Bad Brokers

According to FINRA, Spartan Capital Securities, LLC, along with executives John Dennis Lowry and Kim Marie Monchik, were found in violation of disclosure requirements and ordered to pay significant fines.

The firm was censured, fined $600,000, and required to retain an independent consultant to r...

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According to FINRA, Spartan Capital Securities, LLC, along with executives John Dennis Lowry and Kim Marie Monchik, were found in violation of disclosure requirements and ordered to pay significant fines.

The firm was censured, fined $600,000, and required to retain an independent consultant to review its policies relating to Form U4 and Form U5 disclosures. Lowry was fined $20,000 and suspended for two years, while Monchik was fined $10,000 and also suspended for two years.

The violations centered on the firm's systematic failure to amend, or timely amend, the Form U4s and Form U5s of its registered representatives to disclose customer arbitrations, settlements, and reportable financial events. FINRA found that these failures were willful, as the firm knowingly elected not to disclose arbitrations against its executive officers despite being cautioned twice by FINRA.

Lowry was personally involved in 12 arbitrations resulting in awards and settlements totaling more than $1.6 million. He failed to disclose eight settlements and disclosed four late. Monchik was named in 12 arbitrations alleging supervision failures, with awards totaling over $360,000. She failed to disclose 11 arbitrations and disclosed one 562 days late.

Investors should understand that brokers and firms are required to promptly disclose arbitration filings, complaints, and settlements on their regulatory forms. These disclosures appear on BrokerCheck and help investors make informed decisions. When firms and brokers hide this information, it deprives investors of critical data about their financial professional's history.

The sanctions are currently not in effect pending SEC review.

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According to FINRA, Drexel Hamilton, LLC and four of its representatives were sanctioned for submitting fraudulent retail orders for municipal bonds.

The firm was censured, fined $300,000, and ordered to pay disgorgement of $837,353. Individual representatives received varying sanctions: Michael ...

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According to FINRA, Drexel Hamilton, LLC and four of its representatives were sanctioned for submitting fraudulent retail orders for municipal bonds.

The firm was censured, fined $300,000, and ordered to pay disgorgement of $837,353. Individual representatives received varying sanctions: Michael Ivcic was fined $30,000 and suspended for 15 months; Thomas Mead Jr. received a deferred fine of $15,000 and a six-month suspension in principal capacity; Frederick Phelan was fined $20,000 with a four-month suspension; and David Steigerwald was fined $30,000 with a six-month suspension.

The investigation revealed that on at least 572 occasions, the firm submitted orders designated as retail without a legitimate basis, using fake zip codes to make the orders appear as though they came from genuine retail customers. Additionally, on at least 44 occasions, orders exceeding the $1 million maximum were split into smaller orders to evade eligibility requirements.

Ivcic personally submitted 276 fraudulent retail orders with fake zip codes and split at least 29 oversized orders. Phelan and Steigerwald submitted 46 and 127 false orders respectively. Mead, as department head, failed to respond to red flags when a syndicate manager challenged numerous orders that did not appear to be for genuine retail customers.

This case highlights the importance of regulatory oversight in municipal bond markets. Retail order periods exist to give individual investors priority access to new bond issues. When firms circumvent these rules, they harm both the integrity of the market and individual investors who should have had first access to these securities.

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According to FINRA, Torch Securities, LLC and its representative Thomas Bruce O'Driscoll were sanctioned for anti-money laundering compliance failures and submitting falsified documents to regulators.

The firm was fined $5,000 (a reduced amount considering the firm's financial resources), while O...

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According to FINRA, Torch Securities, LLC and its representative Thomas Bruce O'Driscoll were sanctioned for anti-money laundering compliance failures and submitting falsified documents to regulators.

The firm was fined $5,000 (a reduced amount considering the firm's financial resources), while O'Driscoll was fined $5,000 and suspended from the securities industry for two months.

FINRA's investigation revealed that the firm failed to conduct any independent testing of its anti-money laundering (AML) program for 17 years, from 2005 to 2022. AML testing is a critical compliance requirement designed to ensure firms can detect and report suspicious financial activity.

Perhaps more troubling, O'Driscoll created and submitted backdated documents to FINRA during an examination. When FINRA requested documentation regarding outside business activities, O'Driscoll produced documents that falsely appeared to show timely disclosure of these activities. He failed to inform FINRA that he had created these documents after receiving their request, deliberately creating a false impression of compliance.

This case serves as an important reminder that regulatory compliance is not optional. Firms must maintain robust AML programs with regular independent testing. Moreover, when regulators request documentation, providing falsified or backdated documents constitutes a serious violation that can result in individual sanctions and bars from the industry. Investors rely on the integrity of regulatory examinations to ensure their financial professionals are operating within the rules.

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According to FINRA, Smith, Brown & Groover, Inc. and its principal Raymond Hill Smith Jr. were sanctioned for recommending a trading strategy to customers without understanding its risks, resulting in near-total losses for investors.

The firm was censured and ordered to pay $2,000,000 in partial ...

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According to FINRA, Smith, Brown & Groover, Inc. and its principal Raymond Hill Smith Jr. were sanctioned for recommending a trading strategy to customers without understanding its risks, resulting in near-total losses for investors.

The firm was censured and ordered to pay $2,000,000 in partial restitution to customers. Smith was fined $15,000 and suspended for a total of ten months (six months in all capacities followed by four months in principal capacity).

The violations stemmed from Smith developing and implementing a trading strategy that primarily invested in a high-risk, complex exchange-traded note (ETN). Despite being the strategy's developer, Smith did not fully understand the ETN's basic features, including how it maintained inverse exposure to volatility or that it was designed for daily trading only.

The firm and Smith invested customers in this ETN for extended periods (averaging 72 days) contrary to the product's disclosure documents. They also conducted flawed testing that over-estimated potential returns. When market volatility surged, customer accounts fully invested in the strategy suffered near-total losses as the ETN's value collapsed and the issuer called the product.

The firm had no procedures for conducting reasonable-basis suitability analysis for complex products and no documented concentration limits. Though there was an informal 10% concentration guideline, some customers exceeded it significantly.

This case underscores the importance of understanding complex products before recommending them. Investors should be wary of strategies involving leveraged or inverse ETNs, which are designed for short-term trading and can produce devastating losses when held longer.

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According to FINRA, Morgan Stanley & Co. LLC was censured and fined $1,000,000 for failing to establish adequate risk management controls for its market access business.

The firm's violations centered on inadequate documentation and procedures for controlling potentially erroneous orders. When on...

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According to FINRA, Morgan Stanley & Co. LLC was censured and fined $1,000,000 for failing to establish adequate risk management controls for its market access business.

The firm's violations centered on inadequate documentation and procedures for controlling potentially erroneous orders. When onboarding new customers, the firm's procedures did not describe how to place clients into appropriate risk groups or establish reasonable thresholds for order controls.

Specifically, the firm failed to document on a customer-by-customer basis why 'price away' controls (preventing orders priced significantly away from reference prices) and 'single order notional value' controls (limiting maximum order amounts) were appropriate. For high-touch traders, the firm applied standardized thresholds without documented rationale, permitting all traders on certain desks to submit large orders regardless of experience level.

The firm also applied 'soft blocks' or 'hold limits' to orders that breached risk thresholds, but did not require personnel reviewing paused orders to document why they released orders into the market. Additionally, amended orders that were more conservative than originals could be released without manual review, which was unreasonable for preventing erroneous orders.

The firm's periodic reviews of control effectiveness were also inadequate, only triggering when limits exceeded very high maximum guidelines that would not identify customers with potentially unreasonable limits.

This case highlights the critical importance of documented, well-designed market access controls. Such controls protect not only the firm but also the broader market from potentially disruptive erroneous orders.

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According to FINRA, Concorde Investment Services, LLC was censured, fined $110,000, and ordered to pay $20,382.39 plus interest in partial restitution for failing to supervise unsuitable alternative investment recommendations.

The firm's representatives recommended alternative investments related...

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According to FINRA, Concorde Investment Services, LLC was censured, fined $110,000, and ordered to pay $20,382.39 plus interest in partial restitution for failing to supervise unsuitable alternative investment recommendations.

The firm's representatives recommended alternative investments related to an asset management firm to six retail customers who had conservative or moderate risk tolerances. These recommendations were unsuitable given the substantial risks of the limited partnership interests being sold.

Five of the affected customers were seniors, and the recommendations resulted in them holding over 30% of their exclusive net worth in alternative investments, exceeding the firm's own suitability guidelines. This concentration was apparent on suitability paperwork submitted to the firm, but the firm failed to respond to these red flags or conduct further inquiry.

The situation became even more serious when the SEC subsequently filed fraud charges against the asset management firm and its principals. The Department of Justice brought criminal charges, and executives were found guilty of securities fraud, mail fraud, and wire fraud.

This case illustrates the critical importance of proper due diligence and suitability analysis for alternative investments. Conservative and moderate investors should generally have limited exposure to high-risk alternatives. Firms must have robust procedures to identify and prevent unsuitable concentration in risky investments, particularly for senior investors who may have less time to recover from losses.

The firm has since stopped allowing representatives to recommend these investments and updated its supervisory controls.

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According to FINRA, XP Investments US, LLC was censured, fined $225,000, and ordered to pay $575,000 in partial restitution for multiple regulatory violations including inadequate due diligence on private placements and trade reporting failures.

The firm recommended three private placements invol...

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According to FINRA, XP Investments US, LLC was censured, fined $225,000, and ordered to pay $575,000 in partial restitution for multiple regulatory violations including inadequate due diligence on private placements and trade reporting failures.

The firm recommended three private placements involving real estate projects intended for co-working spaces and hotels without conducting reasonable due diligence. The firm failed to obtain financial information necessary to understand the capital structure, evaluate projected returns, or understand all associated risks. The firm also did not adequately research the company and its founder. These offerings eventually resulted in foreclosures and bankruptcy, causing losses for customers who purchased $3,619,550 in securities.

Additionally, the firm failed to supervise trading activity for potential non-bona fide trading. The fixed income desk would cause an affiliate fund to purchase bonds from the firm to avoid breaching internal risk limits, then buy them back. The firm had no systems to identify this potentially manipulative activity.

The firm also provided inaccurate confirmations to retail customers, stating it acted as agent when it actually acted as riskless principal, failing to disclose mark-up and mark-down information. Trade reports to TRACE also incorrectly identified the firm's capacity.

This case demonstrates the importance of thorough due diligence before recommending private placements and the need for proper trade reporting. Investors should be aware that private placements carry significant risks and that firms have obligations to investigate before recommending such investments.

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According to FINRA, Commerce Brokerage Services, Inc. was censured and fined $75,000 for failing to comply with FINRA's Code of Arbitration Procedure for Industry Disputes.

FINRA's rules require that disputes between member firms and their former associated persons or other member firms be resolv...

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According to FINRA, Commerce Brokerage Services, Inc. was censured and fined $75,000 for failing to comply with FINRA's Code of Arbitration Procedure for Industry Disputes.

FINRA's rules require that disputes between member firms and their former associated persons or other member firms be resolved through FINRA arbitration. Commerce Brokerage violated these rules in two separate instances.

In the first instance, the firm filed suit in Missouri state court against a former associated person alleging violations of a non-solicitation and confidentiality agreement. The firm sought injunctive relief and damages but failed to file a required statement of claim with FINRA Dispute Resolution.

In a more significant second instance, the firm's non-FINRA-member affiliate filed suit in Kansas state court against two former associated persons and their new member firm, alleging violations of non-solicitation agreements, misappropriation of trade secrets, and tortious interference. The other member firm incurred approximately $800,000 in attorney fees defending against this litigation. The court eventually ruled that the dispute was subject to mandatory arbitration and stayed the action. A FINRA arbitration panel subsequently ordered Commerce Brokerage to pay the other firm approximately $800,000 in compensatory damages.

This case reinforces that securities industry participants must resolve their disputes through FINRA's arbitration process rather than circumventing it through state court litigation. This requirement helps ensure efficient and consistent resolution of industry disputes while protecting all parties from unnecessary litigation costs.

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According to FINRA, Tastytrade, Inc. was censured and fined $30,000 for failing to establish and maintain a supervisory system for monitoring outside securities accounts disclosed by its associated persons.

FINRA rules require broker-dealers to supervise the securities activities of their employe...

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According to FINRA, Tastytrade, Inc. was censured and fined $30,000 for failing to establish and maintain a supervisory system for monitoring outside securities accounts disclosed by its associated persons.

FINRA rules require broker-dealers to supervise the securities activities of their employees, including trading in personal accounts held at other firms. This supervision helps detect potential conflicts of interest, insider trading, and other misconduct.

The investigation found that Tastytrade's written supervisory procedures failed to specify how the firm would document its review of outside securities account statements or track whether those reviews had been completed. The firm also failed to review securities transactions in accounts disclosed by its associated persons in a reasonable manner.

Without proper tracking and documentation, it becomes impossible to verify whether required supervisory reviews are actually occurring. This gap could allow employee trading misconduct to go undetected.

Following FINRA's action, Tastytrade updated its written supervisory procedures and made enhancements to its system for supervising employee outside securities accounts.

For investors, this case illustrates the importance of firms having robust compliance programs to monitor their employees' personal trading. Such oversight helps ensure that representatives are not engaging in activities that could harm their customers or the integrity of the markets. When firms fail to maintain these controls, it increases the risk that misconduct could occur without detection.

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According to FINRA, Osaic Services, Inc. (formerly SagePoint Financial, Inc.) was censured and fined $250,000 for failing to adequately supervise options trading and excessive trading in customer accounts.

The firm permitted unqualified Trade Desk employees who lacked sufficient knowledge and tra...

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According to FINRA, Osaic Services, Inc. (formerly SagePoint Financial, Inc.) was censured and fined $250,000 for failing to adequately supervise options trading and excessive trading in customer accounts.

The firm permitted unqualified Trade Desk employees who lacked sufficient knowledge and training with options to override automated supervisory alerts and trading restrictions. In one case, the firm allowed a representative to open options positions requiring margin in a 60-year-old customer's cash account. Despite alerts warning of uncovered options creating potential losses exceeding the account's cash, the Trade Desk overrode the alerts without assessing the underlying facts.

Some options transactions exposed this customer to potential losses exceeding $4.5 million, more than 22 times her $200,000 liquid net worth. The firm also failed to respond to red flags about the same representative excessively trading this customer's account and that of her 91-year-old mother, who was widowed, in ill health, and had a net worth of $500,000.

Despite flagging high losses, cost-to-equity ratios, commissions, and turnover rates in December 2018, March 2019, and July 2019, the firm continued allowing the representative to trade these accounts without restrictions. The customers paid over $60,000 in combined commissions and costs, incurring over $1.2 million in losses. One customer lost her entire account value.

After the mother's death, the firm also failed to freeze her account despite being notified, allowing approximately $10,000 in additional commissions to be charged posthumously.

This case underscores the importance of responsive supervision when red flags appear.

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