Bad Brokers

According to FINRA, Rande Scott Aaronson was assessed a deferred fine of $5,000 and suspended from association with any FINRA member in any principal capacity for one month for failing to reasonably supervise sales of illiquid oil and gas limited partnerships.

As a principal, Aaronson was respons...

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According to FINRA, Rande Scott Aaronson was assessed a deferred fine of $5,000 and suspended from association with any FINRA member in any principal capacity for one month for failing to reasonably supervise sales of illiquid oil and gas limited partnerships.

As a principal, Aaronson was responsible for supervising sales to ensure they were suitable for customers given their investment profiles, as required by FINRA Rule 2111 and his member firm's policies and written supervisory procedures. Aaronson failed to conduct reasonable suitability analysis for sales of two illiquid limited partnerships, even when reviewing sales to senior customers and sales within 30 days of a customer's risk tolerance increase.

Aaronson was aware of but failed to reasonably investigate and respond to red flags of potentially unsuitable sales of limited partnerships to certain senior customers. He was also aware of changes to customer risk tolerances around the time of limited partnership sales. An increase in risk tolerance could be necessary for a customer to purchase limited partnerships under the firm's sales parameters or to purchase increased amounts. However, Aaronson did not reasonably investigate certain risk tolerance increases as red flags requiring additional scrutiny.

This case highlights the importance of principal supervision of complex, illiquid product sales, particularly to senior investors. Illiquid investments like oil and gas limited partnerships carry significant risks including lack of liquidity, concentration risk, and potential for total loss of investment. They are typically appropriate only for sophisticated investors with high risk tolerance and financial resources to withstand potential losses.

Red flags such as recent risk tolerance increases shortly before purchases of high-risk products warrant careful investigation by supervising principals. Such timing may indicate the risk tolerance change was made to facilitate a desired transaction rather than reflecting a genuine change in the customer's circumstances or investment objectives. Principals must conduct meaningful suitability reviews rather than merely rubber-stamping transactions, especially for senior investors and complex products.

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According to FINRA, Sidney Lebental was named as a respondent in a FINRA complaint alleging he engaged in 523 instances of "spoofing," a type of fraudulent trading involving the use of non-bona fide orders to induce executions of bona fide orders entered on the opposite side of the market.

The co...

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According to FINRA, Sidney Lebental was named as a respondent in a FINRA complaint alleging he engaged in 523 instances of "spoofing," a type of fraudulent trading involving the use of non-bona fide orders to induce executions of bona fide orders entered on the opposite side of the market.

The complaint alleges Lebental engaged in spoofing while trading as a market maker in U.S. Treasury Bonds and supervising the U.S. Treasury desk of his FINRA member firm. In each instance, Lebental allegedly entered a large, fully displayed non-bona fide order to purchase or sell the 30-year U.S. Treasury Bond while already having a bona fide order on the opposite side of the market in either the 30-year Bond or the correlated Ultra Treasury Bond future.

The non-bona fide orders allegedly created a false appearance of market depth and activity so that Lebental's bona fide orders would receive favorable executions at better prices. Market participants on the other side of the spread from his bona fide order allegedly responded by crossing the spread and executing at his price, sometimes resulting in even better prices for Lebental. After receiving executions of his bona fide orders, Lebental allegedly cancelled the non-bona fide orders within three seconds of entry in all 523 instances, and within one second in 370 instances.

The complaint alleges Lebental acted with scienter (intent to deceive) in each instance by entering orders with the intent to cancel them before execution to intentionally or recklessly create an artificial imbalance and induce executions of his opposite-side bona fide orders. The complaint also alleges violations of quotation rules, anti-fraud provisions, and ethical standards.

Because this is a complaint and findings have not been made, the allegations remain unproven. Spoofing undermines market integrity by creating false impressions of supply and demand. If proven, such conduct in U.S. Treasury markets is particularly serious given the critical importance of these markets to the global financial system.

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According to FINRA, FINRA expelled broker-dealer SW Financial for multiple serious violations including making misrepresentations to customers, churning customer accounts, and failing to supervise representatives. In a related settlement, Thomas Diamante, the firm's co-owner and CEO, was suspended f...

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According to FINRA, FINRA expelled broker-dealer SW Financial for multiple serious violations including making misrepresentations to customers, churning customer accounts, and failing to supervise representatives. In a related settlement, Thomas Diamante, the firm's co-owner and CEO, was suspended for nine months in all capacities followed by three months in all principal capacities, fined $50,000, and required to requalify by examination if he seeks future registration as a general securities principal or investment banking representative.

Between January 2018 and December 2021, Diamante and SW Financial made material misrepresentations and omitted material information in connection with selling private placement offerings of pre-IPO securities, violating both FINRA rules and Regulation Best Interest's Disclosure Obligation. The firm informed potential investors it would receive only a 10 percent sales commission when Diamante had entered into an undisclosed agreement under which SW Financial would receive an additional 5 percent in selling compensation and half of any carried interest.

SW Financial sold the private offerings to 171 investors, including 163 retail customers, and the firm and its owners received approximately $2 million in undisclosed compensation - a serious conflict of interest that should have been fully disclosed. The firm and Diamante also failed to conduct reasonable due diligence and did not confirm the issuer actually held or had access to the shares it purported to sell, violating FINRA's suitability rule and Reg BI's Care Obligation.

Between January 2016 and May 2019, SW Financial, through two former representatives, churned nine customer accounts, causing customers to incur more than $350,000 in total trading costs and realized losses exceeding $465,000. In one case, a retired 75-year-old customer's excessively traded account had a cost-to-equity ratio over 103 percent, paid $101,806 in commissions, and incurred realized losses of $131,979 comprising most of his retirement savings. SW Financial failed to reasonably follow up on red flags of excessive trading.

This case demonstrates egregious sales practice and supervisory violations warranting expulsion from FINRA membership. The undisclosed compensation and lack of due diligence on pre-IPO offerings, combined with churning of customer accounts including those of vulnerable senior investors, show a pattern of putting firm interests ahead of customer interests.

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According to FINRA, Clearview Trading Advisors, Inc. and its AML Compliance Officer Gregg Harley Ettin were sanctioned for failing to establish and implement an adequate anti-money laundering compliance program. The firm was fined $100,000 and Ettin was fined $25,000 and suspended for nine months in...

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According to FINRA, Clearview Trading Advisors, Inc. and its AML Compliance Officer Gregg Harley Ettin were sanctioned for failing to establish and implement an adequate anti-money laundering compliance program. The firm was fined $100,000 and Ettin was fined $25,000 and suspended for nine months in any principal capacity.

The findings revealed that despite significant business expansion toward liquidation of low-priced securities, the firm and Ettin failed to tailor their AML program to this high-risk business. They did not use exception reports or automated tools to monitor customer account activity for suspicious transactions, instead relying solely on manual review which proved inadequate. The firm failed to establish reasonable processes to identify red flags specific to low-priced securities issuers or patterns of suspicious trading. Even though their procedures outlined red flags to watch for, they did not explain how to monitor for or investigate those red flags.

Additionally, the firm and Ettin failed to establish adequate supervisory systems for Section 5 compliance regarding restricted securities. They primarily delegated reviews to a third party without proper formalization or oversight, and Ettin failed to conduct reasonable inquiry before executing trades in low-priced securities.

This case demonstrates the critical importance of having an AML program specifically designed for your firm's actual business model. Firms dealing with low-priced securities face heightened risks of money laundering and must implement robust, automated monitoring systems rather than relying on manual reviews. Investors should be aware that inadequate AML controls can expose them to fraudulent schemes and manipulative trading practices.

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According to FINRA, FFEC Wealth Partners LLC (formerly First Financial Equity Corporation) and Jeffrey Scott Graves were sanctioned for failing to establish adequate supervisory systems for margin use and mutual fund switches. The firm was fined $35,000 and ordered to pay $112,672.87 in restitution,...

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According to FINRA, FFEC Wealth Partners LLC (formerly First Financial Equity Corporation) and Jeffrey Scott Graves were sanctioned for failing to establish adequate supervisory systems for margin use and mutual fund switches. The firm was fined $35,000 and ordered to pay $112,672.87 in restitution, while Graves was fined $5,000 and suspended for 15 business days in any principal capacity.

The firm's written supervisory procedures lacked specific eligibility requirements for margin approval and provided no guidance on factors to consider before recommending margin use. There were no surveillance or exception reports designed to flag potentially unsuitable margin use. As branch office manager, Graves failed to reasonably supervise a registered representative who recommended margin in customer accounts. He did not track or review margin trading amounts, failed to question the representative, and did not contact customers about the margin use in their accounts.

This supervisory failure resulted in customers paying $100,109.37 in margin interest, commissions, and fees on unsuitable margin trades. Additionally, inadequate supervision of mutual fund switches caused customers to pay $12,563.50 in unnecessary costs and fees.

Investors should understand that margin trading amplifies both gains and losses, and is not suitable for all investors. This case underscores the importance of proper firm supervision to ensure that margin recommendations align with customer profiles and investment objectives. Firms must have robust procedures and surveillance systems in place to detect and prevent unsuitable margin use before customers incur substantial costs.

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According to FINRA, Western International Securities, Inc. was censured and fined $400,000 for failing to establish adequate supervisory systems for non-traded REIT sales. The firm was also ordered to pay $471,401.57 in restitution and partial restitution to customers.

The firm's written supervis...

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According to FINRA, Western International Securities, Inc. was censured and fined $400,000 for failing to establish adequate supervisory systems for non-traded REIT sales. The firm was also ordered to pay $471,401.57 in restitution and partial restitution to customers.

The firm's written supervisory procedures required suitability reviews for non-traded REIT investments but failed to specify what documents to review or steps to take in conducting proper suitability analysis. Some supervisors reviewed only non-traded REIT disclosure forms that lacked critical customer profile information including age, investment objectives, experience, time horizon, liquidity needs, risk tolerance, and financial situation. The procedures did not require supervisors to review new account forms before approving transactions, and some supervisors failed to do so.

A former representative recommended over $7.8 million in non-traded REIT purchases to customers without reasonable basis to believe the recommendations were suitable. He sold these illiquid, high-risk investments within three months of joining the firm to customers of various ages and profiles, including retirees, those with limited financial resources, and customers with little to no investment experience. The firm's supervisory system failed to detect or properly investigate red flags associated with these sales.

Additionally, the firm failed to report or timely report written customer complaints, arbitrations, and settlements, which impeded FINRA investigations and prevented public disclosure.

Non-traded REITs are illiquid investments that may not be suitable for investors needing access to their money or those with limited financial resources. This case highlights the critical need for thorough suitability analysis before recommending such investments.

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According to FINRA, Superior Financial Services, Inc. was censured and fined $5,000 for failing to conduct annual independent testing of its anti-money laundering compliance program.

Although the firm received a report from its outside financial auditor stating that he had reviewed the firm's wri...

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According to FINRA, Superior Financial Services, Inc. was censured and fined $5,000 for failing to conduct annual independent testing of its anti-money laundering compliance program.

Although the firm received a report from its outside financial auditor stating that he had reviewed the firm's written AML policies and procedures, spoken with principals, and reviewed cash disbursements, the auditor did not actually perform any testing of the adequacy of the AML compliance program or the firm's compliance with it. This superficial review failed to meet the regulatory requirement for genuine independent testing.

FINRA rules require all member firms to conduct annual independent testing of their AML programs to ensure they are functioning effectively and identifying suspicious activity. This testing must go beyond simply reviewing written policies to actually evaluate whether the firm is implementing and following those policies in practice.

For investors, a properly functioning AML program is crucial protection against fraud and financial crimes. When firms fail to conduct genuine independent testing, weaknesses in their AML programs may go undetected, potentially exposing customers to money laundering schemes, fraud, and other illegal activities. This case serves as a reminder that firms must take their AML obligations seriously and ensure their independent testing is substantive rather than perfunctory.

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According to FINRA, Wedbush Securities Inc. was censured and fined $850,000 for negligently misrepresenting bond default status on customer account statements and failing to deliver required annual disclosures.

The firm generated and distributed monthly account statements that inaccurately repres...

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According to FINRA, Wedbush Securities Inc. was censured and fined $850,000 for negligently misrepresenting bond default status on customer account statements and failing to deliver required annual disclosures.

The firm generated and distributed monthly account statements that inaccurately represented that municipal and corporate bonds held by customers were making interest or principal payments when the bonds were actually in default. Although the firm received notice of the defaults, it failed to provide this information to the vendor maintaining securities information. Customers received default notices from a vendor but the defaults were not reflected on their account statements.

Wedbush failed to establish a supervisory system to review account statement accuracy. Even after becoming aware of red flags indicating incorrect reporting, the firm did not take steps to verify that account statements accurately reported bond default status and continued misreporting until it revised its procedures.

Additionally, the firm failed to deliver required annual privacy notices, margin disclosures, and order execution disclosures to customers who elected electronic delivery. The firm relied on a third-party vendor but failed to instruct the vendor to append required notices to electronically-delivered statements and did not verify delivery. Although these notices were available on the firm's website, that did not satisfy the delivery requirement.

Accurate account statements are fundamental to investor protection, enabling customers to make informed decisions about their holdings. This case demonstrates that firms must implement robust systems to ensure the accuracy of information provided to customers and verify that required disclosures are actually delivered, not merely made available.

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According to FINRA, Vanguard Marketing Corporation was censured and fined $50,000 for accepting option exercise instructions after its established cut-off time and failing to maintain adequate supervisory procedures.

The firm's written supervisory procedures established 4:30 p.m. Eastern Time as ...

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According to FINRA, Vanguard Marketing Corporation was censured and fined $50,000 for accepting option exercise instructions after its established cut-off time and failing to maintain adequate supervisory procedures.

The firm's written supervisory procedures established 4:30 p.m. Eastern Time as its internal deadline for accepting option exercise instructions. However, the firm's option exercise form, which was incorporated into the procedures, indicated that exercise instructions could be accepted on a "best efforts basis" after 4:30 p.m., creating an internal inconsistency.

In one instance, a customer held out-of-the-money put options that were set to automatically expire worthless. After market close, the underlying company announced bankruptcy, causing the options to become in-the-money when the after-hours stock price dropped below the strike prices. At 6:27 p.m. ET, the customer called requesting to exercise the options. Although initially told the firm could not help because the request was after the 4:30 p.m. cut-off, a supervisor authorized acceptance of the instructions on a "best efforts basis." The options were exercised shortly after 7:00 p.m., and the customer earned a net profit of $32,709.10.

The firm's supervisory system lacked reasonable procedures to resolve the discrepancy between its stated cut-off time and the "best efforts" language, and failed to properly identify the applicable cut-off time for option exercise instructions.

This case illustrates the importance of clear, consistent policies regarding time-sensitive trading instructions. Firms must have unambiguous procedures that all employees understand and follow to ensure fair and equitable treatment of all customers.

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According to FINRA, Credit Suisse Securities (USA) LLC was censured and fined $375,000 for misreporting the covered quantity of over-the-counter short positions to the Large Options Position Report due to coding errors.

The firm's supervisory system for LOPR reporting included reviews of rejected...

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According to FINRA, Credit Suisse Securities (USA) LLC was censured and fined $375,000 for misreporting the covered quantity of over-the-counter short positions to the Large Options Position Report due to coding errors.

The firm's supervisory system for LOPR reporting included reviews of rejected records, acting-in-concert submissions, and periodic completeness reviews. However, the firm failed to provide for any supervisory review to determine whether short-covered quantity information reported to LOPR was complete and accurate. As a result, the firm failed to detect that it was misreporting covered quantities for over eleven years.

The Large Options Position Report is a critical regulatory tool that provides FINRA with visibility into large options positions that could pose systemic risk or be used for market manipulation. Accurate reporting is essential for market surveillance and investor protection.

After discovering the error, the firm completed remediation of the coding errors and amended its supervisory system and written procedures to include review of short-covered quantity reporting.

This case demonstrates the importance of comprehensive supervisory systems that verify accuracy of regulatory reporting, not just completeness. Firms must implement controls to detect reporting errors before they persist for extended periods. For investors, accurate regulatory reporting helps ensure market integrity and enables regulators to identify and address potential risks and misconduct that could harm market participants.

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