Suitability

FINRA Bars Gary Chackman Over Allegations of Unsuitable Non-Traded REIT Sales

March 11, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) imposed a permanent bar against Gary J. Chackman (Chackman) concerning allegations that he recommended unsuitable transactions in the accounts of at least eight LPL Financial, Inc. (LPL) customers by over-concentrating the customers’ assets in real estate investment trusts (REITs). Additionally, FINRA found that Chackman falsified LPL documents to evade the firm’s supervision by submitting dozens of “alternative investment purchase” forms that misrepresented customers’ liquid net worth. FINRA found that by submitting falsified documents Chackman increased his customers’ accounts’ concentration in REITs and other alternative investments beyond the firm’s maximum allocation limits.

From December 2001, through March 2012, Chackman was registered through LPL. On March 2012, LPL filed a Uniform Termination Notice for (Form U5) stating that Chackman was terminated for violating firm policies and procedures regarding the sale of alternative investments. From March 2, 2012 through April 3, 2013, Chackman was registered through Summit Brokerage Services, Inc. (Summit). In April 2013, Summit filed a Form U5 terminating Chackman stating that the broker was operating a business out of an unregistered location. According to Chackman’s BrokerCheck there have been at least five customer complaints filed against the broker. Many of the complaints involve allegations of unsuitable REITs

According to FINRA, from July 2009 to February 2012, Chackman recommended REITs and other alternative investments to at least eight of his LPL customers. FINRA found that Chackman purchased the REITs at periodic intervals in each of their accounts. For example, in one customer’s account Chackman made seven purchases of a particular REIT, each for $75,000 over six months. After twelve months, FINRA found that 35% of the customer’s assets and more than 25% of her liquid net worth were invested in REITs and other alternative investments. In order to evade LPL’s limitation on the concentration of alternative investments in customers’ accounts, FINRA found that Chackman misidentified his customers’ purported liquid net worth on LPL forms. FINRA found that over sixteen months and on seventeen alternative investment purchase forms Chackman tripled the customer’s purported liquid net worth.

FINRA Alleges Royal Securities Company Failed to Supervise the Sale of Church Investments – Part II

March 6, 2014 | by Staff Attorney

This article continues the findings of The Financial Industry Regulatory Authority (FINRA) that led to sanctions against Royal Securities Company (Royal Securities) concerning allegations Royal lacked adequate supervision and controls in several areas. FINRA found that from 2009 through 2011, Royal Securities failed to establish adequate supervisory systems to ensure due diligence, training, and fair pricing of church bonds and funds sold by its representatives.

FINRA alleged that Royal Securities acted as the lead underwriter for three churches who were issuing church bonds. From May 2009, through October 2011, according to FINRA Royal Securities sold approximately $4.3 million in church bonds to customers. FINRA also found that Royal Securities was also involved in the sale of secured certificates of participation in a fund that raised capital for Christian churches. The church fund was sold primarily by another broker-dealer but FINRA found that Royal Securities had a secondary clearing arrangement with the broker-dealer where 151 church fund sales occurred in 65 accounts with a total of approximately $2,908,000 in sales.

FINRA found that Royal Securities failed to adopt reasonable written supervisory procedures and supervisory controls to govern church bonds and church funds lines of business. Specifically, FINRA found that Royal Securities procedures did not address specific suitability considerations, particularly supervision of issues, or any required due diligence of church bonds underwritten.

Merriman Capital Sanctioned Over Private Placement and Supervisory Failures

March 5, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Merriman Capital, Inc. (Merriman) concerning allegations that for more than three years Merriman’s written supervisory procedures were not reasonably designed to achieve compliance the FINRA rules. FINRA alleged that Merriman’s written supervisory procedures failed to describe the specific procedures to be followed and the persons responsible for carrying them out. In addition, according to FINRA, between May 2009, and September 2013, Merriman Capital raised more than $16 million for its parent company through several private offerings of securities even though Merriman did not have written procedures related to the sale of private placements.

Merriman has been a FINRA member since November 1986 and its business is focused on offerings of growth companies and institutional investors. Merriman is headquartered in San Francisco, California and employs fifty-five registered persons.

FINRA alleged that Merriman Capital’s written supervisory procedures, at fifteen pages long, listed legal rules and regulations that had to be complied with but failed to describe the specific procedures to be followed by the firm or how compliance with the procedures would be documented. Further, FINRA found that until June 2011, Merriman written supervisory procedures failed to address private placements even though the selling private placements was a substantial portion of the firm’s business. FINRA found that Merriman failed to address private placements in the firm’s supervisory manual even though Merriman Capital raised more than $16 million for its parent company through several private offerings.

Center Street Securities Fined by FINRA Over Email Supervisory Failures

February 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Center Street Securities, Inc. (Center Street) concerning allegations that the firm failed to establish, maintain, and enforce adequate supervisory systems and written supervisory procedures to monitor the use of external email accounts to conduct firm-related business by the firm’s registered representatives. The firm was fined $30,000.

Center Street has been a FlNRA member since February 7, 1991 and employs approximately 84 registered persons out of 74 branch offices. Center Street’s principal office is in Nashville, Tennessee. Center Street sells variable life insurance and annuities, mutual funds, private placements, options, corporate equities, debt securities, U.S. government securities and municipal securities.

The duty to supervise is a critical component of the securities regulatory scheme. The duty to supervise is an affirmative responsibility of all brokerage firms. The SEC has found that effective supervision by a broker-dealer must provide effective staffing, efficient resources and a system of follow-up and review to determine that any responsibility to supervise is being diligently exercised. Evidence that there is a variance between the conduct called for by a firm’s procedures and the actions actually undertaken by a firm supports a finding of liability and failure to supervise.

FINRA Alleges that Cambridge Investment Research Failed to Supervise Broker Emails

February 20, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Cambridge Investment Research, Inc. concerning allegations that from January 2009, to July 2010, Cambridge failed to ensure that the firm preserved, maintained, and reviewed the business emails of two of its registered representatives. FINRA found that during this time Cambridge was relying upon its representatives to forward copies of their emails but did not have effective procedures reasonably designed to ensure that the representatives actually forwarded emails in violation of FINRA supervision rules.

Cambridge has been a FINRA member since December 1995 and has 3,044 registered individuals in 1,530 branch offices.

The duty to supervise has been held to be a critical component of the securities regulatory scheme. Supervisors have an obligation to employ systems and processes designed to ferret out wrongful behavior. In addition, firms must respond vigorously to indications of irregularity, commonly referred to as “red flags” of misconduct.

FINRA Suspends Former NSM Securities Supervisor Irving Burstein

February 4, 2014 | by Staff Attorney

Supervisor Irving Burstein (Burstein) has settled charges brought by the Financial Industry Regulatory Authority (FINRA) by accepting a one-year bar from the securities industry. FINRA’s allegations concerned Burstein’s activities from March 2007, until July 2011, where Burstein, as Chief Compliance Officer at NSM Securities, Inc. (NSM) failed to supervise the activities of NSM’s registered representatives and also failed to implement and enforce the firm’s Written Supervisory Procedures.

Burstein first became associated with a member firm in 1988, when he joined Stuart, Coleman & Co. Thereafter, Burstein became licensed as a registered representative of at least 15 other brokerage firms including Aura Financial Services, Inc., Pointe Capital, LLC, Legend Securities, Inc., and R.M. Stark & Co., Inc.

According to FINRA, NSM’s business model is to solicit high net worth individuals of Indian descent and then engage in a highly active trading strategy in their accounts involving only a few securities. FINRA alleged that many NSM customer accounts were excessively traded in order to generate large fees for NSM registered representatives and the firm. FINRA found that Burstein, as a supervisor, failed to supervise the activities of the firm’s registered representatives and failed to implement and enforce the firm’s written supervisory procedures. FINRA alleged that NSM, through Burstein’s conduct, helped to create a “culture of noncompliance at NSM that resulted in the rampant churning of customer accounts, unsuitable recommendations, unauthorized trading, and significant customer harm.”

Benjamin Cox of Red River Securities Settles Charges Over Improper Sales Of Oil and Gas Private Placements

February 3, 2014 | by Staff Attorney

Broker Benjamin Cox (Cox) has settled charges brought by the Financial Industry Regulatory Authority (FINRA) concerning improper sales of oil and gas private placement offerings sold by Red River Securities LLC (Red River). Cox accepted a one-year bar from the securities industry and a fine of $5,000.

Cox entered the securities industry in 2010 when he joined Red River. Cox was employed at Red River until termination in March 2012. According to Cox’s BrokerCheck, in March 2012, Red River filed a termination notice stating that a potential client called Red River explaining that his suitability information was not accurate and was not the information that the client had provided to Cox.

FINRA alleged that from September 2011, through March 2012, Cox cold called potential investors for oil and gas offerings offered and sold by Red River. During the calls with potential investors, Cox was responsible for documenting suitability information from the potential investors to ensure that the investments were appropriate for those investors. FINRA found that Cox was supposed to verify the potential investor’s name, address, occupation, and obtain financial and investment experience information in order to evaluate the suitability of the oil and gas private placements for the customer.

Rive, Leavell & Co. Sanctioned Over Misleading Communications In the Sale of Church Bonds

January 22, 2014 | by Staff Attorney

Brokerage firm Rives, Leavell & Co. (Rives) was recently sanctioned by the the Financial Industry Regulatory Authority (FINRA) over allegations that the firm disseminated to the investing public 29 advertisements including newspapers, brochures, offering documents, and pastor letters related to church bond investments that failed to comply with FINRA’s advertising rules. FINRA determined that these communications generally failed to adequately explain or highlight the risks associated with the investments, contained misleading language, or failed to explain investment terms sufficiently.

Rives is a broker-dealer based in Jackson. Mississippi, employs twelve registered brokers and has no branch office locations. NASD Conduct Rule 2210(d)(1) establishes content standards for public communications. All member communications with the public are to be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or service. Further, FINRA prohibits members from omitting any material fact. In addition, NASD Rule 2210(d)(1)(B) prohibits claims that are false, exaggerated, unwarranted or misleading. FINRA has reminded firms that members must consider the nature of the audience to which the communications will be directed and that different levels of explanation or detail may be necessary depending on the audience to which a communication is directed.

During the first review period FINRA examined, the agency found that Rives disseminated two newspaper advertisements, five brochures, one pastor letter, one mailed advertisement, and two offering documents that contained improper content. For example, FINRA found that a number of the communications promoted the bonds’ high interest rates but failed to disclose various risks associated with the investment including that the bonds were unrated by a rating agency, were potentially illiquid and might result in a loss of principal. The communications also failed to explain and contrast the difference between different interest options on the bonds.

The Problem of Senior Investor Abuse – A Securities Attorney’s Perspective

January 21, 2014 | by Staff Attorney

The financial abuse of seniors continues to be a significant problem in the United States. Nearly 40 million people are age 65 and older and the number is expected to grow to 89 million by 2050. However, even though seniors comprise of a large portion of the population they make up the vast majority of clients that seek our firm’s assistance as securities attorneys.

Securities regulators have taken increased interest in recent years to stress to brokerage firms the need to implement increased supervision and devise specific policies to address issue facing senior investors. FINRA recently published its 2014 Business Conduct Priorities where the regulator stated that its examiners will continue to focus on how firms engage with senior investors with a focus on suitability determinations as well as disclosures and communications. FINRA has also stated that firms must develop policies and procedures to identify and address situations where issues of diminished capacity may be present.

In a 2010 article published by the SEC, the regulator summarized practices that financial services firms and brokers must adhere to in order to properly service the accounts of senior investors in areas including:

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.