Failure to Supervise

Update On Eric Johnson Alleged Theft of Over $1,000,000 in Customer Funds

March 9, 2015 | by Staff Attorney

As previously reported by Gana Weinstein LLP, the Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) barred broker Eric Johnson (Johnson) concerning allegations that he misappropriated more than $1,000,000 from at least six firm customers’ brokerage accounts. FINRA had also alleged that Johnson falsified the signatures of two firm employees and notarized seals on firm documents.

In a second disciplinary proceeding FINRA sanctioned RedRidge Securities, Inc. (RedRidge) and principal Brent D. Hurt (Hurt) alleging that the firm and Hurt failed to establish and enforce a supervisory system reasonably designed to detect unauthorized wire transfers.

In March 1999, Johnson became registered with RedRidge and operates out of his DBA business called HD Brent & Company (HD Brent). RedRidge terminated Johnson’s registration on September 24, 2014.

FINRA Bars Broker Gregg Beemer Concerning Private Securities

March 5, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and barred broker Gregg Beemer (Beemer) concerning allegations that Beemer engage in outside business activities including the sales of private securities. When outside business activities also include the recommendation of investments the activity is referred to in the industry as “selling away.”

FINRA Rule 8210 authorizes the regulator to require persons associated with a FINRA member to provide information with respect to any matter involved in the investigation. In December 2014, FINRA alleged that it pursued an investigation into allegations that Beemer engaged in undisclosed outside business activities. FINRA requested that Beemer appear and provide testimony. FINRA stated that Beemer emailed the regulator and stated that he would not provide information or cooperate in the investigation. Consequently, he was barred from the industry

According to Beemer’s brokercheck he has disclosed outside business activities including his insurance business called Associated Insurance Consultants, Inc. It is unclear at this time what organization or product that Beemer was involved with that FINRA was investigating.

FINRA Files Complaint Against Daniel McCourt Concerning Promissory Notes

February 27, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) filed a complaint against broker Daniel McCourt (McCourt) concerning allegations McCourt participated in private securities transactions, also known as “selling away”, without providing prior written notice to his member firm. In addition, FINRA alleged that McCourt provided false information and falsified documents to a mortgage company for a client to help the client qualify for a home loan.

McCourt first entered the securities industry in 1984. In 1985 McCourt associated with FINRA firm Foothill Securities, Inc. (Foothill). McCourt remained registered with Foothill until he was permitted to resign on or about June 7, 2013, due to “possible violations of firm policies and procedures.”

FINRA alleged that at various times from May 2005 through May 2009, McCourt participated in private securities transactions without providing Foothill prior written notice of the transactions. FINRA alleged that in or around 1990, McCourt notified Foothill that he wanted to begin an outside business activity in a coffee business. According to McCourt’s brokercheck the coffee business is called Surf City Coffee Co., Inc. (Surf City). Foothill approved McCourt’s involvement with Surf City.

FINRA Sanctions Felt & Company Broker Timothy O’Brien Over Discretionary Trades

February 17, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned broker Timothy O’Brien (O’Brien) alleging that O’Brien exercised discretion in two customers’ accounts without obtaining prior written authorization from the customers. O’Brien is associated with brokerage firm Felt & Company.

The FINRA rules provide that registered representatives shall not exercise discretionary power in a customer’s account unless the customer has given prior written authorization to a stated broker and the account has been accepted by the member on that basis. FINRA found that O’Brien was the registered representative for two Felt customers. FINRA determined that in handling the customers’ accounts O’Brien periodically discussed trading strategies with these two customers. However, FINRA alleged that these customers did not give O’Brien written authorization to exercise discretion in their accounts nor did Felt approve these accounts as discretionary accounts. From July 2012, through February 2013, FINRA found that O’Brien used discretion to execute approximately 171 transactions in these customers’ accounts.

Often times unauthorized discretionary trading goes hand and hand with churning, trading that broker engages in solely to generate commissions at the client’s expense. In order to establish a churning claim the investor must show that the trading was first excessive and second that the broker had control over the investment strategy. Certain commonly used measures and ratios used to determine churning help evaluate a churning claim. These ratios look at how frequently the account is turned over and whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably be expected to profit from the activity.

FINRA Bars Broker David Lavine Concerning Allegations of Outside Business Activities

February 12, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and barred broker David Lavine (Lavine) concerning allegations that Lavine engage in private securities transactions also known as “selling away.” FINRA Rule 8210 authorizes the regulator to require persons associated with a FINRA member to provide information with respect to any matter involved in the investigation.

In October 2014, FINRA alleged that it pursued an investigation into allegations that Lavine (i) exceeded the scope of an approved outside business activity and potentially engaged in an unapproved private securities transaction; and (ii) failed to timely disclose several reportable financial events. FINRA requested that Lavine provide documents and information on or before November 14, 2014. On December 2, 2014, FINRA stated that Lavine, through his counsel, requested an extension of time to respond but ultimately failed to provide the responsive documents and information and informed FINRA that he would not provide information at any time.

According to Lavine’s brokercheck his disclosed outside business activities include Angel Flight South Central and LAKAP, LLC. It is unclear at this time if FINRA’s investigation concerned Lavine’s participation in these enterprises.

FINRA Bars Broker Michael Evangelista Over Real Estate Securities Sales

January 30, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker Michael Evangelista (Evangelista) concerning allegations that between 2006 and 2011, Evangelista referred approximately six of his firm customers to invest in real estate securities issued by ABC Corp. (ABC), an entity that purportedly invested in real estate in Pennsylvania and neighboring states. FINRA alleged that the customer investments totaled over $3 million while Evangelista received at least $50,000 in compensation in connection with these referrals. FINRA found that Evangelista did not disclose to his brokerage firms that these customers were purchasing securities away from the firm, a practice known as “selling away”, or that he was being compensated in connection with his referrals.

Evangelista entered the securities industry in 1993. From 1994 to December 2012, he was registered with the following FINRA firms: (1) Capital Analysts, Inc. until to December 2007; (2) Cambridge Investment Research, Inc. from January 2008 to May 2012; and (3) Comprehensive Asset Management and Servicing, Inc. (Comprehensive) from May 2012 to December 2012. Comprehensive filed a Form U5 on December 20, 2012, stating that Evangelista was terminated because he became the subject of a customer complaint.

FINRA alleged that starting in 2006, Evangelista participated in meetings with certain of his brokerage clients the president of ABC to have the clients invest with ABC. The investments were for the development of specific parcels of property. When client’s invested in ABC they acquired either promissory notes issued or limited partnership agreements. The promissory notes allegedly provided for a repayment of principal plus interest. Investments in the form of limited partnership agreements had clients receiving a percentage interest in the partnership that would yield a minimum return in the form of interest paid on a per annum basis and a return of principal.

FINRA Bars Broker Chase Casson For Failing to Respond to Inquiries Over Private Transactions

January 23, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker Chase Casson (Casson) alleging that Casson failed to provide documents and information to FINRA in response to demands made to investigate the broker’s activities. On various dates in August and September 2014, FINRA sent Casson a request for documents concerning allegations that he participated in a private securities transactions. The details concerning the exact nature of the alleged transaction and Casson’s role are not yet fully known.

The allegations against Casson are consistent with a potential “selling away” securities violation. In the industry the term selling away refers to when a financial advisor solicits investments in companies, promissory notes, or other securities that are not pre-approved by the broker’s affiliated firm. Under the FINRA rules, a brokerage firm owes a duty to properly monitor and supervise its employees in order to detect and prevent brokers from offering such products. In order to properly supervise their brokers each firm is required to establish and maintain written supervisory procedures and implement such policies in order to monitor the activities of each registered representative. Selling away often occurs in environments where the brokerage firms either fails to put in place a reasonable supervisory system or fails to actually implement that system and meet supervisory requirements.

In selling away cases, investors are unaware that the advisor’s investments are either not registered or not real. Typically investors will not learn that the broker’s activities were wrongful until after the investment scheme is publicized or the broker simply shuts down shop and stops returning client calls.

Gana LLP Brings Claim on Behalf of Client Against Rockwell Global Capital

January 8, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a complaint on behalf of an investor against Rockwell Global Capital, LLC (Rockwell), accusing the firm of making unsuitable recommendations and failing to properly supervise one of its financial advisers. In or around July 2013, the client alleged that he received a cold call from Rockwell financial adviser, Patrick Lofaro. A cold call is when someone solicits and individual who was not anticipating such an interaction. Cold calling is a technique used by a salesperson to contact individuals who have not previously expressed an interest in the products or services that are being offered.

It was alleged that Mr. Lofaro aggressively pursued the client’s investment related business and that Mr. Lofaro convinced him that he could build a diversified portfolio with minimal risk to the client. In reliance upon Mr. Lofaro’s assurances, the Claimant alleged that he opened an account with Rockwell in or around August 2013. Over a seven-month period, the Claimant invested a substantial sum with Rockwell which represented close to 50% of his liquid net worth. The complaint alleges that Mr. Lofaro, rather than create a suitable portfolio, implemented a high-leverage, excessive trading strategy that generated a high amount of commissions without providing any material benefit to the Claimant.

According to the complaint, over the course of just over a year, Mr. Lofaro executed nearly one-hundred-forty (140) trades into and out of thirty-five (35) different stocks, including seventeen (17) small caps, two (2) initial public offerings (IPO’s), eight (8) penny stocks, and fifteen (15) different stocks that were more than twice as volatile as the S&P 500. The complaint alleges that Mr. Lofaro created a portfolio laden with risk while providing no material benefit to the Claimant. Mr. Lofaro’s investment strategy ultimately cost the Claimant an estimated $837,131, while Mr. Lofaro received over $261,080 in commissions.

Aegis Capital Corp. Broker Malcom Segal Barred From Industry Over Allegations of Outside Business Activities

January 6, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred former Aegis Capital Corp. (Aegis) broker Malcom Segal (Segal) alleging that Segal may have engaged in unauthorized transfers of funds from customer accounts to an outside business activities (a/k/a “selling away”).

According to Segal’s BrokerCheck, Segal was registered with Cumberland Brokerage Corporation from 1989 until April 2011. Thereafter, Segal was a broker for Aegis until July 2014 where he was terminated on allegations of by the firm violations of the firm that Segal failed to cooperate with an internal investigation into a customer complaint he made unauthorized wire transfers from a customer’s account. Segal’s disclosures also reveal that he is listed as a partner of J & M Financial and President of National C.D. Sales.

Upon information and belief, it is in connection with National C.D. Sales that customer have filed complaints against Segal concerning. While details concerning Segal’s activities are still pending, the allegations against Cox are consistent with a “selling away” securities violation. Selling away occurs when a financial advisor solicits investments in companies or promissory notes that were not approved by the broker’s affiliated firm. In many cases the broker transfers funds or liquidates investments at his registered firm in order to make the investment in the outside business.

Complaint Filed Against Joseph Hooper Relating to iPractice Group Investment Sales

January 3, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently filed a complaint against former Source Capital Group, Inc. (Source Capital) broker Joseph Hooper (Hooper) alleging that Hooper was serving as the Director of Investor Relations for a company called the iPractice Group, Inc. (iPractice) and that in such capacity, Hooper participated in the sale of iPractice stock and was compensated for that participation without notifying Source Capital of these activities. FINRA alleged that Hooper participated in 53 private securities transactions involving 41 investors or investor groups and a total of $3,400,648 worth of iPractice stock. In return, FINRA alleged that Hooper received $425,081 and more than 21,000 shares of iPractice stock as compensation for his activities.

This is not the first time our firm has written about supervisory and disclosure issues at Source Capital. Our firm has previously written concerning FINRA’s action against Source Capital concerning the agency’s findings that certain Source Capital brokers failed to adequately disclose material facts and made sales through misstatements in oil and gas partnership interests in Blue Ridge Securities (Blue Ridge) and Argyle Securities. (Argyle).

In FINRA’s recent action, when Hooper became associated with Source Capital in May 2012, he was also the Director of Investor Relations for iPractice, a medical technology company. FINRA alleged that Hooper remained the Director of Investor Relations for iPractice throughout the time he was associated with Source. iPractice raised funds for its operations by selling stock in the company through exempt private placement securities offerings. FINRA alleged that Hooper participated in the solicitation and sale of iPractice stock to investors. In addition, Hooper was listed by iPractice as a promoter on an amended Form D filed with the SEC on May 18, 2012.