Bad Brokers

According to FINRA, Damian Mark Baird was named as a respondent in a FINRA complaint alleging that he failed to provide information and documents and failed to appear for on-the-record testimony requested by FINRA as part of two separate investigations.

The complaint alleges that FINRA's investig...

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According to FINRA, Damian Mark Baird was named as a respondent in a FINRA complaint alleging that he failed to provide information and documents and failed to appear for on-the-record testimony requested by FINRA as part of two separate investigations.

The complaint alleges that FINRA's investigations were concerning discovery in FINRA arbitrations and, separately, whether Baird altered a customer check and attempted to convert customer funds. The complaint alleges that Baird's failure to provide the requested documents and information impeded FINRA's investigations and his testimony was material to FINRA's investigation concerning whether he altered a customer check and attempted to convert customer funds.

FINRA arbitration is a forum where investors can seek to recover losses from their brokers or firms. During arbitration proceedings, parties exchange information through a discovery process. FINRA has the authority to investigate whether parties are complying with discovery obligations and other aspects of the arbitration process.

The allegation that Baird may have altered a customer check and attempted to convert customer funds is particularly serious, as it would constitute fraud and theft. Conversion of customer funds is one of the most egregious violations in the securities industry and typically results in a permanent bar.

Baird's alleged refusal to cooperate with FINRA's investigations into these serious matters would itself be a significant violation. Registered persons have an obligation to cooperate fully with FINRA investigations, including appearing for testimony when requested and producing documents and information. This obligation continues even after a person leaves the securities industry.

By allegedly refusing to cooperate with investigations into both the arbitration discovery issues and the potential check alteration and conversion, Baird allegedly obstructed FINRA's ability to protect investors and maintain market integrity.

It is important to note that this is a complaint with allegations that have not yet been proven. Baird has the right to defend against these allegations. However, the nature of the allegations demonstrates the seriousness with which FINRA treats both potential conversion of customer funds and failure to cooperate with investigations.

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According to FINRA, NatAlliance Securities, LLC was censured and fined $40,000, while Jason Adams was fined $5,000 and suspended for two months in a principal capacity for failing to establish and maintain a supervisory system reasonably designed to review bond marks and ensure accurate books and re...

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According to FINRA, NatAlliance Securities, LLC was censured and fined $40,000, while Jason Adams was fined $5,000 and suspended for two months in a principal capacity for failing to establish and maintain a supervisory system reasonably designed to review bond marks and ensure accurate books and records.

The firm required traders to mark bonds to market daily but failed to conduct systematic reviews of these valuations. This oversight allowed a proprietary corporate bond trader to mismark bonds, ultimately overstating the value of his portfolio by more than $2.6 million. The mismarking caused the firm to maintain inaccurate books and records and file incorrect monthly FOCUS reports that overstated net capital.

Adams, as the trader's direct supervisor, failed to respond reasonably to red flags indicating mismarking. On several occasions, Adams identified discrepancies between the trader's marks and market prices but did not follow up to verify corrections, escalate concerns to management, or take disciplinary action against the trader.

Investors should understand that proper supervision of trading activities is essential for maintaining accurate firm records and protecting customer interests. This case demonstrates how supervisory failures can lead to significant inaccuracies in a firm's financial reporting. The firm has since enhanced its supervision by implementing a price discrepancy report that flags deviations from pricing service quotations. However, FINRA found that the firm's procedures still need improvement to explicitly require daily mark reviews and describe supervisory processes with greater specificity.

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According to FINRA, Lighthouse Capital Group, LLC was censured and fined $250,000 for failing to establish, maintain, and enforce a supervisory system reasonably designed to ensure it did not engage in general solicitations of private placements.

The firm raised approximately $273 million in capi...

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According to FINRA, Lighthouse Capital Group, LLC was censured and fined $250,000 for failing to establish, maintain, and enforce a supervisory system reasonably designed to ensure it did not engage in general solicitations of private placements.

The firm raised approximately $273 million in capital from selling private placements in reliance on Rule 506(b) of Regulation D, which requires firms to avoid general solicitation and only solicit investors with whom they have a pre-existing, substantive relationship. However, the firm's supervisory system did not consistently monitor or document when it established substantive relationships with prospective investors. The firm failed to systematically collect complete information about prospective investors and lacked a reasonable system to determine when it first developed a substantive relationship with each investor.

As a result, the firm could not always confirm that it had a pre-existing, substantive relationship with prospective investors prior to solicitation. Additionally, the firm's written supervisory procedures failed to define general solicitation or provide sufficient guidance to supervisors about reviewing activities to prevent general solicitation.

Investors should be aware that Rule 506(b) private placements are restricted securities offerings that require firms to follow strict solicitation rules. These rules exist to protect investors by ensuring they have appropriate investment sophistication and relationships before being solicited for risky unregistered securities. Following this action, the firm revised its supervisory systems to require representatives to consistently obtain and document each potential investor's accreditation, investment experience, goals, and financial information prior to any solicitation.

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According to FINRA, Aeon Capital Inc. was censured and fined $10,000 for conducting a securities business while failing to maintain required minimum net capital and for failing to file required notices of net capital deficiencies.

The firm received a $150,000 Economic Injury Disaster Loan (EIDL) ...

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According to FINRA, Aeon Capital Inc. was censured and fined $10,000 for conducting a securities business while failing to maintain required minimum net capital and for failing to file required notices of net capital deficiencies.

The firm received a $150,000 Economic Injury Disaster Loan (EIDL) during the COVID-19 pandemic. This loan increased the firm's aggregate indebtedness and therefore its required minimum net capital. However, the firm failed to include the loan value when calculating aggregate indebtedness, causing it to inaccurately calculate its required net capital. As a result, the firm's net capital fell below the required minimum and remained deficient for over ten months until the firm added capital.

In a separate incident, the firm began selling stock warrants of a biotechnology company received as compensation for participating in a private placement. When the firm effected its eleventh sale of warrants, this constituted the eleventh transaction for its own investment account, which increased required net capital. The firm did not have the required minimum net capital until five months later when it added capital. The firm also failed to make and preserve accurate records of aggregate indebtedness and net capital, and filed inaccurate FOCUS reports.

Investors should understand that net capital requirements exist to ensure broker-dealers maintain sufficient liquid assets to meet obligations to customers and other creditors. When firms fall below minimum net capital, they pose increased risk to customer accounts. FINRA imposed a lower fine after considering the firm's revenues and financial resources.

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According to FINRA, Transamerica Capital, Inc. was censured and fined $500,000 for failing to register, or timely register, more than 400 call center personnel who engaged in securities business on the firm's behalf.

The firm used a contracted third-party vendor to administer call centers relatin...

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According to FINRA, Transamerica Capital, Inc. was censured and fined $500,000 for failing to register, or timely register, more than 400 call center personnel who engaged in securities business on the firm's behalf.

The firm used a contracted third-party vendor to administer call centers relating to variable products and insurance products issued by the firm's affiliates. Call center personnel handled customer transaction requests related to securities, including orders for investment of additional premiums, reallocations of contract value among subaccounts, and withdrawals of contract value. These personnel were associated persons of the firm and required registration in the appropriate category based on their functions.

Although the firm determined to register certain call center personnel and advised FINRA of this fact, it failed to register, or timely register, these individuals before they engaged in conduct requiring registration. This meant that unregistered individuals were handling securities transactions for customers, which violates FINRA registration requirements.

Investors should understand that registration requirements exist to ensure that individuals handling securities transactions have demonstrated minimum competency through required examinations and background checks. When firms allow unregistered personnel to conduct securities business, it undermines investor protection. Following this action, the firm made changes to its call centers regarding handling of policyholder requests for variable products, registered approximately 175 individuals who handle such requests, and established policies, procedures, and systems prohibiting unregistered call center personnel from addressing transaction requests involving variable products.

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According to FINRA, SageTrader, LLC was censured and fined $175,000 for mismarking approximately 9.7 million principal short sell orders, resulting in approximately 390,000 executions being incorrectly marked as long, and for failing to obtain required locates for short sales.

The firm began effe...

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According to FINRA, SageTrader, LLC was censured and fined $175,000 for mismarking approximately 9.7 million principal short sell orders, resulting in approximately 390,000 executions being incorrectly marked as long, and for failing to obtain required locates for short sales.

The firm began effecting customer short sale orders on a net basis but mismarked its principal short sales as long because it incorrectly believed that receiving a customer sell order created an unconditional contract to purchase securities from the customer. However, the firm would only purchase securities from customers if it could sell those securities to another broker-dealer, meaning no unconditional contract existed. As a result of mismarking principal sell orders as long, the firm effected approximately 390,000 short sales without obtaining required locates under Regulation SHO.

When the firm corrected the marking issue and began marking principal sales as short, it uploaded easy-to-borrow lists to its smart order router to comply with locate requirements. However, the firm failed to program the router to prevent routing of short sale orders for securities not on the lists, resulting in approximately 100,000 principal short sales without proper locates.

Investors should understand that Regulation SHO's order marking and locate requirements exist to prevent abusive short selling practices and maintain market integrity. The locate requirement ensures that shares are available for borrowing before executing short sales, preventing failures to deliver. The firm also failed to establish reasonable supervisory procedures for order marking and locates for principal short sales, conducting no supervisory reviews in this area.

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According to FINRA, Hornor, Townsend & Kent, LLC was censured and fined $180,000 for failing to reasonably supervise a registered representative's disclosed but unapproved outside business activity involving the sale of a structured cash flow investment security.

The registered representative sub...

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According to FINRA, Hornor, Townsend & Kent, LLC was censured and fined $180,000 for failing to reasonably supervise a registered representative's disclosed but unapproved outside business activity involving the sale of a structured cash flow investment security.

The registered representative submitted an OBA request to sell interests in the security. The representative's supervisor reviewed the request and recommended approval, recording this in the firm's systems. However, the firm's Home Office Supervision did not review the OBA request until nearly seven months later, at which point they decided to disapprove it. While the disapproval was recorded in the firm's systems, no one ever communicated this decision to the registered representative.

Despite the OBA request putting the firm on notice that the representative planned to sell the security at a firm branch office, the firm failed to conduct reasonable supervision of the representative or the branch office. Had the firm exercised proper supervision, it would have discovered that the representative was using firm resources to sell the security to firm customers, including his firm email account and assigned sales assistant. As a result, the firm failed to detect the representative's sales of over $7 million in the security to investors.

Investors should understand that outside business activities require firm approval to ensure they are monitored for compliance and potential conflicts of interest. This case illustrates how communication breakdowns and inadequate supervision can allow representatives to engage in unapproved securities activities using firm resources, potentially exposing customers to unsuitable or risky investments that lack proper firm oversight.

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According to FINRA, Newbridge Securities Corporation was censured, fined $50,000, and ordered to pay $114,025.24 plus interest in restitution to customers for failing to reasonably supervise representatives' recommendations of an alternative mutual fund.

The firm permitted the sale of an alternat...

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According to FINRA, Newbridge Securities Corporation was censured, fined $50,000, and ordered to pay $114,025.24 plus interest in restitution to customers for failing to reasonably supervise representatives' recommendations of an alternative mutual fund.

The firm permitted the sale of an alternative mutual fund on its platform without conducting reasonable due diligence and without sufficient understanding of its risks and features, including that the fund pursued a risky strategy relying in part on purchasing uncovered options. The firm lacked a reasonable supervisory system to review representatives' alternative mutual fund recommendations. It had no system or procedures to determine whether a new mutual fund constituted a complex product or alternative mutual fund requiring heightened due diligence.

The firm subjected alternative mutual funds to the same approval standards as traditional mutual funds, which did not evaluate the potential risks and rewards of the fund strategies. The firm relied solely on due diligence conducted by its clearing firm and conducted no independent due diligence. Additionally, the firm did not provide adequate guidance or training to representatives regarding alternative mutual fund risks and features. The firm's electronic trade review system auto-approved alternative mutual fund transactions without principal review for suitability.

Firm representatives sold approximately $323,000 in shares of the alternative mutual fund to customers. During an extreme volatility event, the fund lost about 80 percent of its value and ultimately liquidated, resulting in thousands of dollars in customer losses. Investors should recognize that alternative mutual funds employ complex strategies with risks that differ significantly from traditional mutual funds and require heightened due diligence before investment.

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According to FINRA, Baker Tilly Capital, LLC was censured and fined $90,000 for willfully violating Exchange Act Rule 10b-9 by permitting material changes to the terms of two related private placement offerings without terminating the offerings and returning funds to investors.

The original priva...

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According to FINRA, Baker Tilly Capital, LLC was censured and fined $90,000 for willfully violating Exchange Act Rule 10b-9 by permitting material changes to the terms of two related private placement offerings without terminating the offerings and returning funds to investors.

The original private placement memorandum stated that a closing would not occur until the offerings met a minimum contingency of $16 million in investor subscriptions. However, the issuer amended the PPM to state that an initial closing of approximately $6 million would take place later that month. The issuer conducted this closing so certain investors would not lose tax benefits of their investment.

Additionally, amendments to the PPM provided for the first time that alternative funding sources obtained by the offerings' manager could count toward the minimum contingency amount, in addition to investor subscriptions. This alternative funding could include deferred developer fees, construction loans, and other sources not involving investor subscriptions. Since these were material changes to the offerings' terms, the firm was required to terminate the offerings and return investor funds at that time but failed to do so. Ultimately, the issuer conducted a closing with only $10.925 million in investor subscriptions, below the required $16 million minimum contingency.

Investors should understand that minimum contingency requirements in private placements exist to protect investors by ensuring offerings only proceed if sufficient capital is raised. Exchange Act Rule 10b-9 requires that material changes to offering terms trigger termination and return of investor funds, giving investors the opportunity to reconsider their investment decisions based on the new terms.

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According to FINRA, Kathleen A. Johansen was barred from association with any FINRA member in all capacities for refusing to appear for on-the-record testimony requested by FINRA during an investigation.

The investigation originated from a Form U5 filed by Johansen's former member firm with respe...

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According to FINRA, Kathleen A. Johansen was barred from association with any FINRA member in all capacities for refusing to appear for on-the-record testimony requested by FINRA during an investigation.

The investigation originated from a Form U5 filed by Johansen's former member firm with respect to a separate registered representative. FINRA requested Johansen's testimony as part of this investigation, but she refused to appear. By refusing to cooperate with FINRA's investigation, Johansen violated one of the fundamental obligations of registered persons to assist in regulatory inquiries.

Investors should understand that FINRA has the authority to request information and testimony from registered persons as part of investigations. The obligation to cooperate with regulatory investigations is essential to FINRA's ability to protect investors and maintain market integrity. When registered persons refuse to participate in investigations, they undermine the regulatory process and face the most severe sanctions.

A bar from the securities industry means that Johansen cannot work in any capacity for a FINRA member firm. This permanent sanction reflects the serious nature of obstructing regulatory investigations. Registered individuals who refuse to provide testimony or documents when requested by FINRA face automatic bars unless they can demonstrate compelling reasons for non-compliance. This case serves as a reminder that cooperation with regulatory authorities is not optional but a fundamental requirement for anyone working in the securities industry.

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