The Ever Changing FINRA Enforcement Horizon

Let’s see, if you can guess, how many different types of FINRA enforcements actions typically arise during a quarterly reporting period such as the fourth quarter of 2011.

In reviewing the below described summaries, the reader will be amazed as to the stupidity underlying some actions, the negligence and/or fraud perpetrated against the investing public and/or the downright theft of a customer’s hard earned money.

1. Entering Fictitious Trades and Causing Inaccurate Firm Records:

• FINRA settled a matter involving a registered representative who executed fictitious trades to misrepresent to his member firm the firm’s inventory levels in Small Business Administration loan-backed securities (SBA securities). The representative was his firm’s head trader on the SBA desk. The firm purchased SBA loans from small regional banks, pooled the loans and securities them, then ultimately sold them as SBA securities to institutional customers. During a period of approximately one year, the firm’s inventory levels of SBA securities exceeded its inventory limit.
• The representative knowingly placed four fictitious trades valued at more than $82 million into the firm’s system to create the impression that its inventory levels of SBA securities were lower than they actually were. The four fictitious trades created the false impression that the representative had sold SBA securities to institutional customers, and that the firm’s SBA desk had decreased overall inventory levels by $75 million. The representative also manipulated forward the settlement dates for the four fictitious trades to afford him additional time to try to legitimately sell the SBA securities. Firm employees noticed a discrepancy in the firm’s records, and the representative misrepresented to them that he had mistakenly effected the trades and would correct them.
• FINRA found that the registered representative entered fictitious trades, engaged in unethical business practices and caused inaccurate books and records. FINRA also found that the representative willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5 (federal securities fraud), NASD Rules 2120* (fraud), 2110** (ethical standards) and 3110† (books and records), and FINRA Rule 2010 (ethical standards). FINRA fined the registered representative $10,000 and suspended him in all capacities for six months.

2. Improper Transfer of Confidential and Proprietary Information:

• FINRA settled a matter involving a registered representative who improperly transferred confidential and proprietary information outside of his firm for purposes other than firm business. When the representative joined the firm, he agreed to comply with firm policies that required him to maintain the confidentiality of all information the firm and its customers supplied. During a period of approximately four months, the registered representative emailed the member firm’s proprietary and confidential information outside of the firm. First, he emailed two monthly compliance reports to an individual at another member firm; these reports contained the firm’s proprietary information and confidential, non-public information regarding six of the firm’s customers. Later, after notifying his member firm of his intent to resign, the registered representative emailed to his personal email account two documents containing proprietary information about the firm and confidential, non-public information regarding approximately 70 of the firm’s customers. Several days later, the registered representative emailed to his personal email account three documents containing confidential, non-public information regarding the firm’s clients, including driver’s license numbers and information regarding customers’ residences.
• FINRA found that, in each of the referenced instances, the registered person acted for purposes other than his firm’s business and in a manner contrary to the firm’s established procedures; FINRA found that these actions caused the firm to violate SEC and other federal regulations.
• FINRA found that the registered representative’s conduct violated NASD Rule 2110 (ethical standards) and FINRA Rule 2010 (ethical standards). FINRA fined the representative $5,000 and suspended him from associating with any member firm in any capacity for 15 business days.

3. Misrepresenting Information Regarding Prospectus Delivery:

• FINRA’s NAC issued a decision in which a registered representative misrepresented information to his member firm regarding delivery of preliminary prospectuses to nine customers who intended to purchase shares in an initial public offering (IPO) of stock, and caused his firm’s books and records to be inaccurate. The representative’s firm required its registered representatives to complete a syndicate worksheet for IPO sales to document the representative’s compliance with the firm’s procedures. The syndicate worksheet included columns for recording, among other things, the date and method of preliminary prospectus delivery to each customer. The registered representative testified that he was not aware that he was responsible for delivering the preliminary prospectuses to customers because he understood that the firm would handle delivery. The representative testified that, when he advised the branch manager that he had not delivered preliminary prospectuses to nine customers for whom he had submitted order tickets to purchase stock in the IPO, the branch manager advised him to nonetheless misrepresent on the syndicate worksheet that he had hand-delivered the prospectuses. Relying on the representative’s misrepresentations on the syndicate worksheet, the firm’s office administrative manager input into the firm’s official records that the prospectuses had been hand-delivered to the customers. FINRA’s NAC found that the representative violated NASD Rules 2110 (ethical standards) and 3110 (books and records). The NAC fined the representative $5,000.

When I first started putting this post together, I was planning on setting forth the information in one article. However, little did I know how expansive the list would be. Consequently, to see more, please go to article number 2 on the ever changing FINRA enforcement horizon.