Bad Brokers

According to FINRA, Megurditch Mike Patatian was barred from association with any FINRA member in all capacities, ordered to pay $262,958.73 plus interest in restitution to customers who sold at a loss, ordered to pay disgorgement of $458,418.07 plus interest, and ordered to offer rescission to cust...

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According to FINRA, Megurditch Mike Patatian was barred from association with any FINRA member in all capacities, ordered to pay $262,958.73 plus interest in restitution to customers who sold at a loss, ordered to pay disgorgement of $458,418.07 plus interest, and ordered to offer rescission to customers still holding the securities at issue. The sanctions are not in effect pending Patatian's appeal to the National Adjudicatory Council.

An Office of Hearing Officers found that Patatian made unsuitable recommendations to his customers involving non-traded real estate investment trusts (REITs) and variable annuities. Patatian violated his reasonable-basis suitability obligation by recommending non-traded REITs to customers without understanding the potential risks of these products. He also violated his customer-specific suitability obligation by recommending that customers with specific liquidity needs, who did not want illiquid or risky investments, invest a substantial percentage of their liquid net worth into non-traded REITs.

Patatian made unsuitable recommendations that customers surrender their variable annuities to purchase non-traded REITs. He did not understand that these surrenders would cause significant tax liabilities and incorrectly advised some customers that their surrenders qualified as tax-free 1035 exchanges, when in fact they did not. He also made unsuitable recommendations that customers exchange their variable annuities for new variable annuities based on faulty cost comparisons and his failure to secure intended optional death benefits. These exchanges caused customers to experience significant and unexpected increases in fees and lose valuable existing death benefits.

FINRA also found that Patatian impersonated a customer on a phone call with an insurance company, providing the customer's date of birth and last four digits of their social security number. Patatian claimed he had authority from the customers to obtain information but provided no documentation of express authority that would have permitted him to impersonate the customer.

Finally, Patatian caused his member firm to maintain inaccurate books and records by overstating customers' investment experience on new account forms and inflating customers' net worth and liquid net worth on client disclosure forms for non-traded REIT recommendations. Patatian admitted he overstated financial information and experience to circumvent investment limitations and obtain principal approval for non-traded REIT purchases.

This case illustrates multiple serious violations that harmed customers through unsuitable recommendations, inadequate understanding of products, false tax advice, impersonation, and falsification of records. The substantial restitution and disgorgement orders reflect the significant customer harm. Investors should be cautious about non-traded REITs and variable annuity exchanges, verify tax consequences independently, and ensure their financial information on account forms is accurate.

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According to FINRA, David Thomas Hixon was named as a respondent in a FINRA complaint alleging that he failed to provide a complete response to FINRA's requests for information and documents in connection with its investigation into the circumstances of his termination from his member firm.

The c...

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According to FINRA, David Thomas Hixon was named as a respondent in a FINRA complaint alleging that he failed to provide a complete response to FINRA's requests for information and documents in connection with its investigation into the circumstances of his termination from his member firm.

The complaint alleges that Hixon's firm filed a Form U5 disclosing that he had been terminated as a result of concerns that he borrowed from a customer and asked other persons, including a customer and a coworker, for loans. Borrowing from customers is generally prohibited under FINRA rules because it creates conflicts of interest and puts customers in difficult positions. The rules exist to prevent representatives from exploiting their relationships with customers for personal financial benefit.

FINRA alleges that Hixon failed to provide complete responses to its requests for information. Specifically, he failed to provide any documents relating to his receipt of funds in connection with a loan he obtained from a certain customer, failed to provide copies of any loan agreements or other documents relating to the loan, and failed to provide any documents evidencing his claimed repayment of the loan. Additionally, Hixon allegedly failed to confirm whether, apart from the two customers named in FINRA's requests, he had solicited or obtained loans from any other customers or coworkers, and if he had solicited other loans, he failed to indicate the intended purpose of such loans.

The missing information and documents are material to FINRA's investigation into whether Hixon improperly borrowed from a customer, whether he repaid that customer, and whether and why he solicited other customers and coworkers for loans. Without this information, FINRA cannot determine the full scope of Hixon's conduct, the number of affected customers, or whether customers suffered financial harm.

Because this is an unadjudicated complaint, findings have not been made regarding the allegations, and Hixon has the opportunity to respond and defend against the charges. However, the case illustrates the importance of cooperation with regulatory investigations and the serious view FINRA takes of borrowing from customers. Investors should be aware that financial professionals are generally prohibited from borrowing from customers and should report any such requests to firms and regulators. The complaint stage represents FINRA's formal initiation of proceedings, not a determination of guilt.

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According to FINRA, Network 1 Financial Securities Inc. was censured and fined $15,000 for failing to file required documents related to public offerings in a timely manner.

The firm participated in public offerings subject to FINRA Rule 5110 and was required to file certain documents with FINRA ...

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According to FINRA, Network 1 Financial Securities Inc. was censured and fined $15,000 for failing to file required documents related to public offerings in a timely manner.

The firm participated in public offerings subject to FINRA Rule 5110 and was required to file certain documents with FINRA after filing them with the SEC. In some instances, the firm failed to file the documents altogether, and in other cases, filed them between one day to 83 days late. Some documents have still not been filed with FINRA to date.

FINRA Rule 5110 requires broker-dealers participating in public offerings to file specific documentation to ensure transparency and regulatory oversight. These filing requirements help FINRA monitor securities offerings and protect investors from potential misconduct. When firms fail to meet these obligations, it undermines the regulatory framework designed to safeguard the investing public.

As part of the settlement, the firm consented to implement policies, systems, procedures, and training reasonably designed to achieve compliance with FINRA Rule 5110. Investors should be aware that timely regulatory filings are essential indicators of a firm's commitment to compliance and transparency. When evaluating broker-dealers, investors can check FINRA BrokerCheck to review a firm's disciplinary history and ensure their chosen firm maintains proper regulatory standards.

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According to FINRA, Morgan Stanley & Co. LLC was censured and fined $325,000 for publishing equity research reports containing inaccurate historical stock ratings and failing to accurately disclose beneficial ownership information.

The firm used software containing a typographical error that caus...

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According to FINRA, Morgan Stanley & Co. LLC was censured and fined $325,000 for publishing equity research reports containing inaccurate historical stock ratings and failing to accurately disclose beneficial ownership information.

The firm used software containing a typographical error that caused price charts in research reports to display stock ratings from five years prior but inaccurately labeled them as being from three years prior. Even after identifying the issue, the firm continued publishing research reports with inaccurate historical stock ratings until the problem was resolved. Additionally, the firm failed to establish adequate supervisory systems to ensure compliance with disclosure requirements for historical stock ratings.

In a separate issue, after acquiring an investment management company, Morgan Stanley's system rejected an updated beneficial ownership feed due to a software error. The system failed to send the required notification to firm personnel, resulting in research reports that either failed to disclose beneficial ownership stakes of one percent or more, or erroneously disclosed stakes where none existed.

Research reports are critical tools investors rely on to make informed decisions. Accurate historical ratings help investors evaluate an analyst's track record, while beneficial ownership disclosures reveal potential conflicts of interest. This case highlights the importance of robust technology systems and supervisory procedures in maintaining the integrity of investment research. Investors should critically evaluate research reports and consider multiple sources when making investment decisions, recognizing that even major firms can experience systemic failures in their disclosure processes.

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According to FINRA, J.P. Morgan Securities LLC was censured and fined $200,000 for failing to reasonably supervise a registered representative who engaged in unsuitable recommendations and unauthorized trading in his grandmother's account.

The representative concentrated his grandmother's account...

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According to FINRA, J.P. Morgan Securities LLC was censured and fined $200,000 for failing to reasonably supervise a registered representative who engaged in unsuitable recommendations and unauthorized trading in his grandmother's account.

The representative concentrated his grandmother's account in structured notes, eventually reaching 43 percent of her liquid net worth despite the firm's 15 percent guideline. Although supervisors identified the concentration, they failed to adequately explain the risks to the customer or investigate her understanding of structured products. When questioned, the representative falsely inflated the customer's net worth from $100 million to $155 million to avoid scrutiny. The firm mailed written confirmation but never called the customer to verify the sudden increase or question its suspicious timing.

Before the firm restricted purchases, the representative had already bought over $108 million in securities, including $77 million in structured notes, resulting in $5.5 million in realized losses. The representative also placed unauthorized transactions, including forging the customer's signature on a $5 million private equity investment. Although the firm received a complaint alleging unauthorized trading, it waited a month to restrict the account, during which time a $582,849 unauthorized wire was sent. An arbitration panel later ordered the firm to pay $9 million to the customer.

This case demonstrates the vulnerability of senior investors and the critical importance of robust supervisory systems. Warning signs included concentration violations, suspicious net worth changes, customer complaints, and a family relationship between broker and client. Investors, especially seniors, should maintain regular contact with compliance departments, carefully review all account statements, and immediately report any suspicious activity or concentration in complex products they don't fully understand.

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According to FINRA, SG Americas Securities, LLC was censured and fined $325,000 for failing to properly report over-the-counter options positions to the Large Options Positions Reporting system.

The firm's reporting system only captured positions originating from U.S.-based activity and filtered ...

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According to FINRA, SG Americas Securities, LLC was censured and fined $325,000 for failing to properly report over-the-counter options positions to the Large Options Positions Reporting system.

The firm's reporting system only captured positions originating from U.S.-based activity and filtered out transactions between U.S. customers and the firm's foreign affiliates, which should have been reported. The firm also failed to recognize that certain customer accounts were under common control, resulting in failure to properly report account groups as acting-in-concert and using incorrect acting-in-concert numbers. Additionally, the firm reported OTC options positions without customers' tax identification numbers or tax types.

The firm's supervisory system was inadequate because it did not provide for reviews of the LOPR reporting logic to determine whether the system captured all reportable positions. The firm's system for detecting acting-in-concert accounts was too restrictive, only linking accounts that shared an internal legal entity number or were identified as having the same fund manager.

Large options position reporting requirements exist to help regulators monitor potential market manipulation and systemic risk. Accurate reporting enables FINRA to identify concentrated positions that could threaten market stability or indicate insider trading. While this case involved technical reporting failures rather than investor harm, it underscores the complex regulatory infrastructure supporting market integrity. Investors benefit from these reporting systems even though they operate behind the scenes, as they help ensure fair and orderly markets. The firm has since implemented enhanced controls and reviews to address the deficiencies.

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According to FINRA, LPL Financial LLC was censured and fined $300,000 for failing to accurately calculate its customer reserve requirement under Rule 15c3-3 of the Securities Exchange Act.

The firm's customer reserve calculations excluded customer checks that had been received but not yet process...

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According to FINRA, LPL Financial LLC was censured and fined $300,000 for failing to accurately calculate its customer reserve requirement under Rule 15c3-3 of the Securities Exchange Act.

The firm's customer reserve calculations excluded customer checks that had been received but not yet processed for deposit. This resulted in two hindsight deficiencies totaling approximately $162 million, meaning the firm failed to maintain sufficient deposits in its customer reserve account to protect client funds. The firm's written procedures did not specify how to handle undeposited checks or require their inclusion in reserve calculations on the date received.

The business unit that received and processed customer checks prepared a daily report used for reserve calculations, but this report excluded checks awaiting processing. The firm took no other steps to ensure these checks were included in the calculation as required. Consequently, the firm also maintained inaccurate books and records and filed inaccurate monthly FOCUS reports that did not reflect the true amount of the firm's customer reserve obligation.

The customer reserve requirement is a critical investor protection rule requiring broker-dealers to segregate customer cash and securities in a special reserve account. This ensures customer assets remain available even if the firm experiences financial difficulty. While no customer funds were lost in this case, the regulatory violation exposed clients to unnecessary risk. Investors should understand that customer reserve rules and SIPC insurance work together to protect their assets, but only if firms properly comply with reserve calculation requirements. Following the discovery, LPL commenced steps to revise its supervisory procedures and implement proper controls.

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According to FINRA, Axiom Capital Management, Inc. was censured, fined $40,000, and ordered to pay $7,000 in disgorgement plus interest for failing to conduct reasonable ongoing due diligence of a private placement offering.

The firm learned that the Federal Trade Commission had sued the company'...

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According to FINRA, Axiom Capital Management, Inc. was censured, fined $40,000, and ordered to pay $7,000 in disgorgement plus interest for failing to conduct reasonable ongoing due diligence of a private placement offering.

The firm learned that the Federal Trade Commission had sued the company's founder for fraud and obtained a court order freezing his assets and those of companies he controlled. The firm recognized this as a red flag but unreasonably relied on the lead placement agent to monitor the situation. During the three-month offering period, the FTC sought to freeze all company assets and hold the CEO in contempt for funneling assets to the founder for personal use, but the firm remained unaware because it relied solely on the issuer for updates.

Shortly after the selling period ended, the court held the CEO in contempt and ordered the company to transfer $1.205 million to a court-appointed receiver, representing a substantial portion of its assets. The company subsequently failed to repay investors when the debentures matured. The firm never requested written explanations, verified oral representations, reviewed the lawsuit's public docket, or followed up with additional questions. The firm's supervisory system lacked formal processes for ongoing due diligence and did not address continued monitoring of identified red flags.

Additionally, the firm failed to timely file the offering documents with FINRA until over four months after the first sale, preventing FINRA from conducting timely compliance reviews. This case illustrates the danger of inadequate due diligence in private placements. Investors should be especially cautious with private offerings involving issuers with litigation history or regulatory problems. Red flags like fraud lawsuits and asset freezes warrant thorough investigation, not reliance on issuer representations. Investors should always independently verify information about private placements and understand that these investments carry substantial risk and limited regulatory oversight compared to public securities.

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According to FINRA, Morgan Stanley & Co. LLC was censured and fined $250,000 for failing to report the short sale indicator for transactions in National Market System securities and OTC equity securities.

Programming errors caused the firm to exclude the short sale indicator when reporting short ...

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According to FINRA, Morgan Stanley & Co. LLC was censured and fined $250,000 for failing to report the short sale indicator for transactions in National Market System securities and OTC equity securities.

Programming errors caused the firm to exclude the short sale indicator when reporting short sale transactions to both the NYSE Trade Reporting Facility and the OTC TRF. The firm discovered the issue during a FINRA cycle examination and subsequently corrected the programming errors. However, the firm's supervisory system failed to detect these problems despite conducting reviews of equity trade reporting.

When the firm began reporting to the NYSE and OTC TRF, it reviewed certain test trades, but those reviews did not detect the absence of the short sale indicator. The firm conducted no subsequent reviews to determine whether it was accurately reporting the short sale indicator to these facilities, demonstrating inadequate ongoing supervision of its trade reporting systems.

Short sale indicator reporting is essential for regulatory oversight and market transparency. These indicators help regulators monitor short selling activity, detect potential market manipulation, and enforce rules designed to prevent abusive short selling practices. Accurate short sale data also contributes to market integrity by providing transparency into selling pressure and helping identify unusual trading patterns. While this technical reporting violation did not directly harm individual investors, it impaired regulatory surveillance capabilities designed to protect all market participants. The case highlights how even sophisticated firms can experience systemic compliance failures in automated reporting systems, underscoring the need for robust testing and ongoing monitoring of critical trading infrastructure.

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According to FINRA, Gar Wood Securities, LLC was censured and fined $100,000 for failing to comply with the locate requirement of Regulation SHO and for inaccurately reporting trade capacity symbols.

The firm inadvertently misconfigured its delivery-versus-payment client accounts, allowing short ...

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According to FINRA, Gar Wood Securities, LLC was censured and fined $100,000 for failing to comply with the locate requirement of Regulation SHO and for inaccurately reporting trade capacity symbols.

The firm inadvertently misconfigured its delivery-versus-payment client accounts, allowing short sale orders to route for execution without obtaining required locates. This violated Rule 203 of Regulation SHO, which requires broker-dealers to have reasonable grounds to believe securities can be borrowed before executing short sales. Additionally, one of the firm's order management systems was incorrectly coded to send a principal capacity symbol for client agency orders, causing transactions to be reported with the wrong capacity designation.

The firm's supervisory system failed to achieve compliance with the locate requirement. While procedures required locate reviews, the firm inadvertently excluded DVP accounts from this review. For custodial accounts, the firm's locate review incorrectly excluded short sales orders that were accepted but did not execute. The firm also lacked any review to confirm that all required trade information, including capacity, was accurately reported to the FINRA TRF.

Locate requirements under Regulation SHO were implemented to prevent abusive naked short selling and ensure securities can be delivered by settlement date. Proper capacity reporting (principal versus agency) is important for market transparency and accurate transaction cost analysis. While these were inadvertent technical violations, they represent serious compliance failures that could impact market integrity. Investors should understand that regulatory requirements like locate rules and accurate trade reporting protect them from manipulative practices and ensure orderly markets. The firm has since corrected the coding errors and switched all agency order routing to a properly configured system.

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