the Financial Industry Regulatory Authority. He alleged failure to supervise, breach of fiduciary duty, and negligence.

InvestmentNews reports that in an interview this week, Santagati accused Bennett of taking advantage of his lack of understanding about “financial details.” Santagati said that Bennett leveraged his account and invested in risky investments, including the SPDR Gold Shares exchange traded fund.

Finra awarded Santagati $746K. Western International Securities, which was Bennett’s ex-brokerage firm, and her Bennett Group Financial Services are additional respondents in this case. They were found “jointly and severally” liable for the violations. In addition to Santagati’s award, they must pay $27K in expert witness fees and $252K in legal fees.

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Financial Industry Regulatory Authority Fines Merrill Lynch $2.8M

Finra has fined Merrill Lynch, Pierce, Fenner and Smith Inc. $2.8 million. By settling, the firm is not denying or admitting to the self-regulatory organization’s charges.

FINRA said because of system errors, Merrill Lunch inaccurately reported millions of trades.The regulator said that Merrill Lynch’s supervisory system as it relates to specific matters related to documenting, reporting, and records was  not designed in a reasonable manner.

 

Ernst & Young Settles Audit Failure Charges By Agreeing to Pay Over $11.8M

Ernst & Young LLP has agreed to resolve U.S. Securities and Exchange Commission charges accusing it of audit failures. The monetary settlement, along with the $140M penalty that audit client Weatherford International agreed to pay separately, will go back to investors who were hurt in the accounting fraud.

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A FINRA arbitration panel has ordered Wells Fargo Advisors LLC (WFC) to pay UBS Financial Services Inc. $1.1M to resolve a claim involving financial adviser David Kinnear who went to work for the Wells Fargo & Co. brokerage arm after leaving the UBS Group AG (UBS) unit. UBS claims that Kinnear stole thousands of client and business records, as well as proprietary information, after resigning from the firm.

The Wall Street Journal reports that according to a source, Kinnear downloaded the data and distributed it to clients. UBS contends that the compensation Kinnear received at Wells Fargo was related to his ability to successfully bring UBS clients with him. UBS also claims that Kinnear owes it promissory notes.

Wells Fargo denies UBS’s allegations. It submitted a counterclaim accusing the firm of unfair completion, including preventing clients from moving from UBS to Wells Forgo.

Under the Protocol for Broker Recruiting, brokers are only allowed to bring the names and contact information of clients that they serviced while having worked at a firm when moving to another brokerage firm.

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A Financial Industry Regulatory Authority panel says that Royal Bank of Scotland’s (RBS) securities division in the U.S. must pay Jeffrey Howard, an ex-executive that it fired, $2.05M in compensatory damages because of the way he was let go. The bank must also retract his termination and expunge his regulatory record of any comments that are defamatory.

The FINRA arbitration panel’s case summary said that according to Howard, the bank fired him because it didn’t want people to find out that there was “significant internal turmoil” at the financial institution. Howard, who joined the firm’s RBS Securities in 2012 as head of its prime services for the Americas, eventually went on to become global-co-head of the group and then later its sole head. Previous to all of that he worked at Bank of America (BAC) Merrill Lynch. After he was let go by Royal Bank of Scotland in 2014, Howard filed a breach of contract and defamation case with FINRA contending that the disclosure about his firing was false.

According to the FINRA panel, Howard should not have been let go for cause. It found that the bank made fundamental mistakes and inconsistencies in: the way it interpreted internal policies and put them into effect, the facts it employed to decide to fire him, and the rationale behind that decision. The panel said that Howard did not violate any internal policies.

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A Financial Industry Regulatory Authority arbitration panel has awarded First United Bank & Trust and First United Corp. over $11.5M in their securities fraud case against FTN Financial Securities Corp., Hugh James Boone, and Franklin Benjamin Kennedy. The bank is claiming unsuitable investments, misrepresentations, omission, breach of fiduciary duty, failure to supervise, breach of implied contract, and common law fraud involving the claimants’ purchase of preferred term securities, trust preferred securities, and other collateralized debt obligations. Two of the preferred term securities at issue are the PreTSL Notes, also known as the I-PreTSLI notes, and the PreTSL XVII.

The claimants said that that purchase of the PreTSL Notes were among a number of transactions in their leverage strategy. They said that the respondents were aware that the notes had deteriorated after they were issued but did not inform the claimants. The respondents denied the claimants’ allegations. Boone and Kennedy in their response said that they acted properly as financial adviser.

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A Financial Industry Regulatory Authority panel arbitration panel says that Morgan Stanley (MS) must pay at least $2.4M to settle the latest client claims accusing its former broker, Steven Mark Wyatt, of mishandling their investments. The brokerage firm fired Wyatt in 2012.

According to a group of doctors and their loved ones, Wyatt, who was their broker, made unauthorized and excessive trades in the stock market that cost them during and after the 2008 financial crisis. Wyatt bought thinly-traded stocks for the investors and placed speculative bets on exchange-traded funds and other securities in their portfolios.

This is the latest batch of claims against Wyatt, Morgan Stanley, and managers at the Mississippi branch where he worked. The claimants believe that Morgan Stanley failed to detect warning signs of Wyatt’s purported wrongdoing. Other employees named in this securities case are adviser Hilary Zimmerman, currently a Morgan Stanley senior vice president, and branch manager Fred Eugene Brister III. The claimants contend that Brister failed to properly supervise Zimmerman and Wyatt. They say that their accounts were mismanaged and suspect trading occurred.

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