Articles Posted in FINRA Regulation

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7-waysAs recently reported, the Financial Industry Regulatory Authority (“FINRA”) barred broker John Phillip Correnti (CRD# 5319471) in light of his failure to provide testimony and documents in connection with an investigation into potential violations of applicable securities industry rules.  Publicly available information through FINRA indicates that, in a career spanning 2007 – 2016, Mr. Correnti was previously affiliated with four different brokerage firms.  Most recently, Mr. Correnti was associated with AXA Advisors, LLC (“AXA”) (CRD# 6627) (2015-2016).

FINRA records also indicate that Mr. Correnti was the subject of a customer dispute in 2011, which concerned allegations of mismanagement, misrepresentations, breach of fiduciary duty, as well as claims grounded in negligence / negligent misrepresentation.  Furthermore, FINRA records indicate that Mr. Correnti was discharged from his employment with AXA in July 2016, following allegations concerning “[h]is apparent involvement in the possible manipulation of a low-price security.”

In August 2017, Mr. Correnti, who worked as a registered representative for AXA in Cleveland, Ohio, was barred from the securities industry by FINRA.  Specifically, FINRA sanctioned Mr. Correnti with an industry bar following his failure to completely respond to FINRA’s request for documents, as well as his incomplete testimony.  In addition, FINRA records suggest that the investigation was aimed, at least in part, on whether Mr. Correnti “[e]ngaged in undisclosed business activities….”

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House in HandsOn October 11, 2017, Michael Giokas, the founder of Giokas Wealth Advisors, was reportedly arrested on fraud charges.  Mr. Giokas’ arrest was the result of an investigation by the FBI Buffalo Office concerning allegations that the Williamsville broker misappropriated $200,000 from one of his clients.  At Mr. Giokas’ arraignment before Magistrate Judge Michael J. Roemer, Assistant U.S. Attorney Paul E. Bonanno informed the Judge that the investigation suggests Giokas led his client to believe that the $200,000 would be placed in an investment that would yield 8-9% interest.  Instead, according to Attorney Bonanno “… the money was not placed in any investment and was instead spent by the defendant on personal expenses.”

According to publicly-available information as disclosed by the Financial Industry Regulatory Authority (“FINRA”), Michael Giokas (CRD# 1398674) has worked in the securities industry for over three decades.  Since 1986, he has been affiliated with the following brokerage firms: Cigna Securities, Inc. (CRD# 145) (1986-1987), FSC Securities Corporation (CRD# 7461) (1987-1991), Guardian Investor Services Corporation (CRD# 6635) (1991-1992), Linsco/Private Ledger Corp. (CRD# 6413) (1992-1999), Securities Service Network, Inc. (CRD# 13318) (1999-2001), Comprehensive Asset Management and Servicing, Inc. (CRD# 43814) (2002-2013), and Fortune Financial Services, Inc. (“Fortune Financial”) (CRD# 42150) (2013-2017).

FINRA BrokerCheck indicates that Mr. Giokas is no longer registered as a broker.  Further, in May 1991 he was permitted to resign from his employment with FSC Securities following violation of firm policy concerning an insurance related bank account.  Mr. Giokas has been the subject of several customer complaints, including two complaints in 2000 and 2001 that were settled.

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The Financial Industry Regulatory Authority (FINRA) recently fined Investors Capital Corporation $250,000 over the sale of unit investment trusts (UITs).  Investors Capital did not admit or deny the allegations leading to the fine, but also agreed to pay $841,500 in restitution to customers, bringing its total payment to over $1 million.

Abstract Businessman enters a Dollar Maze.FINRA alleged that certain Investors Capital brokers recommended that customers engage in unsuitable short-term transactions in UITs, and also alleged that the firm failed to apply sales charge discounts that should have been available to some customers. FINRA further alleged that Investors Capital Corporation lacked adequate systems and procedures to supervise the sales of UITs, leading to the violations.  Short-term trading in UITs may be uneconomical in many cases due to relatively high up-front sales charges, and UITs are typically recommended only as long-term investments.

Investors Capital’s alleged violations occurred between 2010 and 2015.

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Investors Capital will pay $1.1 million in fines and restitution over the sale of unit investment trusts (UITs) to resolve an investigation by the Financial Industry Regulatory Authority Inc. (FINRA).  FINRA alleges that certain Investors Capital brokers recommended unsuitable short-term trading of UITs and other complex financial products known as steepener notes in accounts of 74 clients, according to the settlement.

old bird cage

old bird cage

Investors Capital also allegedly failed to apply sales charge discounts to certain customers’ purchases of UITs, and inadequately supervised its representatives, according to FINRA’s allegations. To resolve the FINRA case, Investors Capital agreed to pay $250,000 in fines and $842,000 in restitution. The firm has already reportedly paid close to $224,500 in restitution to clients.

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The Financial Industry Regulatory Authority (FINRA) recently fined LPL Financial $10 million fine and ordered it to pay $1.7 million in restitution to investors who lost money with LPL brokers.  The charges levied by FINRA alleged widespread supervisory failures involving securities such as nontraditional exchange-traded funds, variable annuities and non-traded real estate investment trusts (or REITs).

15.6.10 moneyand house in handsLPL’s failure to supervise sales of nontraditional ETFs continued into 2015, according to FINRA.   FINRA also alleged that LPL failed to have adequate supervisory systems and guidelines for sales of nontraded REITs from January 2007 to August 2014. LPL consented to the fine without admitting or denying the charges.

This was not LPL’s first regulatory issue concerning lack of supervision concerning high-commission investments such as non-traded REITs.  In March 2014, FINRA fined LPL $950,000 for supervisory deficiencies related to sales of a wide range of alternative investment products. These include nontraded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid investments.

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Securities fraud attorneys are currently investigating claims on behalf of former clients of Northwestern Mutual Investment Services LLC, MML Investors Services LLC, Wealth By Design Inc. and Clinton D. Fraley. In August, an emergency law enforcement action was filed by the Colorado Securities Commissioner to enjoin Wealth by Design and Clinton Fraley from violating the Colorado Securities Act. According to the allegations, Fraley violated the Colorado Securities Act by accessing investors’ mutual fund accounts without authorization, converting their securities into cash illegally and forging checks in order to access funds for personal use.

Victims of Clinton D. Fraley Could Recover Losses

“Fraley, who was a licensed securities professional employed with licensed broker-dealers until he was terminated in 2011, solicited hundreds of thousands of dollars from Colorado investors, promising the investors that their money would be invested in ‘a well-balanced portfolio of investments’ consisting of Roth IRAs, traditional investments such as stocks and bonds, mutual funds and non-qualified investments,” says the statement from Colorado enforcement officials. However, “Fraley gained unauthorized access to the investors’ accounts, forged the investors’ signatures on checks, deposited the money in a Wealth bank account and converted the money for his own personal benefit, including the purchase of a house.”

Stock fraud lawyers say Fraley was registered from March 2007 to May 2011 with Northwestern Mutual Investment Services, a FINRA-registered broker-dealer. Fraley was registered with another FINRA-registered broker-dealer, MML Investors Services, from May 2011 to October 2011. All FINRA-registered broker dealers are, according to securities fraud attorneys, required to properly supervise the activities of their brokers during the time in which they are registered with the firm. As a result, these firms may be held liable for failing to adequately supervise Fraley.

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December 15, 2011, the Financial Industry Regulatory Authority (FINRA) announced its decision to fine Wells Fargo Investments LLC for “unsuitable sales of reverse convertible securities through one broker to 21 customers, and for failing to provide sales charge discounts on Unit Investment Trust (UIT) transactions to eligible customers.” The fine totals $2 million; in addition, Wells Fargo must pay restitution to customers who had unsuitable reverse convertible transactions and/or did not receive the sales charge discounts on UIT transactions. Furthermore, the stock broker misconduct of Alfred Chi Chen led FINRA to file a complaint against him.

Finra Ruling: Wells Fargo Fined, Complaint Filed Against Chen

UITs offer sales charge discounts on purchases that exceed certain thresholds, often called “breakpoints,” or involve redemption or termination proceeds from another UIT during the initial offering period. Wells Fargo’s insufficient monitoring of the reverse convertible sales caused them to fail to provide breakpoint and rollover and exchange discounts in the sales of UITs to eligible customers from January 2006 to July 2008.

The registered representative, who is no longer with Wells Fargo, Alfred Chi Chen, made unauthorized trades in multiple customer accounts. In some cases, the customer accounts belonged to deceased individuals. FINRA filed a complaint against Chen, in addition to its decision to fine Wells Fargo. According to FINRA’s investigation, Chen’s broker misconduct extended to 21 clients, most of which had limited experience in investments, low risk tolerances and/or were elderly. To these 21 clients, Chen made hundreds of unsuitable recommendations for reverse convertible investments. Repayment of reverse convertibles, which are interest-bearing notes, is tied to the performance of a stock, basket of stocks, or another underlying asset. These investments were unsuitable for many of Chen’s low-risk profile clients because they risk sustaining a loss if the value of the underlying asset falls below a certain level at maturity or during the term of the reverse convertible, according to FINRA.

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On November 22, the Financial Industry Regulatory Authority (FINRA) announced its securities arbitration decision to fine Wells Investment Securities Inc. for using misleading marketing materials. The materials were used in the sale of Wells Timberland REIT Inc., for which Wells was the wholesaler and dealer-manager, and the fine imposed by FINRA was $300,000.

Wells Timberland REIT is a non-traded Real Estate Investment Trust that invested in timber-producing land. Because it was the wholesaler, Wells was responsible for the review, approval and distribution of the marketing materials. According to FINRA’s investigation, Wells distributed 116 sales materials and advertising that contained exaggerated, unwarranted and misleading statements concerning the REIT from May 2007 through September 2009.

One of the misleading statements contained in the offering prospectus was that Wells Timberland intended to qualify as a Real Estate Investment Trust for the Dec. 31, 2006 tax year when, in fact, it did not qualify until the Dec. 31, 2009 tax year. Furthermore, most of the sales literature and advertisements either did not adequately express the significance of the investment’s non-REIT status or suggested that the investment was a REIT when it had not yet qualified. In addition, the FINRA investigation found that the supervisory procedures of the firm did not adequately monitor whether sensitive customer information that was stored on laptops was adequately safeguarded through the use of encryption technology.

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LaeRoc Funds, a real estate investment firm that, according to its website, has managed assets totaling more than $650 million over the last 23 years, is currently attempting to raise another $12 million to $15 million to pay off debt for its LaeRoc 2005-2006 Income Fund. The fund’s debt totals at least $49 million. This “cash call” could be a negative sign for individuals invested in the fund. In addition, an article in Investment News states that, “The fund’s leaders have said that they will foreclose on one of its holdings, the Country Club Plaza shopping center in Sacramento, Calif., by the end of the year if they can’t raise enough money.”

A Notice to LaeRoc Income Funds Investors

The due diligence and sales practices of FINRA-registered brokerage firms who solicited this fund, along with the LaeRoc 2002 Investment Fund, are currently being investigated. In total, the two LaeRoc Funds purchased eight properties, costing a total of more than $180 million, and still owe mortgage debt totaling $105 million.

According to investors of the fund, the investment was represented as fixed income and conservative. If it can be proven that the investments were misrepresented, or the full extent of the risks associated with them were not disclosed, investors who believed the investment to be conservative may have a claim for a securities arbitration case. FINRA Rules state that firms must perform a “reasonable” investigation of the securities recommended as private placements, like the LaeRock Fund. Private placements — offerings made under Regulation D of the Securities Act of 1933 — are not exempt from the federal securities law’s antifraud provisions, even though exemptions are provided by Regulation D from registration requirements of Section 5 of the act.

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According to a recent press release from the Financial Industry Regulatory Authority (FINRA), Morgan Stanley & Co. Inc. and Morgan Stanley Smith Barney LLC, together were fined $1 million in securities arbitration. Furthermore, Morgan Stanley was ordered to pay $371,000 in restitution and interest. The restitution and interest will go to Morgan Stanley customers because of supervision violations and excessive markups and markdowns that were charged on their municipal bond transactions.

Morgan Stanley Fined $1 Million, Plus Restitution

Markups refer to the difference between the lowest current offering price of an investment for the dealer and the actual price the dealer charges the customer. According to the Municipal Securities Rulemaking Board, or MSRB, “MSRB rules require that the price at which a broker-dealer sells a municipal security to a customer be fair and reasonable, taking into consideration all relevant factors.” Though the MSRB does not set numerical guidelines for what constitutes a “reasonable” markup, they do acknowledge that whether the total price paid by the customer can be considered “fair and reasonable” can be affected by the mark-up.

According to FINRA’s investigation, Morgan Stanley’s 5 percent to 13.8 percent markups and markdowns were higher than warranted when considering market conditions, value of services rendered to customers and the cost of executing the transactions. In addition, the supervisory system Morgan Stanley had in place for corporate and municipal bond markups and markdowns was found to be inadequate by FINRA. Inadequacies of the supervisory system included a failure to include markups and markdowns less than 5 percent — regardless of if they were excessive or not — and the firms’ policies and procedures.

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