Bad Brokers

According to FINRA, Patrick Stanton Matlock was named a respondent in a FINRA complaint alleging he misrepresented material facts to obtain an EIDL. The complaint alleges Matlock falsely represented seeking a loan for a sole proprietorship that had earned $120,000 in revenue and had one employee. Th...

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According to FINRA, Patrick Stanton Matlock was named a respondent in a FINRA complaint alleging he misrepresented material facts to obtain an EIDL. The complaint alleges Matlock falsely represented seeking a loan for a sole proprietorship that had earned $120,000 in revenue and had one employee. The business did not exist when he submitted the application. Matlock reaffirmed these false representations when executing the loan agreement to secure a $59,000 loan. One week after signing, he used substantial loan proceeds to purchase energy company stock in his personal account, not for the stated COVID-19 economic injury purpose. The complaint also alleges Matlock formed an LLC to provide remodeling services without providing notice to his firm. Additionally, the complaint alleges Matlock failed to provide bank statements material to FINRA's investigation into whether the purported business had any revenue and whether he received compensation from his undisclosed remodeling business. These are allegations only; no findings have been made.

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According to FINRA, Daniel Pita was named a respondent in a FINRA complaint alleging that he failed to provide information and documents requested by FINRA during an investigation into an allegation that he had not disclosed all of his outside business activities while employed at his member firm. T...

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According to FINRA, Daniel Pita was named a respondent in a FINRA complaint alleging that he failed to provide information and documents requested by FINRA during an investigation into an allegation that he had not disclosed all of his outside business activities while employed at his member firm. The complaint alleges that FINRA's requests sought information and documents that were material to its investigation and were necessary to determine whether Pita had disclosed all of his OBAs to the firm or engaged in other misconduct. These are allegations only; no findings have been made. The complaint represents FINRA's initiation of a formal proceeding. Because this complaint is unadjudicated, conclusions should not be drawn regarding the allegations.

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According to FINRA, Michael Christopher Venturino was named a respondent in a FINRA complaint alleging that he willfully violated Section 10(b) of the Exchange Act, Rule 10b-5, and FINRA Rule 2020 by churning customer accounts. The complaint alleges Venturino exercised de facto control of trading, c...

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According to FINRA, Michael Christopher Venturino was named a respondent in a FINRA complaint alleging that he willfully violated Section 10(b) of the Exchange Act, Rule 10b-5, and FINRA Rule 2020 by churning customer accounts. The complaint alleges Venturino exercised de facto control of trading, controlling volume, frequency, securities selection, quantity, and timing. His customers relied on him and consistently followed his recommendations. Venturino also allegedly made unauthorized transactions in customers' accounts. The complaint alleges Venturino's trading was excessive and quantitatively unsuitable based on high turnover rates and cost-to-equity ratios, frequent in-and-out trading, and high transaction costs. The complaint alleges Venturino acted with scienter, intending to defraud or acting with reckless disregard of customer interests to maximize his own compensation. His trading allegedly caused approximately $1,028,389 in cumulative customer losses and $518,313 in costs, while Venturino received over $325,000. These are serious allegations; however, no findings have been made as this matter is pending adjudication.

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According to FINRA, H.C. Wainwright & Co., LLC was fined $1,500,000, and two executives, John Wesley Chambers and Robert Eugene Kristal, were each fined $15,000 and suspended for 30 days for failing to preserve business-related text messages.

The findings revealed that firm employees, including C...

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According to FINRA, H.C. Wainwright & Co., LLC was fined $1,500,000, and two executives, John Wesley Chambers and Robert Eugene Kristal, were each fined $15,000 and suspended for 30 days for failing to preserve business-related text messages.

The findings revealed that firm employees, including Chambers and Kristal, routinely communicated about firm business through text messages on their personal cell phones. These communications included exchanges between employees and with third parties such as issuers and clients. The firm failed to obtain or preserve copies of these communications, which significantly hindered FINRA's investigations. Nearly all text messages between Chambers and Kristal were deleted before FINRA could request them, preventing a thorough investigation into whether investment banking personnel improperly influenced the firm's research coverage.

Additionally, the firm failed to reasonably supervise employees' business-related communications. The firm's written supervisory procedures did not require review of text messages, and despite management's awareness that employees were using text messaging for business purposes, the firm took no steps to enforce its policies prohibiting such use. The firm also failed to adequately supervise email communications, reviewing only a small percentage of emails—often more than a year after they were sent—and escalating very few for supervisory review.

The case also highlighted breaches of the firm's information barrier. Chambers, who worked in research, and Kristal, who worked in investment banking, frequently exchanged unsupervised text messages and phone calls using their personal devices. Some of these communications occurred while the research department was preparing coverage of issuers for whom investment banking was simultaneously seeking business, creating a risk that the firm's business interests could inappropriately influence research analysts.

Investors should recognize the importance of firms maintaining proper communication records and supervisory systems. These safeguards are critical for ensuring that conflicts of interest are managed appropriately and that regulators can effectively investigate potential misconduct. When firms fail to preserve communications or supervise their employees adequately, it raises serious questions about internal controls and the potential for investor harm.

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According to FINRA, Acorns Securities, LLC was fined $200,000 for sending customers account statements that inaccurately showed negative quantities of ETF shares with negative values, creating the false impression that customers held short positions in those funds.

The findings revealed that shor...

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According to FINRA, Acorns Securities, LLC was fined $200,000 for sending customers account statements that inaccurately showed negative quantities of ETF shares with negative values, creating the false impression that customers held short positions in those funds.

The findings revealed that short selling is not even available on the firm's platform. In reality, these customers did not hold any positions in the ETFs but had withdrawn more cash from their accounts than they had deposited. The negative balances ranged from $0.01 to approximately $9,500, which the firm did not pursue customers to collect. The account statements also failed to show these negative cash balances and contained inaccurate information about investments in ETFs that customers did not hold, creating the misleading impression that customers could sustain additional losses or gains based on ETF values.

Despite receiving warnings from FINRA and another regulator, the firm continued to issue inaccurate statements. When the firm initiated a remediation process and enhanced its procedures, it still sent additional account statements that either inaccurately stated negative ETF share balances or reflected inaccurate cash balances. The firm also maintained inaccurate books and records by creating internal cash and securities reports showing negative ETF shares rather than negative cash balances.

The firm's supervisory failures were significant. It lacked a system for reviewing or confirming the accuracy of customer account statements or for correcting errors. The firm prepared multiple distinct reports requiring manual compilation to accurately identify cash held for customers, and accounts with negative cash balances appeared on a separate report that inaccurately stated these accounts had negative ETF shares. Even after additional FINRA warnings and implementing a monthly review process, the firm's procedures were inadequate, as they did not identify criteria for selecting statements for review or steps to identify and correct inaccurate information.

This case underscores the critical importance of accurate account statements for investors. Customers rely on these statements to understand their financial positions and make informed decisions. When firms fail to ensure accuracy and maintain proper supervisory systems, investors may make decisions based on false information, potentially leading to financial harm and loss of trust in the financial system.

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According to FINRA, Sanctuary Securities, Inc. was fined $60,000 and ordered to pay $48,000 in restitution to customers for negligently failing to inform investors that issuers had not timely filed required SEC documents.

The findings revealed that the firm sold limited partnership interests in p...

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According to FINRA, Sanctuary Securities, Inc. was fined $60,000 and ordered to pay $48,000 in restitution to customers for negligently failing to inform investors that issuers had not timely filed required SEC documents.

The findings revealed that the firm sold limited partnership interests in private sector companies totaling $600,000 after being notified that delivery of the issuers' audited financial statements would be delayed pending completion of a forensic audit. Despite this knowledge, the firm's representatives did not inform customers that the issuers had failed to timely file their audited financial statements with the SEC or explain the reasons for the delay. This information was material and should have been disclosed to investors.

The situation became even more serious when the SEC subsequently filed a complaint against the alternative asset management firm and other defendants, alleging securities fraud in violation of federal law. The U.S. Department of Justice also brought criminal charges against the firm's founder, CEO, and two other executives, charging securities fraud, mail fraud, and wire fraud. The firm received $48,000 in commissions from these sales.

This case illustrates a fundamental principle of securities regulation: material information must be disclosed to investors. When issuers fail to file required financial statements, particularly when the delay involves a forensic audit, this raises significant red flags about potential problems with the company's finances or operations. Forensic audits are typically conducted when there are concerns about fraud, misrepresentation, or other serious financial irregularities.

Investors should understand that broker-dealers have an obligation to disclose material information that could affect an investment decision. The failure to timely file audited financial statements, especially when coupled with a forensic audit, is precisely the type of information that could cause a reasonable investor to reconsider or decline an investment. When firms fail to meet this obligation, they not only violate regulatory requirements but also deprive investors of the information needed to make informed decisions about risk.

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According to FINRA, Canaccord Genuity Wealth Management (USA) Inc. was fined $200,000 for failing to establish and enforce a supervisory system reasonably designed to achieve compliance with suitability obligations in connection with private placement sales.

The findings revealed multiple systemi...

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According to FINRA, Canaccord Genuity Wealth Management (USA) Inc. was fined $200,000 for failing to establish and enforce a supervisory system reasonably designed to achieve compliance with suitability obligations in connection with private placement sales.

The findings revealed multiple systemic failures in the firm's supervision of private placements. The firm's written supervisory procedures lacked guidance for representatives and supervisors about what communications constituted a recommendation for private placements. The procedures also failed to inform supervisors what to review to determine whether representatives correctly identified sales as recommended or non-recommended, and did not address retention of documents reflecting whether a private placement was recommended. Furthermore, the firm failed to provide guidance concerning the suitability review that should occur before recommending a private placement.

In practice, the firm's email review policy was not reasonably designed to identify when recommendations had been made. In some instances, the firm failed to identify that a recommendation had occurred when a representative brought an investment to a customer's attention, resulting in no supervisory review to assess whether there was a reasonable basis for the recommendation. In other cases, even when the firm knew a transaction had been solicited, it failed to reasonably document the recommendation or its suitability analysis. Instead, the firm advised customers in forms that it had conducted no due diligence in connection with the offerings.

Additional violations included the firm's failure to timely file required documents with FINRA related to private placements and allowing an individual registered with the firm's Canadian affiliate to engage in U.S. securities business without proper registration. This unregistered person emailed potential U.S. investors about an issuer with whom the person's spouse was affiliated and recommended that a potential investor participate in the offering and open an account at the firm.

This case highlights the heightened risks associated with private placements and the critical importance of proper supervision. Private placements are typically complex, illiquid investments that carry substantial risks. Firms must have robust procedures to ensure that these investments are suitable for customers and that all recommendations are properly documented and reviewed. When supervision breaks down, unsuitable investments may be sold to investors who don't understand the risks or whose financial situations make such investments inappropriate.

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According to FINRA, Glendale Securities, Inc. was fined $50,000 and required to retain an independent consultant to review its anti-money laundering compliance program after failing to develop and implement an AML program reasonably designed to detect and report suspicious transactions.

The findi...

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According to FINRA, Glendale Securities, Inc. was fined $50,000 and required to retain an independent consultant to review its anti-money laundering compliance program after failing to develop and implement an AML program reasonably designed to detect and report suspicious transactions.

The findings revealed that the firm lacked reasonable written AML procedures for surveillance of potentially suspicious transactions. The procedures failed to identify the need to monitor for sustained customer trading activity representing a significant portion of daily trading volume in thinly-traded or low-priced securities, and for trading activity with no discernable purpose or business sense. The procedures also failed to describe how supervisors should conduct monitoring, the frequency of such monitoring, or how to document investigations of potentially suspicious activity.

The firm's surveillance methods were inadequate. Its manual review of the daily trade blotter did not reflect patterns of trading across accounts or multiple days, coordinated trading between firm accounts, sustained customer trading in thinly-traded securities, or trading resulting in losses that might indicate lack of business purpose or intent to artificially support a security's price. Although the firm implemented exception reports for marking the open, marking the close, and suspicious order cancellations, it had no exception reports to alert it to other forms of suspicious and potentially manipulative trading. The written AML procedures made no reference to these exception reports or provided any information about how they should be used.

The firm also failed to reasonably detect, investigate, and respond to potentially suspicious transactions by a corporate customer. The customer made numerous purchases of small blocks of stock in an affiliated holding company that lacked business sense. These purchases consistently comprised the majority of total market volume for the issuer and occurred when there was minimal market interest, no positive issuer developments, and while both the issuer and customer were subject to negative news and reported negative cash flow. On multiple trading days, the customer placed a series of small buy orders at increasing prices, and the issuer's closing price improved from the prior trading day. The customer also engaged in multiple transactions with other firm customers, including accounts controlled by firm principals, on days when this activity comprised the majority of market volume.

This case demonstrates the critical role that AML programs play in protecting market integrity. Firms must have robust systems to detect suspicious trading patterns that may indicate market manipulation or other illicit activity. The failure to monitor for red flags such as trading that dominates market volume in thinly-traded securities, trading lacking business sense, or coordinated trading can allow manipulative schemes to flourish, ultimately harming innocent investors and undermining confidence in fair markets.

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According to FINRA, MM Global Securities, Inc. was fined $450,000 and prohibited from providing market access to customers for two years for failing to establish and implement an AML compliance program reasonably designed to detect and report suspicious activity.

The findings revealed severe defi...

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According to FINRA, MM Global Securities, Inc. was fined $450,000 and prohibited from providing market access to customers for two years for failing to establish and implement an AML compliance program reasonably designed to detect and report suspicious activity.

The findings revealed severe deficiencies in the firm's AML program. The procedures did not identify any types of manipulative trading such as wash trades, matched orders, spoofing, or layering, and failed to describe how the firm would detect such trading. The firm never created parameters for trade review and wire transfers to determine whether transactions lacked financial sense or were suspicious, and the procedures did not describe how parameters should be set. Furthermore, the firm's AML procedures did not identify any exception reports to detect unusual transactions, did not describe how supervisors should use such reports, or what activity should trigger further action.

Instead of using exception reports or automated tools to detect suspicious activity such as cancelled orders, patterns of trading across accounts or multiple days, coordinated trading, or trading resulting in losses indicating lack of rational economic motive, the firm relied almost exclusively on a manual review of the daily trade blotter. This approach was unreasonable given the volume and complexity of trading by the firm's customers. As a result of these failures, the firm did not detect, investigate, or respond to red flags of suspicious activities and failed to investigate additional suspicious activity even after it was brought to the firm's attention.

The firm also failed to implement its Customer Identification Program for retail and institutional customer accounts in foreign jurisdictions. It only collected basic information and conducted OFAC checks when opening accounts, failing to implement its CIP for at least four individual customers in China and a customer located in a jurisdiction designated by the U.S. as a major money laundering jurisdiction.

Additional violations included failing to reasonably supervise for potentially manipulative trading. The firm's procedures were not reasonably designed to detect potentially manipulative transactions or patterns over time. As a result, the firm failed to detect potential market manipulation including matched orders in a company's stock. Even when potential market manipulation was brought to the firm's attention by FINRA and its clearing broker, the firm unreasonably relied on unverified representations from the customer about steps to prevent future manipulation.

FINRA also found that the firm failed to preserve instant messages and email communications of its registered representatives discussing securities-related business with another firm, including referrals of prospective IPO investors and account applications. The firm was aware of these communications but took no steps to preserve them.

This case illustrates the serious consequences when firms fail to maintain adequate AML and supervisory systems, particularly when providing market access. The two-year prohibition from providing market access reflects the severity of the violations and the risk posed to market integrity. Investors should be aware that firms facilitating market access have heightened obligations to detect and prevent potentially manipulative trading, and failures in these areas can enable bad actors to manipulate securities prices to the detriment of innocent investors.

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According to FINRA, SagePoint Financial, Inc. was fined $35,000 and ordered to pay $51,830.24 in restitution to customers for failing to establish and maintain a reasonable supervisory system to oversee unsuitable trading on margin.

The findings revealed significant gaps in the firm's supervisory...

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According to FINRA, SagePoint Financial, Inc. was fined $35,000 and ordered to pay $51,830.24 in restitution to customers for failing to establish and maintain a reasonable supervisory system to oversee unsuitable trading on margin.

The findings revealed significant gaps in the firm's supervisory structure. First-line supervisors were not responsible for reviewing new account documents or approving margin or options accounts. More critically, the firm's transaction review system did not provide these supervisors any indication of whether transactions were executed on margin, effectively blinding them to a key risk factor in customer accounts.

Although the firm ran a quarterly surveillance report that alerted the surveillance department to margin accounts with high debit balances, significant margin interest, and high commissions—all potential red flags of unsuitable trading—the surveillance department failed to reasonably review and resolve these alerts for at least two senior customer accounts. This supervisory breakdown resulted in customers paying $51,830.24 in commissions, fees, and margin interest that could have been avoided with proper oversight.

Margin trading allows investors to borrow money to purchase securities, which can amplify both gains and losses. While margin can be appropriate for experienced investors with suitable risk tolerances and financial situations, it can be particularly dangerous for senior investors or those with conservative investment objectives. The leverage inherent in margin trading means that market downturns can quickly erode account values, and margin interest charges can accumulate rapidly, especially when accounts experience high turnover.

This case highlights the importance of having multiple layers of supervision, particularly for high-risk activities like margin trading. First-line supervisors who review day-to-day trading activity need visibility into whether transactions involve margin, while surveillance systems must not only generate alerts for potentially unsuitable activity but also ensure those alerts are meaningfully reviewed and acted upon. When these supervisory systems fail, particularly for vulnerable populations like seniors, customers can suffer significant financial harm that proper oversight could have prevented.

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