Bad Brokers

According to FINRA, Blaylock Van, LLC was censured and fined $50,000 for failing to establish and maintain a supervisory system reasonably designed to detect and prevent pre-arranged trading, a form of manipulative trading.

The firm's written supervisory procedures prohibited pre-arranged trading...

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According to FINRA, Blaylock Van, LLC was censured and fined $50,000 for failing to establish and maintain a supervisory system reasonably designed to detect and prevent pre-arranged trading, a form of manipulative trading.

The firm's written supervisory procedures prohibited pre-arranged trading, but its supervisory system failed to provide reasonable surveillance or reviews to identify such activity. A single supervisor conducted daily reviews of the firm's trade blotter listing hundreds of transactions, but the blotter did not associate transactions between potentially related customers. The procedures also lacked guidance on how to identify indicia of pre-arranged trading.

As a result of these deficiencies, the firm failed to detect 34 pairs of municipal securities transactions executed on a principal basis with two institutional customers under common control. These customers directed the firm to buy bonds from one customer and then sell the same bonds to the other customer at agreed-upon prices. The customers traded the bonds back and forth, sometimes at increasing prices that were three to twelve points above the prevailing market price.

The trading pattern only stopped when one customer refused to pay for bonds purchased from the firm. At that point, the firm closed the customers' accounts and sold the bonds into the marketplace for a monetary loss.

This case demonstrates the importance of having robust supervisory systems that can identify patterns of potentially manipulative trading. Firms must implement surveillance tools that can detect relationships between accounts and flag suspicious trading patterns, not rely solely on manual reviews that may miss critical connections. Investors should be aware that manipulative trading schemes can artificially inflate prices and create losses for innocent market participants.

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According to FINRA, Sequence Financial Specialists LLC was censured and fined $17,500 for willfully violating Rule 10b-9 of the Securities Exchange Act of 1934 when a contingency offering of securities did not meet its minimum by the offering termination date.

When the minimum contingency was not...

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According to FINRA, Sequence Financial Specialists LLC was censured and fined $17,500 for willfully violating Rule 10b-9 of the Securities Exchange Act of 1934 when a contingency offering of securities did not meet its minimum by the offering termination date.

When the minimum contingency was not met, the firm issued supplements to the private placement memorandum extending the offering termination date on two separate occasions. However, the firm failed to send written reconfirmation offers to investors disclosing either of the offering period extensions prior to the offering termination date. As a result, the firm did not obtain written confirmation from any customers of their decision to continue their investments, and their funds were not returned to them as required.

The minimum contingency amount for the offering was eventually met by the latest extended deadline and the offering closed. However, this violated important investor protection rules designed to give investors the opportunity to withdraw from an offering that has been extended beyond its original terms.

Rule 10b-9 requires that when an offering is extended, firms must give investors notice and an opportunity to reconfirm or withdraw their investment. This protects investors from having their funds tied up indefinitely in offerings that fail to meet their stated goals on time. The rule recognizes that an extended offering may be riskier than the original offering, and investors deserve the right to reconsider their participation.

This case underscores the importance of firms following proper procedures when conducting securities offerings. Investors should carefully review offering documents for contingency provisions and understand their rights if an offering is extended.

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According to FINRA, UBS Securities LLC was censured and fined $3,750,000 for failing to report and inaccurately reporting over-the-counter options positions to the large options positions reporting system (LOPR) in at least 7.1 million instances.

These violations were caused by multiple technolog...

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According to FINRA, UBS Securities LLC was censured and fined $3,750,000 for failing to report and inaccurately reporting over-the-counter options positions to the large options positions reporting system (LOPR) in at least 7.1 million instances.

These violations were caused by multiple technology issues that persisted for at least six years. The firm failed to report to LOPR positions in OTC options overlying foreign securities where it acted as an intermediary between U.S.-based customers and its foreign affiliates. These intermediated positions were booked to foreign affiliate systems and not fed into the firm's LOPR reporting system.

Additionally, the firm reported inaccurate short-covered quantities to LOPR in millions of instances. Unable to systematically determine the short-covered quantity of OTC options positions, the firm programmed its systems to report a default quantity to LOPR, misreporting most short positions as fully covered. This issue impacted the majority of the firm's LOPR reports for short positions in OTC options.

The firm also established OTC options positions that exceeded applicable position limits because its position limit monitoring systems did not capture positions booked to foreign affiliate systems. These positions were over the limit for periods ranging from two days to 208 days.

Furthermore, the firm failed to reasonably investigate and act upon red flags of LOPR reporting deficiencies, taking several years to correct known reporting issues. The firm lacked supervisory systems and written procedures reasonably designed to determine whether the short-covered quantity information reported to LOPR was accurate.

This case illustrates how technology failures and inadequate supervisory systems can lead to widespread reporting violations. Accurate position reporting is critical for market surveillance and risk management across the securities industry.

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According to FINRA, Deloitte Corporate Finance LLC was censured and fined $200,000 for failing to retain business-related Apple iPhone-to-iPhone messages (iMessages) sent and received by its registered representatives on firm-owned iPhones.

The firm permitted personnel to use text messages for wo...

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According to FINRA, Deloitte Corporate Finance LLC was censured and fined $200,000 for failing to retain business-related Apple iPhone-to-iPhone messages (iMessages) sent and received by its registered representatives on firm-owned iPhones.

The firm permitted personnel to use text messages for work-related purposes on firm-owned mobile phones. However, iPhones automatically create end-to-end encrypted iMessages that the firm's third-party archiving system could not capture. Knowing this, the firm sought to disable or block the iMessage function on issued iPhones so that text messages would be sent as retainable messages and archived by the firm's third-party service.

While attempting to apply the disabling control to new employees' iPhones, firm personnel noticed the control was not working on new iPhones, possibly due to an issue with a new version of the iPhone operating system. The individual coordinating deployment of the iMessage disabling control left the firm, and that person's responsibilities were not fully transitioned to a new person. As a result, the blocking control ceased working or was never applied on an increasing number of firm-owned iPhones.

The issue came to light when a representative referenced specific text messages that the firm could not find in its archiving system. Upon investigation, the firm learned these were iMessages that were not being archived. The firm then collected firm-owned iPhones from its representatives and uploaded iMessages into its archiving system for supervisory review. Only four of the collected iPhones had the iMessage function disabled, meaning many firm-owned iPhones were not compliant with the original blocking control.

This case highlights the importance of firms maintaining effective recordkeeping systems that can adapt to evolving technology. Firms must ensure proper archival of all business communications to comply with regulatory requirements and protect investors.

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According to FINRA, Corinthian Partners, L.L.C. was censured and fined $10,000 for failing to establish, maintain, and enforce a supervisory system reasonably designed to prohibit firm principals from supervising their own trading.

The firm allowed its chief executive officer (CEO) and chief comp...

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According to FINRA, Corinthian Partners, L.L.C. was censured and fined $10,000 for failing to establish, maintain, and enforce a supervisory system reasonably designed to prohibit firm principals from supervising their own trading.

The firm allowed its chief executive officer (CEO) and chief compliance officer (CCO) to supervise their own trading in accounts they jointly managed, with commissions split equally between them. For two trades, the CEO both entered and approved the trades. For the remaining trades, the firm could not distinguish who entered the trades and therefore could not ensure they were not self-supervising.

The firm also failed to perform the required analysis and create the required documentation needed to qualify for the exception allowing for self-supervision of trades in certain limited circumstances. The firm's written supervisory procedures did not identify the individual responsible for trading reviews by name or title and did not assign the CEO's or CCO's trades to a different principal, even though other principals were available.

Furthermore, the firm's procedures failed to reflect the firm's use of automated surveillance and electronic review of trades by a firm principal. Instead, the procedures contained outdated references to discontinued manual reviews of trade blotters.

This case demonstrates the fundamental principle that no one should supervise their own trading activities. Self-supervision creates an obvious conflict of interest and undermines the integrity of a firm's supervisory system. Even small firms with limited personnel must ensure that trades are reviewed by someone other than the person who entered them. Additionally, firms must keep their written procedures current to accurately reflect their actual supervisory practices. Investors rely on firms having proper checks and balances to prevent misconduct and ensure compliance with securities laws.

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According to FINRA, Insight Securities, Inc. was censured and fined $25,000 for failing to establish and maintain a supervisory system reasonably designed to achieve compliance with its suitability obligations in connection with inverse and leveraged exchange traded funds or notes (non-traditional e...

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According to FINRA, Insight Securities, Inc. was censured and fined $25,000 for failing to establish and maintain a supervisory system reasonably designed to achieve compliance with its suitability obligations in connection with inverse and leveraged exchange traded funds or notes (non-traditional exchange traded products or NT-ETPs).

Although the firm was aware of the complex nature of NT-ETPs, it permitted representatives to offer the products to retail customers on a solicited basis without having a supervisory system to reasonably monitor those transactions. Between March 2017 and June 2020, firm registered representatives solicited purchases of NT-ETPs totaling $23.9 million and sales totaling $24.5 million in retail customer brokerage accounts.

The firm did not monitor the holding periods of its customers' positions in NT-ETPs, nor did its written supervisory procedures require supervisors to conduct such monitoring. Instead, the firm relied on supervisors to conduct a manual blotter review to detect potentially unsuitable NT-ETP transactions. However, the blotter review did not provide supervisors with information on how long customers held the products.

Notably, the firm failed to reasonably monitor NT-ETP holding periods despite having twice been warned by FINRA that its supervisory systems were deficient in failing to conduct such monitoring. In response to the first warning, the firm represented to FINRA that it would immediately cease soliciting trades in NT-ETPs, yet continued to solicit the products.

Non-traditional ETPs are complex products designed for short-term trading, typically one day or less. When held for longer periods, these products can perform very differently than expected due to compounding effects. This case illustrates the critical importance of monitoring holding periods for complex products and implementing supervisory systems that can identify when customers are holding products inappropriate for their needs. The firm's continued solicitation of NT-ETPs despite promising FINRA to stop is particularly concerning.

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According to FINRA, Electronic Transaction Clearing, Inc. was censured and fined $150,000 for failing to report accurate short interest position data to FINRA.

The firm failed to exclude the short interest positions of one of its customers whose account was custodied at the firm's clearing firm, ...

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According to FINRA, Electronic Transaction Clearing, Inc. was censured and fined $150,000 for failing to report accurate short interest position data to FINRA.

The firm failed to exclude the short interest positions of one of its customers whose account was custodied at the firm's clearing firm, resulting in duplicative and inaccurate reporting of the customer's short interest positions. Additionally, in short interest reports submitted to FINRA, the firm pulled short interest data before same day trades for a customer were settled. This caused the firm to fail to report short interest positions in some securities, under report in others, and over report in still others.

The firm also failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with the short interest reporting rules. The firm failed to program its reporting system to exclude short positions in certain accounts custodied at its clearing firm, leading to duplicative and inaccurate reporting. The firm's system also failed to include a periodic evaluation of its reporting logic to ensure that only the correct short positions were reported and that all reportable positions, including same day trades, were included.

The firm's written procedures relating to short interest failed to describe a process to reasonably supervise the firm's short interest reporting obligations. The procedures were silent as to when the automated short interest report should be generated, instead of making clear that data should be pulled after same day trades had settled. The comparison described in the procedures compared share totals but failed to match values being reported to the firm's stock record, a comparison that would have identified the inaccurate reporting.

After notification from FINRA of the inaccurate reporting, the firm revised its procedures to exclude positions custodied with and reported by its clearing firm and updated its operations guide to start the short interest report process after same day trades had settled. This case highlights the importance of accurate short interest reporting for market transparency and the need for proper system design and supervision.

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According to FINRA, Nomura Securities International, Inc. was censured and fined $125,000 for failing to accurately calculate its net capital by misclassifying certain reverse repurchase agreements with its corporate affiliate as allowable assets.

Since the securities subject to the reverse repur...

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According to FINRA, Nomura Securities International, Inc. was censured and fined $125,000 for failing to accurately calculate its net capital by misclassifying certain reverse repurchase agreements with its corporate affiliate as allowable assets.

Since the securities subject to the reverse repurchase agreements were under the corporate affiliate's custody and control, the firm should have classified the reverse repurchase agreements as non-allowable assets in its net capital calculations. As a result, in its daily net capital calculations, the firm overstated its net capital and excess net capital in amounts ranging from approximately $183,000 to approximately $1.95 billion.

The firm's miscalculation of its net capital resulted in inflated tentative net capital calculations that caused the firm to fail to account for certain instances when the value of a customer's margin account exceeded 25 percent of the firm's tentative net capital. As a result, the firm improperly omitted an undue concentration charge for its customer reserve formula in amounts ranging from $152 million to $461 million.

Due to the misclassification of the reverse repurchase agreements and resultant inaccurate net capital calculations, the firm filed inaccurate Financial and Operational Combined Uniform Single (FOCUS) reports. The firm failed to report the value of the reverse repurchase agreements and non-allowable assets and inaccurately reported its excess net capital.

The firm failed to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with net capital and customer reserve rules. The firm lacked supervisory systems and procedures reasonably designed to detect custodial arrangements in which securities subject to reverse repurchase agreements were held in the custody or control of a counterparty. The firm relied on an automated third-party system that was unable to detect whether securities subject to reverse repurchase agreements were within the custody or control of a counterparty.

This case underscores the critical importance of accurate net capital calculations, which are fundamental to a broker-dealer's financial integrity and customer protection.

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According to FINRA, Hunnicutt & Co. LLC was censured and fined $10,000 for failing to conduct independent testing of its anti-money laundering (AML) compliance program.

The firm's written AML program requires the firm to perform an independent test every two calendar years. Nonetheless, the firm ...

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According to FINRA, Hunnicutt & Co. LLC was censured and fined $10,000 for failing to conduct independent testing of its anti-money laundering (AML) compliance program.

The firm's written AML program requires the firm to perform an independent test every two calendar years. Nonetheless, the firm failed to conduct an independent test of its AML program for over five years. After a FINRA cycle examination, the firm conducted testing of its AML program. However, the testing was not independent because it was conducted by a person who reported to the firm's designated AML compliance person.

The firm has since completed an independent test of its AML program.

Anti-money laundering programs are critical safeguards that help prevent the financial system from being used for illicit purposes such as money laundering, terrorist financing, and other financial crimes. Independent testing of AML programs is a regulatory requirement designed to ensure that these programs are functioning effectively and that any deficiencies are identified and corrected.

The independence of the testing is crucial because it provides an objective assessment of the AML program's effectiveness. When testing is conducted by someone who reports to the AML compliance person, there is an inherent conflict of interest that undermines the objectivity of the review. The AML compliance person may be reluctant to identify deficiencies in their own program, or the tester may be hesitant to report problems to their supervisor.

This case serves as a reminder that firms must not only have AML programs in place but must also ensure those programs are independently tested at the required intervals. Investors should have confidence that firms are taking appropriate steps to prevent money laundering and other financial crimes. Regular independent testing helps ensure these important protections are working as intended.

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According to FINRA, Wedbush Securities Inc. was censured and fined a total of $975,000 for failing to review electronic trading customers' trading activities for potential manipulation.

The firm stopped providing market access services to its customers but still provided certain electronic tradin...

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According to FINRA, Wedbush Securities Inc. was censured and fined a total of $975,000 for failing to review electronic trading customers' trading activities for potential manipulation.

The firm stopped providing market access services to its customers but still provided certain electronic trading customers with access to third-party electronic trading platforms that routed these customers' orders to other broker-dealers for execution. The firm mistakenly believed it was not required to review this trading for any type of potentially manipulative activity since it was no longer providing market access, believing instead that the obligation rested solely with the executing broker-dealers.

As a result, the firm did not conduct any supervisory reviews of the trading activities by its electronic trading customers for potentially manipulative trading, such as layering, spoofing, wash sales, or marking the close or open. The firm failed to detect potential layering activity by an institutional electronic trading customer comprised of hundreds of foreign day traders. Upon receiving notice of the potential layering activity from the executing broker-dealer, the firm closed the electronic trading customer's account but did not take any steps to detect and prevent other electronic trading customers from engaging in potentially manipulative trading.

Approximately 90 electronic trading customers effected more than 3.4 million transactions involving 13.5 billion shares without being subject by the firm to any review for potentially manipulative trading.

The firm also failed to implement any supervisory system, including written supervisory procedures, to review for potential layering and spoofing by the firm's proprietary traders and all firm customers. While the firm later added a reference to layering and spoofing in its procedures requiring weekly reviews of supervisory reports, those reports were designed to capture other forms of potential manipulative trading and were not reasonably designed to detect layering and spoofing.

This case illustrates that firms cannot abdicate their supervisory responsibilities simply because they are not the executing broker-dealer. Market manipulation harms all investors by distorting prices and undermining market integrity.

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