Bad Brokers

According to FINRA, Home Financial Services, Inc was fined $50,000 for failing to disclose execution time and failing to properly disclose mark-ups and mark-downs on customer confirmations for municipal securities transactions.

The firm reported mark-ups and mark-downs only as a percentage of pre...

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According to FINRA, Home Financial Services, Inc was fined $50,000 for failing to disclose execution time and failing to properly disclose mark-ups and mark-downs on customer confirmations for municipal securities transactions.

The firm reported mark-ups and mark-downs only as a percentage of prevailing market price on customer confirmations, rather than providing the required dollar amount disclosure. Additionally, the firm did not disclose mark-downs in any manner on customer confirmations and failed to disclose execution time on retail customer confirmations, both of which are required under MSRB rules.

The firm also incorrectly applied the non-transaction-based compensation indicator on reports to the MSRB's Real-time Transaction Reporting System for transactions that actually included mark-ups, mark-downs, or commissions. This occurred due to a coding error in the firm's vendor software that automatically applied the incorrect indicator to certain transactions.

Furthermore, the firm failed to supervise reasonably for compliance with MSRB disclosure requirements. The firm's written procedures did not require disclosure of mark-ups or mark-downs, and supervisory reviews of customer confirmations did not verify that mark-downs and execution times were properly disclosed. The firm also lacked procedures for reviewing the correct application of special condition indicators.

This case illustrates why proper disclosure of mark-ups, mark-downs, and transaction details is essential for investor protection. These disclosures help investors understand the true cost of their municipal bond transactions and compare pricing across different firms. When firms fail to properly disclose these charges, investors cannot make fully informed decisions about whether they received fair pricing.

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According to FINRA, Haywood Securities (USA) Inc. was fined $175,000 for recommending sales totaling almost $11 million of private placements to U.S. customers without conducting reasonable due diligence and for failing to establish a supervisory system reasonably designed to achieve compliance with...

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According to FINRA, Haywood Securities (USA) Inc. was fined $175,000 for recommending sales totaling almost $11 million of private placements to U.S. customers without conducting reasonable due diligence and for failing to establish a supervisory system reasonably designed to achieve compliance with Regulation Best Interest.

The firm recommended Canadian non-brokered private placements (NBPPs) where it acted as a finder rather than as an agent of the issuer. The firm's due diligence process was severely deficient, generally consisting of nothing more than a search and review of the issuer's recent public filings. When the firm obtained information from issuers, it sought minimal information and relied mostly on issuer representations with little to no independent verification.

The firm generally did not conduct any independent investigation such as inquiring about litigation or disciplinary problems, reviewing key contracts, exploring business plans, or conducting site visits. The firm also did not generally search for regulatory history or maintain evidence and documentation of its due diligence efforts for these offerings.

Additionally, the firm failed to file required FINRA Rule 5123 filings in connection with the sale of Canadian NBPPs because it incorrectly believed that unsolicited transactions where it received no finder's fee were exempt, when in fact they did not qualify for any exemption.

For investors, this case underscores the critical importance of proper due diligence before recommending investments, particularly for private placements which are inherently risky and illiquid. When firms fail to conduct thorough independent investigations of offerings they recommend, investors are exposed to investments that may not be suitable or may involve undisclosed risks. Investors should always ask what due diligence their broker conducted before accepting recommendations for private placements or other complex investments.

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According to FINRA, Puma Capital, LLC was fined $100,000 for failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent trade-throughs.

Despite receiving a warning from FINRA, the firm had no policy or process to determine whether the intermarket sw...

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According to FINRA, Puma Capital, LLC was fined $100,000 for failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent trade-throughs.

Despite receiving a warning from FINRA, the firm had no policy or process to determine whether the intermarket sweep orders (ISOs) it routed were received and executed as intended by the venues to which it directed them. The firm relied on its order management system to route ISOs when filling orders from its inventory that would trade through a protected quote at another venue.

Due to a coding issue in the firm's OMS, venue identifications for newly-added venues were left blank in electronic messages sent to the broker-dealer providing routing services. This caused ISOs directed to these venues to be executed in the routing broker's dark pool rather than on the intended exchanges, resulting in trade-throughs of protected quotes. After discovering this issue with one venue and fixing it, the firm still failed to implement procedures to verify ISO routing, allowing the same coding error to recur with three other venues.

Later, an update to the routing broker's system inadvertently caused it to stop appending proper execution instructions to ISOs, again causing trade-throughs that the firm failed to identify. Only after these repeated failures did the firm begin obtaining reports to verify where its ISOs were actually being executed.

Trade-throughs occur when a trade is executed at a price inferior to the best available price displayed on another trading venue. Regulation NMS prohibits trade-throughs to ensure investors receive the best available prices. When firms fail to properly route orders or verify execution quality, investors may receive worse prices than they should, resulting in real economic harm. This case demonstrates the importance of firms implementing robust controls and monitoring systems to ensure customer orders receive proper handling and best execution.

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According to FINRA, H.C. Wainwright & Co., LLC was fined $200,000 for conducting a securities business and making capital withdrawals while failing to maintain required net capital.

The firm served as guarantor on loans ranging from $50 million to $175 million taken by its parent company in conne...

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According to FINRA, H.C. Wainwright & Co., LLC was fined $200,000 for conducting a securities business and making capital withdrawals while failing to maintain required net capital.

The firm served as guarantor on loans ranging from $50 million to $175 million taken by its parent company in connection with an employee stock ownership transaction. The firm failed to take an appropriate net capital charge for these loan guarantees, resulting in net capital deficiencies for 14 out of 16 months, with the largest deficiency being $164,922,628 and an average deficiency of $95,931,666.

During this period, the firm made capital withdrawals totaling $250,039,448, almost all of which were used to pay back acquisition-related loans from its parent company or the lending bank. The firm also filed 16 inaccurate FOCUS reports by failing to include the amounts of its parent company's loans as liabilities for purposes of calculating net capital. The firm incorrectly calculated its net capital and thus failed to make and preserve accurate books and records.

Additionally, the firm failed to provide required prior written notice to FINRA in connection with credit agreements it entered into as guarantor for its parent company.

Net capital rules are fundamental investor protections that ensure broker-dealers maintain sufficient liquid assets to meet obligations to customers. When firms operate significantly below required capital levels, as this firm did with deficiencies exceeding $164 million, they put customer assets at serious risk. The fact that the firm simultaneously made massive capital withdrawals while operating in deficiency is particularly concerning. This case demonstrates why accurate financial reporting and strict adherence to net capital requirements are essential for protecting investors.

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According to FINRA, Wedbush Securities Inc. was fined $350,000 for failing to establish and maintain a supervisory system reasonably designed to monitor transmittals of customer funds to third parties.

The firm received and approved four fraudulent wire transfer requests from a hacker totaling mo...

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According to FINRA, Wedbush Securities Inc. was fined $350,000 for failing to establish and maintain a supervisory system reasonably designed to monitor transmittals of customer funds to third parties.

The firm received and approved four fraudulent wire transfer requests from a hacker totaling more than $6.6 million without taking reasonable steps to confirm whether the requests were genuine. The hacker had gained access to an email account belonging to a registered representative at one of the firm's correspondent firms and requested wires from a joint brokerage account to third parties in foreign countries.

The firm failed to reasonably investigate multiple red flags indicating the requests were fraudulent, including: the wires were for large and increasing amounts in a short period of time, they were being sent to third-party recipients in foreign countries who lacked any connection to the customers, and the requests came via email. Rather than contacting an authorized representative of the correspondent firm by telephone to verify the requests, the firm only sent questions to the hacker via the compromised email account.

After the correspondent firm notified Wedbush of the fraud, both firms reimbursed the customers for their losses. The firm subsequently revised its written procedures to require personnel to call a recognized person at a correspondent firm using a known telephone number prior to approving wires over a certain amount.

This case illustrates the critical importance of strong controls around wire transfers and fund movements. Email compromise schemes are increasingly common, and firms must implement robust verification procedures, especially when requests involve large amounts, foreign recipients, or third parties. The red flags in this case were obvious, yet the firm approved over $6.6 million in fraudulent wires. Investors should be aware of these risks and expect their brokerage firms to have stringent controls to verify wire transfer requests before sending funds.

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According to FINRA, Morgan Stanley Smith Barney LLC was fined $400,000 for acting in contravention of the Securities Act by failing to deliver prospectuses to customers electing paper delivery in connection with sales of Exchange-Traded Funds.

The firm's prospectus delivery failures stemmed from ...

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According to FINRA, Morgan Stanley Smith Barney LLC was fined $400,000 for acting in contravention of the Securities Act by failing to deliver prospectuses to customers electing paper delivery in connection with sales of Exchange-Traded Funds.

The firm's prospectus delivery failures stemmed from coding errors in its internal systems that incorrectly indicated that prospectuses need not be delivered for transactions in certain ETFs, all of which were in the same fund family. Because the firm's third-party prospectus fulfillment vendor delivered paper prospectuses only when the firm's systems indicated one should be delivered, the vendor did not deliver prospectuses for these ETFs until the firm discovered and fixed the coding error.

The firm also failed to establish and maintain a supervisory system reasonably designed to monitor and confirm the delivery of prospectuses to customers. The firm's supervisory system was unable to detect whether its internal systems accurately indicated that these prospectuses should be delivered.

After discovering the issue, the firm implemented additional procedures requiring manual reviews of prospectus delivery indicators to confirm its systems accurately indicate whether prospectuses are to be delivered.

Prospectuses are fundamental disclosure documents that provide investors with essential information about investment products, including objectives, risks, fees, and past performance. The requirement to deliver prospectuses exists to ensure investors receive this critical information before or at the time they invest. When firms fail to deliver prospectuses, investors may make investment decisions without full knowledge of important product details. This case demonstrates the importance of firms implementing proper controls to ensure compliance with basic disclosure requirements, and investors should always request and review prospectuses before investing.

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According to FINRA, Cowen and Company, LLC and its predecessor Cowen Prime Services LLC were fined $275,000 for publishing quarterly reports on their handling of customer orders that failed to disclose required information, provided inaccurate and incomplete information, or were not timely published...

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According to FINRA, Cowen and Company, LLC and its predecessor Cowen Prime Services LLC were fined $275,000 for publishing quarterly reports on their handling of customer orders that failed to disclose required information, provided inaccurate and incomplete information, or were not timely published.

Cowen Prime failed to disclose its basis for publishing separate Rule 606 Reports, published non-reportable equities order information, and failed to publish required options order information. Cowen and Company published quarterly Rule 606 Reports late and failed to publish required options information concerning its execution venues.

Additionally, both firms' supervisory systems and written procedures were not reasonably designed to achieve compliance with Rule 606 requirements. Cowen and Company has since revised its written procedures to provide guidance on how to perform supervisory reviews to ensure the accuracy of its Rule 606 reports.

Rule 606 of Regulation NMS requires broker-dealers to publish quarterly reports disclosing information about their order routing practices, including the venues to which they route customer orders and any payments received for order flow. These reports are designed to provide transparency about potential conflicts of interest and help investors understand how their orders are being handled.

When firms fail to properly publish Rule 606 reports or publish inaccurate information, investors lack transparency into important aspects of order handling that could affect execution quality. Payment for order flow and routing practices can significantly impact the prices investors receive on their trades. This case highlights the importance of accurate and timely disclosure of order routing practices so investors can make informed decisions about where to direct their business.

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According to FINRA, TD Private Client Wealth LLC was fined $600,000 for failing to establish and maintain a supervisory system reasonably designed to review correspondence and internal communications, resulting in approximately 3.5 million emails from 691 employee accounts going unreviewed.

The f...

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According to FINRA, TD Private Client Wealth LLC was fined $600,000 for failing to establish and maintain a supervisory system reasonably designed to review correspondence and internal communications, resulting in approximately 3.5 million emails from 691 employee accounts going unreviewed.

The firm often failed to place email accounts for new employees into the electronic queue it established for email review. The firm's written procedures failed to set forth the necessary steps to add accounts to the review queue, identify the departments or personnel responsible for those steps, or identify requirements for when the steps should be taken.

Due to the lack of reasonable written procedures, there were miscommunications between multiple departments about whether email accounts had been placed into the queue and misunderstandings about which department was responsible for particular steps. The firm also failed to maintain a reasonable system to verify that new employees' email accounts were being placed into the review queue, instead relying on an ad hoc and occasional practice of manually comparing lists, which was not reasonable given the volume of employees onboarded during the relevant period.

Furthermore, the firm failed to reasonably investigate and address red flags that employee email accounts were missing from the review queue, and did not investigate why accounts were missing or whether other accounts were missing until after FINRA commenced its investigation.

Email supervision is a critical compliance function that helps firms detect misconduct, unauthorized trading, conflicts of interest, and other violations before they harm customers. When firms fail to review millions of emails over an extended period, they create an environment where misconduct can go undetected. This case demonstrates the importance of firms implementing reliable systems with clear procedures, proper oversight, and regular verification to ensure all employee communications are being reviewed as required.

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According to FINRA, Allied Millennial Partners, LLC was fined $10,000 for failing to file required documents with FINRA for private placement offerings that it sold to retail investors after entering into an agreement with an issuer to act as a selling agent.

FINRA Rule 5123 requires member firms...

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According to FINRA, Allied Millennial Partners, LLC was fined $10,000 for failing to file required documents with FINRA for private placement offerings that it sold to retail investors after entering into an agreement with an issuer to act as a selling agent.

FINRA Rule 5123 requires member firms to file certain documents with FINRA for private placement offerings they participate in selling. This filing requirement exists to provide FINRA with visibility into private placement activity and help protect investors from fraudulent or unsuitable offerings. The rule helps ensure regulatory oversight of these typically high-risk, illiquid investments.

Private placements are securities offerings that are exempt from full SEC registration requirements and are often sold to investors with less disclosure than public offerings. Because these investments carry significant risks including illiquidity, lack of public information, and potential for fraud, regulatory filing requirements help ensure basic oversight and investor protection.

When firms fail to file required documents for private placements they sell, it undermines FINRA's ability to monitor these offerings and protect investors. This case serves as a reminder that firms acting as selling agents for private placements must comply with all filing requirements, regardless of the size or nature of the offering. Investors considering private placement investments should verify that their broker-dealer has conducted proper due diligence and complied with all regulatory requirements.

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According to FINRA, Alterna Securities, Inc. (formerly known as Actinver Securities, Inc.) was fined $32,500 for maintaining a supervisory system that was not reasonably designed to surveil for potentially manipulative pre-arranged trades.

The firm did not have exception reports, trade alerts, or...

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According to FINRA, Alterna Securities, Inc. (formerly known as Actinver Securities, Inc.) was fined $32,500 for maintaining a supervisory system that was not reasonably designed to surveil for potentially manipulative pre-arranged trades.

The firm did not have exception reports, trade alerts, or other supervisory mechanisms to identify pre-arranged transactions. Instead, the firm relied on supervisors to identify such transactions as part of their daily review of a fixed income trade blotter. However, the blotter was organized by customer account and did not show execution times, making it an unreasonable mechanism to identify potential pre-arranged trading.

Moreover, the firm's written procedures provided no information or guidance to supervisors on how to review for pre-arranged trading, what information to identify or evaluate, or what steps were required to address indications of pre-arranged transactions. While the procedures designated a firm principal as responsible for supervising fixed income transactions, they did not designate a supervisor for that principal's own trading activity.

As a result, a designated principal effected 35 pairs of pre-arranged transactions in corporate bonds, selling bonds from the firm's inventory or on behalf of a customer to another broker-dealer and then buying the same bonds back (usually within five minutes) from the same broker-dealer on behalf of other customers. Because the firm had no surveillance system to detect pre-arranged transactions and no supervisor for the principal's trading, none of these transactions were flagged for review.

Pre-arranged trading can be manipulative because it may create a false appearance of market activity or be used to transfer profits between accounts. Firms must have adequate surveillance systems to detect such activity and protect investors from potential manipulation. This case demonstrates the importance of firms implementing comprehensive surveillance systems with clear procedures for all types of potentially problematic trading patterns.

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