FINRA

Capstone Asset Planning Company Fined Over Misleading Church Bond Mutual Fund Disclosures

October 19, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Capstone Asset Planning Company (CAPCO) alleging that from 2010 through 2012, CAPCO distributed communications to the public concerning the Capstone Fund that failed to accurately reflect the change in the fund’s performance. In addition, FINRA alleged that the Capstone Fund’s website contained a misleading statement concerning the fund’s redemption policy and compared church bonds to corporate bonds without disclosing the material differences between them. As a result, FINRA found that CAPCO violated the content and communications standards under Rules 2210(d)(1)(A), 2210(d)(2)(B), and 2210(d)(2)(B).

CAPCO is a brokerage firm with one office in Houston, Texas, and 22 registered representatives. CAPCO is a mutual fund underwriter and is a subsidiary of Capstone Financial Services, Inc. CAPCO served as the principal underwriter and distributor of shares of the Capstone Church Capital Fund (Capstone Fund). Capstone Fund’s holdings were approximately 87% church mortgage bonds and 13% church mortgage loans. From 2009 to 2012, the net assets of the Capstone Fund declined as a result of the decrease in the fair value of the fund’s assets. The Capstone Fund stopped accepting sales on January 24, 2013.

Under NASD Rule 2210(d)(1)(A) communications must be “based on principles of fair dealing and good faith,” “fair and balanced,” and must “provide a sound basis for evaluating the facts in regard to any particular security.” Similarly, NASD Rule 2210(d)(1)(B) prohibits members from making “false, exaggerated, unwarranted or misleading statement or claim in connection with any communication.”

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.

Sunset Financial Services Fined By FINRA Over Nontraditional (Leveraged) ETF Sales

October 16, 2013 | by Staff Attorney

Between March 16, 2009, and September 21, 2012, FINRA alleged that Sunset Financial Services, Inc., (Sunset) failed to establish and maintain a supervisory system regarding the sale of leveraged or inverse exchange-traded funds, otherwise known as nontraditional ETFs, that was reasonably designed to comply with NASD Conduct Rule 3010.

Sunset has its principal offices in Kansas City, Missouri and is wholly-owned by Kansas City Life Insurance Company, Inc., an insurance company. Sunset has approximately 302 branch offices, 504 registered individuals and 197 non-registered individuals associated with the firm.

FINRA alleged that Sunset’s written supervisory procedures did not address the selling of nontraditional ETFs in any fashion. A leveraged ETF employs financial debt in order to amplify the returns of an underlying stock position. Leveraged ETFs are generally available for most indexes like the S&P 500 and Nasdaq 100. For example, a leveraged ETF with 300% leverage will return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse of the benchmark.

FINRA Sanctions Broker Over Unsuitable Concentrations in Private Placement Securities

October 14, 2013 | by Staff Attorney

FINRA has barred broker Daniel P. Deighan (Deighan) for seven months and fined him $27,500 over allegations that he recommended private placements to customers that were not suitable given the customers’ net worth, annual income, and the concentration of the private placements in their accounts.

Private placements are securities that do not trade on stock exchanges and are exempt from the regular filing requirements. Private placements are issued under Regulation D under the Securities Act of 1933. Regulation D contains three rules (Rules 504, 505, and 506) that provide the rules required to be followed in order to qualify for the exemptions from the more rigorous Securities and Exchange Commission (SEC) registration requirements.

The three rules primarily govern the size of the offering and the number of participants that can invest in the private placement. However, under all three rules, with certain limited exceptions, investors must meet the “accredited investor” standard under Rule 501. Rule 501 defines “accredited investor” as any person who has a net worth in excess of $1,000,000, (excluding residence) or annual income in excess of $200,000 (or $300,000 jointly with a spouse) in the two most recent years. While the size of the private placement market is unknown, according to 2008 estimates, companies issued approximately $609 billion of securities through Regulation D offerings.

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.

FINRA Suspends Broker Anthony Mediate for 60 Days Over Allegations of Excessive Trading (Churning) and Unauthorized Trading

October 9, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) suspended broker Anthony Mediate (Mediate) for 60 days concerning allegations of excessive trading (churning) and unauthorized trading. “Churning” is excessive investment trading activity that serves little useful purpose or is inconsistent with the investor’s objectives and is conducted solely to generate commissions for the broker. Churning is also a type of securities fraud.

FINRA alleged that Mediate violated NASD Rules 2110 and 2310. NASD Rule 2310(a) provides that when recommending the purchase, sale, or exchange of any security a broker “shall have reasonable grounds for believing that the recommendation is suitable for such customer…” A broker’s recommendations must “be consistent with his customer’s best interests.” NASD IM-2310-2(a)(1) also require that the broker must “’have reasonable grounds to believe that the number of recommended transactions within a particular period is not excessive.” NASD IM-2310-2(b)(2) prohibits brokers from excessively trading in customer accounts.

An excessive trading violation occurs when: 1) a broker has control over the account and the trading in the account, and 2) the level of activity in that account is inconsistent with the customer’s objectives and financial situation. Where an intent to defraud or reckless disregard for the customer’s interests is present the activity is also churning.

FINRA Bars Broker Over Allegations of Churning (Excessive Trading) and Unauthorized Trading in Customer Accounts

October 7, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred Chad David Kelly (Kelly) concerning allegations of churning (excessive trading) and unauthorized trading. “Churning” is excessive investment trading activity that serves little useful purpose or is inconsistent with the investor’s objectives and is conducted solely to generate commissions for the broker. Churning is also a type of securities fraud.

FINRA alleged that Kelly willfully violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act of 1934”), Rule 10b-5, and violated FINRA Rules 2020, and 2010, NASD Rules 2120, 2110, 2310, and IM-2310(a) and (b).

According to FINRA, excessive trading violation occurs when: 1) a broker has control over the account and the trading in the account, and 2) the level of activity in that account is inconsistent with the customer’s objectives and financial situation. Where an intent to defraud or reckless disregard for the customer’s interests is present the activity is also churning. Section 10(b) of the Exchange Act of 1934 prohibits the use of “any manipulative or deceptive act or practice” in connection with the purchase or sale of a security and Rule 10b-5 prohibits “any device, scheme, or artifice to defraud.” NASD Rule 2310(a) provides that when recommending the purchase, sale, or exchange of any security a broker “shall have reasonable grounds for believing that the recommendation is suitable for such customer…” A broker’s recommendations must “be consistent with his customer’s best interests.” NASD IM-2310-2(a)(1) also require that the broker must “’have reasonable grounds to believe that the number of recommended transactions within a particular period is not excessive.” NASD IM-2310-2(b)(2) prohibits brokers from excessively trading in customer accounts.

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.

Robert Gist Fined $5.4 Million by the SEC and Barred From the Financial Industry

September 29, 2013 | by Staff Attorney

Robert Gist (Gist) was recently fined $5.4 million by the Securities and Exchange Commission (SEC) and barred from association with any broker-dealer by the Financial Industry Regulatory Authority (FINRA). Gist has been accused by both regulators of converting the funds of at least 30 customers in order to pay personal expenses and to fund the operations of a company controlled by Gist.

Gist resides in Atlanta, Georgia and is the president of Gist, Kennedy & Associates, Inc., (Gist Kennedy) a law firm specializing in estate planning and investments. Gist is licensed to practice law in Georgia and has represented professional athletes as a sports agent. From approximately 2002 through early 2013, Gist was CEO and president ENCAP Technologies, LLC (ENCAP), a company with its principal place of business in Roswell, Georgia. ENCAP is in the business of developing industrial coatings for metal surfaces to prevent corrosion. Gist has been associated or registered with numerous brokerage firms since the 1980s. Most recently, Gist was registered with Resource Horizons Group LLC from March 2001 until his December 2011.

On May 31, 2013, the SEC charged Gist and Gist Kennedy with defrauding at least 32 customers out of at least $5.4 million while acting as an unregistered broker from approximately 2003 to the present. According to the SEC’s complaint filed in the U.S. District Court for the Northern District of Georgia, Gist told customers that he would invest their funds conservatively on their behalves in corporate bonds and other securities. However, according to the SEC Gist invested none of the customer funds, but, instead, used the funds for his personal expenses.

How To Guide: Tips on Avoiding Investment Scams

September 28, 2013 | by Staff Attorney

You read about investment scams, but you never think it can happen to someone like you.

We have all read about the Bernie Madoffs and Allen Stanfords of the world. Unsuspecting investors duped into some of the largest ponzi schemes in the world. You think to yourself that it can never happen to you or anyone you know – that you are too smart. You may be right, but a lot of victims are smart and sophisticated investors. The lure of safe investments with high returns is appealing to everyone. Don’t get caught chasing returns in investments you do not understand.

High Yield and No Risk