Bad Brokers

According to FINRA, John Patterson Corey was fined $5,000 and suspended for 15 business days for impersonating a customer in two telephone calls to his former member firm.

Corey made the calls to the firm's customer service line for the purpose of assisting his customer with transferring accounts...

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According to FINRA, John Patterson Corey was fined $5,000 and suspended for 15 business days for impersonating a customer in two telephone calls to his former member firm.

Corey made the calls to the firm's customer service line for the purpose of assisting his customer with transferring accounts from that firm to Corey's current member firm. On the first call, Corey could not provide answers to security questions, and the agent refused to provide him with any account information. On the second call, Corey was able to provide identifying information for the customer, and he successfully requested a copy of the customer's final account statement, which the firm sent to Corey's email address.

Although the customer had authorized Corey to assist with transferring the accounts, the customer did not authorize Corey to impersonate him. The customer did not suffer any loss and did not complain.

Impersonating a customer is a serious violation even when done with the customer's knowledge and for a legitimate purpose like facilitating an account transfer. When representatives impersonate customers, they bypass security measures designed to protect customer information and accounts from unauthorized access. If Corey could impersonate the customer to obtain account statements, someone with malicious intent could use the same technique to gain access to sensitive information or authorize unauthorized transactions.

The fact that Corey succeeded on the second call by providing the customer's identifying information demonstrates that he was able to breach the firm's security protocols through impersonation. While the customer authorized the account transfer and suffered no harm, the conduct violated important security and authentication requirements.

Investors should understand that they should never provide their personal information or security credentials to their broker for use in impersonating them, even for apparently legitimate purposes. There are proper ways to authorize account transfers and access to information that don't require impersonation.

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According to FINRA, Malay Kumar was fined $10,000, suspended for 12 months, and ordered to pay $50,103.43 in restitution for willfully violating Regulation Best Interest by recommending customers exchange variable annuities without reasonably considering the impact of substantial surrender fees and ...

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According to FINRA, Malay Kumar was fined $10,000, suspended for 12 months, and ordered to pay $50,103.43 in restitution for willfully violating Regulation Best Interest by recommending customers exchange variable annuities without reasonably considering the impact of substantial surrender fees and the loss of benefits and liquidity.

Kumar did not have a reasonable basis to believe his recommendations were suitable or in his customers' best interest. Collectively, these exchange recommendations caused Kumar's customers to incur $50,103.43 in surrender fees. Kumar also provided inaccurate information about the source of funds on transaction documents he submitted to his member firm and the annuity issuers. Specifically, Kumar failed to identify and submit variable annuity purchases as exchanges even though each purchase was funded by the sale of another variable annuity. In doing so, Kumar caused his firm to create and maintain inaccurate books and records.

Variable annuity exchanges often trigger substantial surrender fees when an existing annuity is liquidated before the surrender period expires. These fees can be 7% or more of the account value, representing thousands or even tens of thousands of dollars. When brokers recommend exchanges that trigger such fees without a reasonable basis to believe the exchange benefits the customer, they violate suitability obligations and Regulation Best Interest.

Kumar's failure to disclose that the transactions were exchanges on the transaction documents is particularly problematic because it prevented the firm and annuity issuers from conducting proper suitability reviews. Exchange transactions receive enhanced scrutiny because of the risks of surrender charges and loss of benefits, but Kumar circumvented this oversight by misrepresenting the transactions as new purchases rather than exchanges.

The $50,103.43 in surrender fees paid by customers represents money that was taken directly out of their retirement savings to pay penalties for early withdrawal, while Kumar likely earned commissions on the new annuity purchases. This is a clear example of putting the broker's interests ahead of the customers' best interests.

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According to FINRA, BofA Securities, Inc. was fined $24 million for engaging in more than 700 instances of spoofing through two former traders in U.S. Treasury secondary markets and related supervisory failures spanning more than six years.

Spoofing is a type of fraudulent trading that involves t...

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According to FINRA, BofA Securities, Inc. was fined $24 million for engaging in more than 700 instances of spoofing through two former traders in U.S. Treasury secondary markets and related supervisory failures spanning more than six years.

Spoofing is a type of fraudulent trading that involves the use of non-bona fide orders (orders that the trader does not intend to have executed) to create a false appearance of market activity on one side of the market to induce other market participants to execute against bona fide orders entered on the opposite side of the market. Spoofing may deceive other market participants into trading at a time, price, or quantity that they otherwise would not have.

From October 2014 through February 2021, BofA Securities, through a former supervisor and a former junior trader, engaged in 717 instances of spoofing in a U.S. Treasury security to induce opposite-side executions in the same Treasury security or a correlated Treasury futures contract. This manipulative trading undermined the integrity and transparency of the U.S. Treasury markets, which serve as benchmarks for countless financial instruments and transactions.

From at least October 2014 through September 2022, BofA Securities failed to establish and maintain a supervisory system reasonably designed to detect spoofing in U.S. Treasury markets. The firm did not have a supervisory system to detect spoofing in Treasuries until November 2015. Until mid-2019, that system was deficient because it was designed to detect spoofing by trading algorithms, not manual spoofing by its traders. Until at least December 2020, the firm's surveillance did not capture orders its traders entered into certain external venue systems. The firm did not supervise for potential cross-product spoofing in Treasuries through September 2022.

This case demonstrates the importance of robust supervisory systems to detect and prevent market manipulation. The U.S. Treasury market is critical to the global financial system, and spoofing in this market undermines confidence and distorts pricing for investors worldwide.

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According to FINRA, the SEC affirmed findings that Southeast Investments, N.C., Inc. and its owner Frank Harmon Black failed to establish and maintain an effective supervisory system for retaining firm emails. The firm's policy allowed registered representatives to use personal email for business if...

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According to FINRA, the SEC affirmed findings that Southeast Investments, N.C., Inc. and its owner Frank Harmon Black failed to establish and maintain an effective supervisory system for retaining firm emails. The firm's policy allowed registered representatives to use personal email for business if they copied or forwarded emails to the firm, but this was not reasonably designed to ensure compliance with recordkeeping requirements.

The SEC found that Black, who was responsible for supervisory policies and procedures, failed to perform any audit or review of representatives' compliance with the email policy. Additionally, the firm failed to retain a representative's emails as required by law. These violations demonstrate a fundamental breakdown in the firm's recordkeeping infrastructure.

Investors should understand that proper email retention is critical for regulatory oversight and investor protection. When firms fail to maintain complete records of their communications, it becomes nearly impossible for regulators to investigate potential misconduct or for investors to prove wrongdoing in disputes. This case underscores the importance of working with firms that take their compliance obligations seriously.

The SEC affirmed fines totaling $73,500 against the firm and Black, payable jointly and severally, though the sanctions are not in effect pending appeal to the Fourth Circuit. The case serves as a reminder that supervisory failures can result in significant penalties, even when there may be no direct investor harm. Investors should verify that their brokerage firms maintain robust compliance systems, including proper email archiving and supervisory reviews.

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According to FINRA, the SEC affirmed findings that Wilson-Davis & Co., Inc. violated Regulation SHO by engaging in short selling without locating shares for 122 transactions in four penny stocks. The firm claimed to be acting as a bona-fide market maker but failed to establish this defense. The viol...

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According to FINRA, the SEC affirmed findings that Wilson-Davis & Co., Inc. violated Regulation SHO by engaging in short selling without locating shares for 122 transactions in four penny stocks. The firm claimed to be acting as a bona-fide market maker but failed to establish this defense. The violations were compounded by failures in supervision, anti-money laundering policies, and instant message monitoring.

The SEC found that firm principals Byron Bert Barkley and James C. Snow Jr. failed to reasonably supervise the short sales and implement adequate AML procedures and training. These systematic failures created significant compliance gaps that put investors at risk. The firm was ordered to pay disgorgement of $51,624 plus interest and retain an independent consultant to review supervisory and AML systems.

For investors, this case highlights the importance of proper market-making practices and regulatory compliance. Short selling without proper locates can contribute to market manipulation and unfair trading practices. Additionally, weak AML controls can expose firms to being used for money laundering, which can ultimately harm investor confidence and market integrity.

The SEC set aside certain fines and remanded the case to FINRA for reconsideration of sanctions for Barkley and Snow. However, the disgorgement and consultant requirements were affirmed, demonstrating that firms profiting from violations must return those ill-gotten gains. Investors should be cautious when dealing with firms that have histories of supervisory and compliance failures.

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According to FINRA, The Benchmark Company, LLC was censured and fined $450,000 for failing to establish adequate policies to restrict the flow of potentially material non-public research information. The firm's failures concerned research notes—emails following newsworthy events that were distribute...

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According to FINRA, The Benchmark Company, LLC was censured and fined $450,000 for failing to establish adequate policies to restrict the flow of potentially material non-public research information. The firm's failures concerned research notes—emails following newsworthy events that were distributed to sales and trading personnel before published research reports.

These research notes contained analyst analysis using the firm's internal financial modeling, which informed views of covered companies including ratings, price targets, and earnings estimates. The firm failed to address risks that sales and trading personnel might misuse this advance information for personal benefit or selectively disseminate it to favored customers. This created an unfair playing field where some customers received material information before others.

The supervisory failures allowed instances where prospective customers who received research notes traded in the securities before the information became public. This type of selective disclosure undermines market fairness and can harm investors who don't have access to the same timely information. Investors deserve confidence that all market participants receive material information simultaneously.

This case illustrates why strict information barriers between research and trading departments are essential. When these barriers break down, it creates opportunities for insider trading and unfair advantages. Investors should be aware that firms must maintain robust controls over the distribution of research and material non-public information to protect market integrity and ensure fair treatment of all customers.

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According to FINRA, The Windmill Group, Inc. was censured, fined $12,500, and ordered to pay restitution of $8,375.37 plus interest to customers for charging excessive commissions on equity transactions. The firm, acting through one of its owners who is also a registered representative, charged a to...

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According to FINRA, The Windmill Group, Inc. was censured, fined $12,500, and ordered to pay restitution of $8,375.37 plus interest to customers for charging excessive commissions on equity transactions. The firm, acting through one of its owners who is also a registered representative, charged a total of $8,375 in excessive commissions to two customers who were spouses.

The commissions were not fair and reasonable given that the trades involved highly liquid stocks and exceeded five percent. While customers were informed of commissions after the trades, they were not disclosed in advance, preventing customers from making informed decisions about whether to proceed. The firm also failed to maintain adequate supervisory systems for discretionary trading and fair commission practices.

The case revealed that the firm permitted discretionary trading in customer accounts despite its written procedures prohibiting such activity. The firm's supervisory procedures failed to describe how daily reviews of executed transactions should be conducted, what factors determine fair commissions, or how reviews should be documented. These supervisory gaps allowed the excessive charges to continue undetected.

Investors should always understand the costs associated with their trades before executing them. Commissions exceeding five percent on liquid stocks are rarely justified and can significantly erode investment returns. This case demonstrates the importance of reviewing all trade confirmations carefully and questioning any charges that seem excessive. Working with firms that have clear, disclosed fee structures and robust supervisory systems helps protect investors from unfair practices.

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According to FINRA, SRT Securities LLC was censured and fined $30,000 for failing to establish adequate supervisory systems for outside business activities (OBAs). The firm knew that registered representatives were engaged in an investment advisory business and that another representative planned to...

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According to FINRA, SRT Securities LLC was censured and fined $30,000 for failing to establish adequate supervisory systems for outside business activities (OBAs). The firm knew that registered representatives were engaged in an investment advisory business and that another representative planned to solicit hedge fund investments, but failed to properly evaluate these investment-related activities.

When approving these OBAs, the firm did not assess whether they should be restricted or prohibited, whether they would interfere with representatives' responsibilities to the firm or customers, or whether they should be treated as outside securities activities requiring recording on the firm's books and records. The firm's supervisory system was not reasonably designed to achieve compliance with FINRA rules governing OBAs.

Outside business activities can create significant conflicts of interest, especially when they involve investment-related services. Representatives may prioritize their outside businesses over their duties to brokerage customers, or may use their position at the firm to improperly market their outside ventures. Proper supervision of OBAs is essential to protect investors from these conflicts.

This case illustrates why FINRA requires firms to thoroughly review and approve all outside business activities. Investors should be aware that their representatives may have other business interests and should ask about any potential conflicts. Firms must maintain systems to identify, evaluate, and monitor OBAs to ensure they don't compromise the quality of service or create inappropriate conflicts of interest.

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According to FINRA, HRT Financial LP was censured, fined $110,000, and ordered to pay disgorgement of $233,445 plus interest for over-tendering shares in a partial tender offer. The firm had a net long position of 164,920 shares but tendered 350,000 shares without accurately calculating its position...

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According to FINRA, HRT Financial LP was censured, fined $110,000, and ordered to pay disgorgement of $233,445 plus interest for over-tendering shares in a partial tender offer. The firm had a net long position of 164,920 shares but tendered 350,000 shares without accurately calculating its position. Instead, the firm relied solely on the long equities position in one aggregation unit, resulting in over-tendering 185,080 shares.

After applying the proration factor, 13,569 of the over-tendered shares were accepted, resulting in ill-gotten gains of $233,445 for the firm. The firm also lacked any supervisory system or written procedures for achieving compliance with Exchange Act Rule 14e-4, which prohibits over-tendering in partial tender offers. This rule exists to prevent market manipulation and ensure fair treatment of all shareholders.

Over-tendering in partial tender offers can harm other shareholders by reducing their ability to participate in the offer. When firms tender more shares than they own, they effectively game the system at the expense of legitimate shareholders. The prohibition on over-tendering ensures that tender offers operate fairly and that all shareholders have equal opportunity to participate.

This case demonstrates the importance of accurate position tracking and compliance systems. Even sophisticated trading firms can make costly errors when they lack proper controls. The requirement for disgorgement ensures that firms cannot profit from regulatory violations. Investors benefit when FINRA enforces these rules strictly, as it maintains the integrity of tender offer processes and protects shareholder rights.

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According to FINRA, Elevation, LLC was censured and fined $75,000 for failing to establish a supervisory system to monitor for fraudulent trading practices such as spoofing, layering, and wash trades. The firm had no surveillance or supervisory reviews to detect these manipulative trading practices,...

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According to FINRA, Elevation, LLC was censured and fined $75,000 for failing to establish a supervisory system to monitor for fraudulent trading practices such as spoofing, layering, and wash trades. The firm had no surveillance or supervisory reviews to detect these manipulative trading practices, and its written procedures did not describe how to identify different types of fraudulent trading.

The firm's trade blotter included only executed orders and did not include quotation or canceled order information, which is essential for detecting spoofing and layering. These manipulative practices involve displaying and canceling orders to deceive other market participants about supply and demand. Without access to this information, the firm's supervisory personnel could not effectively monitor for such abusive practices.

Spoofing and layering are serious forms of market manipulation that harm investors by creating false impressions of market interest. Traders use these tactics to move prices in their favor by placing orders they intend to cancel, misleading others about true supply and demand. Effective surveillance systems are critical to detecting and preventing these abusive practices.

After FINRA's findings, the firm revised its procedures to explain how to conduct and document supervisory reviews for fraudulent trading and incorporated quotation and canceled order information in its trade blotters. This case highlights the importance of proactive compliance systems. Investors benefit when firms maintain robust surveillance to detect manipulation, as it helps ensure fair and orderly markets where prices reflect genuine supply and demand.

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