Failure to Supervise

Michael Blake Sanctioned Over Sales of Real Estate Securities

November 17, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned broker Michael James Blake (Blake) over allegations that Blake engaged in the unlawful sale of securities including, upon information and belief, securities linked to Longest Drive, LLC and Grace Communities, LLC. According to FINRA, Blake participated in private securities transactions involving the investment of more than $3.2 million by approximately 28 investors in 3 investment contracts without providing prior written notice to his firms of his proposed roles in the transactions. FINRA imposed a $10,000 fine and banned Blake from association with any broker-dealer for one year.

The allegations against Blake are consistent with a “selling away” violation. Selling away occurs when a securities broker solicits securities that were not approved by the broker’s affiliated firm. Selling away is a violation of FINRA Rule 3040. The most common securities sold away from brokerage firms involve private placements and promissory notes. Investors are often completed unaware that the broker’s sales activity is improper. In addition, the investor does not learn that the broker’s activities were wrongful until the investment scheme is publicized, the broker is sanctioned, or the broker stops returning client calls.

FINRA’s order states that between approximately February 2006 and June 2007, Blake recommended to customers to invest $3,200,000 in real estate properties being developed by entity “GC”, which is believed to stand for Grace Communities. The invested funds were provided by 28 investors. According to FINRA, 6 persons invested $250,000 in Development 1 between August and November 2006, 3 persons invested $200,000 in Development 2 in October and November 2006, and 23 persons invested approximately $2,755,000 in Development 3 between February 2006 and June 2008. According to FINRA, as of September 9, 2013, investors in Blake’s real estate investments have not received a return of their principal or any interest or other payments.

Merrimac Corporate Securities, Inc.’s President and CEO Suspended Over Failure to Supervise Allegations

November 11, 2013 | by Staff Attorney

Stephen Douglas Pizzuti (Puttuti) and David Walton Matthews, Jr. (Matthews) were recently suspended for three months by the Financial Industry Regulatory Authority (FINRA) over allegations that Pizzuti failed to adequately inquire into Richard’s Pizzuti (Richard) and Daniel Voccia’s (Voccia) outside business activities and involvement in private securities transactions despite his knowledge of their activities. To that end, Pizzuti failed to follow up on “red flags” regarding Richard’s and Voccia’s investment activities. In addition, FINRA also found that Matthews, Merrimac’s Chief Compliance Officer, also failed to supervise Richard and Voccia investment activities.

Pizzuti controls Merrimac Corporate Securities, Inc. (Merrimac) and was the firm’s Chef Executive Officer during the relevant period. Pizzuti, as the managing principal of Merrimac and the firm’s CEO, had overall responsibility for the Merrimac’s compliance policies. Matthews became President of Merrimac in early 2004. Matthews was also the Merrimac’s Chief Compliance Officer until mid-2008 but thereafter and remained the Merrimac’s President. Matthews reports directly to Pizzuti.

FINRA found that from at least 2006 to April 2009, Pizzuti failed to reasonably supervise the outside business activities and private securities transactions of Richard and Voccia. Both Richard and Voccia were registered representatives at Merrimac.

FINRA Arbitration Panel Awards BBVA Securities’ Investors $1.2 Million

November 8, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) Arbitration Panel has awarded damages to investors in the amount of $1.2 million in compensatory damages and cost of fees associated with the arbitration. The alleged claim was asserted against BBVA Securities of Puerto Rico, Inc. (BBVA Securities) and employees of the brokerage firm.

BBVA Securities is a brokerage firm in San Juan, Puerto Rico.

The Claimants asserted breach of fiduciary duty, unsuitable investments, churning and excessive trading, failure to supervise and gross negligence. These causes of actions related to allegedly unsuitable naked option trading strategy combined with the use of margin which caused losses in the investor’s accounts.

FINRA Bars Broker Mark Hotton Alleging Numerous Fraudulent Activities in Client Accounts

November 4, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has permanently barred broker Mark Christopher Hotton (Hotton) alleging that the broker engaged in numerous and repeated frauds including forgery, falsification of documents, conversion, misuse of funds, manipulating account records, churning, unauthorized trading, false testimony, and providing false information and documents to FINRA.

FINRA alleged that starting from at least 2006, Hotton engaged in numerous fraudulent investment schemes to steal at least $5,932,000 from his brokerage customers. FINRA admitted that due to the complexity of the fraud that it had not been able to track down Hotton’s entire use and receipt of ill-gotten funds. According to FINRA, Hotton converted funds from his customers by using his control over the bank accounts of various corporate entities to divert funds that his customers believed were being invested in legitimate businesses.

Fom November 2002 until November 2005, Hotton was associated with Ladenburg, Thalmann & Co., Inc., From November 2005 until February 2009, Hotton was associated with Oppenheimer & Co., Inc. (Oppenheimer). While at Oppenheimer, Hotton focused on clients with an average net worth of between $1,000,000 and $20,000,000. Thereafter, Hotton was a registered representative of American Capital Partners, LLC until August 2010. From September 2010 until March 2012, Hotton was associated with Alexander Capital, L.P. Finally, from February 2012 until May 2012, Hutton was associated with Obsidian Financial Group, LLC. Obsidian terminated Hotton’s registration on May 31, 2012.

Broker Jerry McGlothlin of Lincoln Financial Barred Over Selling Away Allegations

October 18, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) barred broker Jerry McGlothlin from associating with any member firm for engaging in outside business activities, engaging in private securities transactions, providing false responses on annual compliance questionnaires, and failing to respond to FINRA requests for information.

Between May 2003, and October 2012, McGlothlin was registered with FINRA through his association with Lincoln Financial Securities Corporation (“Lincoln Financial”) and its predecessor Jefferson Pilot Securities, Inc. On October 12, 2012, Lincoln Financial filed a Uniform Termination Notice (Form U5) terminating McGlothlin’s registration with the firm.

FINRA alleged that McGlothlin engaged in outside business activities without notifying Lincoln Financial, in violation of NASD Conduct Rules 3030 and 2110, and FINRA Conduct Rules 3270 and 2010. FINRA alleged that while McGlothlin was employed with Lincoln Financial he engaged in business activities with International Business Law Center, Inc. (IBLC), a/k/a Internet Business Law Services and IBLS Online Education, Inc. (IBLS Online). Both IBLC and IBLS Online provide internet legal services and learning programs.

FINRA Fines Brokerage Firm Over Misleading Variable Annuities Disclosures and Failure to Supervise

October 12, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined brokerage firm Financial West Investment Group, Inc. d/b/a Financial West Group (Financial West Group) over allegations between March 2009 and May 2010, the firm did not provide accurate variable annuity disclosures to customers concerning certain fees and charges. FINRA also alleged that Financial West Group failed to have an adequate written supervisory procedure to ensure that customers received accurate disclosures about these fees and charges. Finally, FINRA alleged that Financial West Group did not adequately enforce its policies for reviewing emails. In resolving these allegations Financial West Group paid a $35,000 fine.

Financial West Group’s main offices are in Westlake Village, California. The firm has approximately 116 registered branch offices and employs 290 registered brokers.

FINRA alleged that between March 2009, and May 2010, the Financial West Group used forms called variable annuity disclosure and investment form, request to switch investments form, and the product comparison worksheet to inform customers of various features of deferred variable annuities. The forms included information concerning the potential surrender period and surrender charge, potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59 1/2, mortality and expense fees, the potential charges for and features of riders, the investment options, death benefits, payment options, and risks disclosures. However, according to FINRA, Financial West Group did not provide accurate disclosures to customers in 28 out of 93 (30%) of the variable annuity transactions and exchanges reviewed by the regulator.

Diego Hernandez of AXA Advisors Accused of Misusing Customer Funds

September 30, 2013 | by Staff Attorney

Diego Fernando Hernandez (Hernandez) was recently barred from the financial industry by the Financial Industry Regulatory Authority (FINRA) concerning allegations that he failed to disclose outside business activities, a practice known in the industry as “selling away” and misused customer funds.

Hernandez entered the securities industry in May 1998. In August 2005, Hernandez became a registered representative of AllState Insurance Company until April 2012. In April 2012, Hernandez became a registered representative of AXA Advisors, LLC (AXA) until February 2013. On Hernandez’s public securities disclosures he is listed as the owner of H.D. Mile High Marketing a marketing, advertising, and banner company located in Lakewood, Colorado. In February 2013, AXA filed a termination notice for Hernandez disclosing that his employment was terminated by the firm for failure to comply with the firm’s policies and FINRA’s rules in connection with undisclosed outside business activity and the commingling and conversion of customer funds.

While Hernandez was associated with AXA, FINRA alleged that he engaged in at least three outside business activities that were not disclosed to or approved by the firm. In March 2012, Hernandez filed articles of organization, forming Wealth Management Partners LLC (Wealth Management Partners) where Hernandez serves as Wealth Management’s president and chief executive officer. In February 2010, Hernandez formed Team Cure Racing as a nonprofit corporation under the laws of Colorado. In November 2009, Hernandez formed DFHR Investments, Inc. (DFHR Investments) under the laws of Colorado. Hernandez is the president of DFHR Investments. Hernandez filed the Wealth Management Partners, Team Cure Racing, and DFHR Investments corporate formation documents before he joined AXA.

Conrad Bautista Barred From Financial Industry for Alleged Private Placements Sales

September 23, 2013 | by Staff Attorney

Conrad Tambalo Bautista (Bautista) resolved charges brought by the Financial Industry Regulatory Authority (FINRA) concerning the sale of private securities and possible involvement in a fraudulent investment scheme by accepting a bar from the securities industry.

Bautista has been associated with seven FINRA member firms including his most recent employer, CUSO Financial Services, L.P. (CUSO) from January 2010 to March 2013. Prior to CUSO, Bautista was associated with SWBC Investment Services, LLC, Financial Network Investment Corporation, and Wells Fargo Investments, LLC. Bautista obtained Series 6, 7, and 63 securities licenses.

Bautista’s public records do not disclose any businesses, other than CUSO, that Bautista was involved in. However, in February 2013, a customer allegedly filed a complaint against Bautista involving potential securities related misconduct. Subsequently, FINRA sent Bautista requests for information concerning the substance of the customer complaint. The FINRA letter sought information into whether Bautista may have engaged in fraudulent investment schemes. In addition, FINRA had information that suggested that Bautista may have been involved in undisclosed outside business activities and private securities transactions that may have involved borrowing money from customers.

VSR Financial Services, Inc. and Donald J. Beary Fined Over Alternative Investment Sales

September 23, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), VSR Financial Services, Inc. (“VSR”), and Donald J. Beary (“Beary”) have reached a settlement concerning charges brought by the securities regulator that VSR violated customer concentration guidelines and otherwise failed to reasonably supervise its brokers in the sales of alternative investments. The settlement led to VSR paying a $550,000 fine and Beary being suspended from associating with a FINRA firm for 45 days and a $10,000 fine.

VSR is based in Overland Park, Kansas, has 211 branch offices, and employs approximately 460 registered personnel. Beary is a co-founder of VSR and is its executive vice-president, chairman of the board, and direct participation principal.

According to FINRA, from 2005 until 2010 VSR and Beary failed to adequately implement the firm’s supervisory procedures concerning concentration limits in customer accounts for alternative investments. The settlement details that VSR’s supervisory failures regarding concentration limits occurred because the firm used inaccurate statements reflecting the customer’s true concentration in alternative investments and because the firm used inaccurate risk ratings of products to increase allowable concentration levels.

Jonathan G. Sorensen Barred Financial Industry Over Alleged Misuse of Customer Funds

September 22, 2013 | by Staff Attorney

Jonathan G. Sorensen (Sorensen) has been barred by the Financial Industry Regulatory Authority (FINRA) after he failed to respond to the agency’s inquiries concerning an investigation concerning the possible misuse of customer funds in his management of limited partnership investment fund.

Sorensen first became registered with FINRA on September 9, 2005. Since that time he was registered until April 4, 2013, with Coker & Palmer, Inc. (Coker & Palmer). According to public records, Sorensen is also a managing member of Higher Standard Insurance and Faith Terrace Holdings, LLC, a purported real estate company.

On April 5, 2013, FINRA staff requested that Sorensen appear for an interview on April 12, 2013. The agency sought information from Sorensen as part of an investigation into his management of a limited partnership investment fund while associated with Coker & Palmer. It was alleged that Sorensen had converted or misused investor funds and falsified documents in connection with his management of the partnership fund.