Bad Brokers

According to FINRA, Integrity Brokerage, LLC was fined $44,938 after an Office of Hearing Officers decision became final on January 3, 2022.

The firm was found in violation of securities rules by improperly allowing an individual who was subject to a statutory disqualification to associate with t...

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According to FINRA, Integrity Brokerage, LLC was fined $44,938 after an Office of Hearing Officers decision became final on January 3, 2022.

The firm was found in violation of securities rules by improperly allowing an individual who was subject to a statutory disqualification to associate with the firm and engage in securities business without proper registration. FINRA had previously denied the firm's Membership Continuance Application (MC-400) seeking permission for this disqualified individual to associate with the firm. Despite this clear prohibition, the firm's owner ignored FINRA's initial warning and implemented a plan to evade the prohibition.

More than six months after the application was denied, the firm sent a letter to customers stating that the disqualified individual would not be their official registered representative but would continue generating investment ideas for them. The letter described these changes as "semantics" and obscured the true nature of the situation - that FINRA had denied approval for the disqualified individual to speak with customers about securities and their portfolios.

This case highlights the importance of firms complying with FINRA's statutory disqualification process. When FINRA denies permission for a disqualified individual to work in the securities industry, firms must respect that decision. Attempting to circumvent these prohibitions through creative arrangements puts investors at risk and undermines the regulatory framework designed to protect them.

Investors should verify that their financial advisors are properly registered and not subject to disqualifications. You can check an advisor's background using FINRA's BrokerCheck system, which displays registration status and disciplinary history.

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According to FINRA, Third Seven Capital LLC was censured and fined $10,000 on January 3, 2022, for conducting securities business while failing to maintain minimum required net capital.

The firm incurred $16,832.71 in legal fees that caused its net capital to fall below the required minimum, with...

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According to FINRA, Third Seven Capital LLC was censured and fined $10,000 on January 3, 2022, for conducting securities business while failing to maintain minimum required net capital.

The firm incurred $16,832.71 in legal fees that caused its net capital to fall below the required minimum, with daily deficiencies ranging between $726 and $29,665. The firm also filed inaccurate notices of net capital deficiency with the SEC and FINRA. Initially, the firm incorrectly stated that its net capital deficiency had ended after receiving funds from a private placement, but had erroneously failed to include certain legal fees in its calculations.

When the firm filed an amended notification stating the deficiencies had not ended, this notification was also inaccurate because the firm had incorrectly recorded certain credits as debits. The firm's net capital remained below the required minimum until the following month. Additionally, the firm failed to maintain accurate books and records concerning its aggregate indebtedness and net capital, and filed an inaccurate FOCUS report.

Net capital requirements exist to ensure broker-dealers maintain sufficient liquid assets to meet their obligations to customers and other creditors. When firms operate below these requirements, it creates potential risks for investors whose securities and funds are held by the firm.

This case demonstrates the importance of accurate financial reporting and proper net capital calculations. Firms must maintain robust accounting systems to ensure they can accurately track their net capital position and remain in compliance with regulatory requirements at all times.

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According to FINRA, Jefferies LLC was censured and fined $55,000 on January 6, 2022, for failing to timely report transactions in TRACE-eligible corporate debt securities to FINRA's Trade Reporting and Compliance Engine (TRACE).

The late reports were caused by several operational issues at the fi...

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According to FINRA, Jefferies LLC was censured and fined $55,000 on January 6, 2022, for failing to timely report transactions in TRACE-eligible corporate debt securities to FINRA's Trade Reporting and Compliance Engine (TRACE).

The late reports were caused by several operational issues at the firm, including delays related to a manual reporting process involving trades with foreign affiliates, operational errors and delays by firm personnel (such as employees not timely matching tickets in the firm's system), and amendments to trade terms that occurred outside of the 15-minute reporting time frame required by FINRA rules.

TRACE reporting requirements exist to promote transparency in the corporate bond market. By requiring firms to report their trades promptly, FINRA makes this information available to market participants and the public, helping ensure fair pricing and market efficiency. When firms fail to report trades on time, it undermines this transparency and can harm investors who rely on timely trade data to make informed investment decisions.

This case illustrates the importance of having robust systems and procedures in place to ensure timely trade reporting. Firms must invest in appropriate technology and training to meet their regulatory obligations. Manual processes and operational delays are not acceptable excuses for late reporting.

Investors benefit when markets are transparent and trade information is reported promptly. This enables better price discovery and helps ensure investors receive fair execution on their trades in corporate bonds and other securities.

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According to FINRA, E*TRADE Securities LLC was censured and fined a total of $350,000 on January 11, 2022, for failing to establish and maintain a supervisory system reasonably designed to detect potentially manipulative trading activity by its customers.

The firm's automated surveillance system ...

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According to FINRA, E*TRADE Securities LLC was censured and fined a total of $350,000 on January 11, 2022, for failing to establish and maintain a supervisory system reasonably designed to detect potentially manipulative trading activity by its customers.

The firm's automated surveillance system used parameters that significantly restricted its ability to detect potential wash trades, prearranged trades, and marking-the-close activity, particularly in lower-priced and thinly traded securities. Wash trades involve a trader buying and selling the same security to create misleading market activity. Marking-the-close involves trades designed to artificially influence a security's closing price. Prearranged trades are non-competitive transactions arranged between parties in advance.

Additionally, the firm did not have surveillance reasonably designed to detect trading that artificially increased or decreased the price of thinly traded stocks, such as when customers attempt to artificially influence prices by effecting a series of buy transactions to create false appearance of trading interest, followed by opposite-side transactions to profit from the artificially inflated price.

This case highlights the responsibility of brokerage firms to maintain effective surveillance systems to detect and prevent market manipulation. Manipulative trading harms honest investors by distorting prices and creating false impressions of market activity.

For investors, this underscores the importance of choosing reputable firms with robust compliance systems. While no firm can prevent all misconduct, firms must have adequate surveillance tools to identify suspicious patterns and take appropriate action to protect market integrity and investor interests.

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According to FINRA, Jefferies LLC was censured and fined a total of $200,000 on January 11, 2022, for failing to take reasonable steps to ensure that intermarket sweep orders (ISOs) it routed met the requirements of Regulation NMS.

The firm's electronic trading desk routed orders marked as ISOs t...

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According to FINRA, Jefferies LLC was censured and fined a total of $200,000 on January 11, 2022, for failing to take reasonable steps to ensure that intermarket sweep orders (ISOs) it routed met the requirements of Regulation NMS.

The firm's electronic trading desk routed orders marked as ISOs that did not meet Regulation NMS requirements because the desk failed to route additional limit orders to execute against other exchanges' protected quotes. Regulation NMS is designed to ensure that investors receive the best available price when their orders are executed across multiple trading venues. ISOs are a special type of order that allows a firm to execute immediately at one venue while simultaneously routing orders to other venues displaying better prices.

The firm's violations stemmed from multiple failures: the trading desk did not inform the firm's compliance department about routing ISOs, had no procedures for Regulation NMS compliance, failed to maintain firm-specific quotation data, and did not conduct periodic reviews to test its policies. Programming errors also caused the firm to mismark orders and fail to retain data needed for compliance reviews.

Furthermore, the firm's supervisory system was not reasonably designed to comply with trade-through rules. Even after implementing supervisory reviews, the firm only reviewed a small fraction of the ISOs it handled daily, making the supervision inadequate.

This case demonstrates that firms must have comprehensive systems to ensure order routing complies with regulations designed to protect investors from receiving inferior trade executions. Investors rely on these protections to ensure they receive fair prices for their securities transactions.

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According to FINRA, Loewen, Ondaatje, McCutcheon USA, LLC (doing business as BLV Securities) was censured and fined $20,000 on January 25, 2022, for failing to establish and implement adequate anti-money laundering (AML) policies and procedures.

Following a change in majority ownership, the firm'...

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According to FINRA, Loewen, Ondaatje, McCutcheon USA, LLC (doing business as BLV Securities) was censured and fined $20,000 on January 25, 2022, for failing to establish and implement adequate anti-money laundering (AML) policies and procedures.

Following a change in majority ownership, the firm's business model shifted to higher-risk activities, but the firm failed to tailor its AML program accordingly. While using a quarterly checklist process as its primary AML monitoring method, the firm failed to detect or investigate red flags of suspicious activity in multiple customer accounts.

The firm also failed to conduct an independent AML test in 2019. The previous year's test only assessed the AML program when the firm's business model still focused on private placements sold to domestic customers. The firm did not conduct another test until the following year, and only after prompting by FINRA. That belated test failed to review customer account activity or evaluate the firm's AML training program, rendering it inadequate to determine whether the firm was properly detecting and investigating potentially suspicious activity.

Additionally, approximately 80 percent of new customer accounts sampled by FINRA were opened without the required signature of a firm principal evidencing supervisory review and approval.

AML programs are critical safeguards against financial crimes that can harm investors and the integrity of financial markets. When firms fail to maintain adequate AML controls, they create opportunities for criminals to exploit the financial system.

Investors should be aware that reputable firms maintain robust AML programs to protect against fraud and financial crimes. This case illustrates the importance of proper supervision and compliance infrastructure at brokerage firms.

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According to FINRA, DriveWealth Institutional LLC (formerly Cuttone & Co., LLC) was censured and fined $100,000 on January 26, 2022, for multiple violations of Regulation SHO and trade reporting requirements.

The firm violated Regulation SHO by failing to obtain locates for short sales. When rece...

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According to FINRA, DriveWealth Institutional LLC (formerly Cuttone & Co., LLC) was censured and fined $100,000 on January 26, 2022, for multiple violations of Regulation SHO and trade reporting requirements.

The firm violated Regulation SHO by failing to obtain locates for short sales. When receiving customer short sale orders, the firm would effect principal short sales on exchanges and then satisfy customer orders by buying the security at a different price. The firm executed these short sales without borrowing securities, entering into bona fide arrangements to borrow, or having reasonable grounds to believe the securities could be borrowed for timely delivery.

Additionally, the firm failed to report short sale transactions with the required short sale indicator because its order management system was not programmed to include this indicator for the customer side of net trades. As a result, trade reports incorrectly showed the contra-party sold long rather than short.

The firm also violated Regulation SHO's circuit breaker provisions by failing to establish adequate policies and procedures to prevent short sales during circuit breakers. The firm had no reasonable process to identify whether transactions were executed at or below the National Best Bid when circuit breakers were in effect. Furthermore, the firm improperly reported trades using incorrect modifiers.

Regulation SHO rules help prevent abusive short selling practices and maintain fair and orderly markets. The locate requirement ensures that short sellers have a reasonable basis to believe they can deliver securities on settlement, reducing the risk of settlement failures.

This case demonstrates the importance of proper system programming and supervisory procedures to ensure compliance with complex trading regulations designed to protect market integrity and investor interests.

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According to FINRA, CIM Securities, LLC was censured and fined $35,000 on January 31, 2022, for failing to establish adequate supervisory systems and written procedures for suitability and email review.

The firm's written supervisory procedures cited the outdated NASD Rule 2310 instead of FINRA R...

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According to FINRA, CIM Securities, LLC was censured and fined $35,000 on January 31, 2022, for failing to establish adequate supervisory systems and written procedures for suitability and email review.

The firm's written supervisory procedures cited the outdated NASD Rule 2310 instead of FINRA Rule 2111, even though Rule 2111 had superseded the old rule and includes additional requirements for obtaining customer investment profiles, including investment time horizon, liquidity needs, and risk tolerance. The firm continued citing the wrong rule despite previous warnings from FINRA.

As a result, the firm failed to obtain critical suitability information from three customers who collectively invested $680,000 in high-risk private placement offerings. The firm did not gather information about these customers' risk tolerance and liquidity needs. Two customers provided information suggesting the private placements might not be suitable for them. Additionally, the firm failed to obtain and maintain principal signatures denoting acceptance of accounts for private placement investors.

The firm also maintained an inadequate supervisory system for email review. Despite previous FINRA warnings, the firm's procedures did not specify required frequency for outgoing email review, sample sizes and parameters, or escalation steps for identified issues. The procedures also lacked information about documenting incoming email review.

Suitability requirements exist to ensure investment recommendations align with customers' financial situations and objectives. When firms fail to gather complete suitability information, they cannot properly evaluate whether investments are appropriate for customers.

This case emphasizes the importance of maintaining current, comprehensive written procedures and actually following them to protect investors from unsuitable investment recommendations.

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According to FINRA, Warren Ellwood Rowe Jr. was barred from association with any FINRA member in all capacities on January 3, 2022, for refusing to provide documents and information requested by FINRA.

FINRA initiated an investigation into allegations that Rowe took impermissible loans from custo...

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According to FINRA, Warren Ellwood Rowe Jr. was barred from association with any FINRA member in all capacities on January 3, 2022, for refusing to provide documents and information requested by FINRA.

FINRA initiated an investigation into allegations that Rowe took impermissible loans from customers. When FINRA requested documents and information in connection with this investigation, Rowe refused to comply with the requests. Broker-dealers and their representatives have a regulatory obligation to cooperate with FINRA investigations. This duty exists to enable FINRA to fulfill its mission of protecting investors and maintaining market integrity.

When registered individuals refuse to cooperate with regulatory investigations, FINRA typically imposes severe sanctions, including bars from the industry. This approach reflects the fundamental importance of the duty to cooperate - without it, FINRA cannot effectively investigate potential misconduct and protect investors.

The underlying investigation concerned impermissible loans from customers, which is itself a serious violation. FINRA rules generally prohibit registered representatives from borrowing money from customers unless specific conditions are met, such as when the customer is an immediate family member or financial institution in the business of making loans.

For investors, this case serves as an important reminder to be cautious if a financial advisor requests to borrow money. Such arrangements are heavily regulated and often prohibited entirely because they create conflicts of interest and put customer funds at risk.

Investors should verify their advisor's disciplinary history through FINRA BrokerCheck, which will show regulatory actions including bars from the industry. Working with barred individuals is illegal and puts your investments at serious risk.

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According to FINRA, Thomas John Lykos Jr. was barred from association with any FINRA member in all capacities following a NAC decision that was appealed to the SEC on January 10, 2022. The bar remains in effect pending review.

Lykos was found in violation of the Rules of Conduct governing examina...

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According to FINRA, Thomas John Lykos Jr. was barred from association with any FINRA member in all capacities following a NAC decision that was appealed to the SEC on January 10, 2022. The bar remains in effect pending review.

Lykos was found in violation of the Rules of Conduct governing examinations after he acted unethically by cheating on a qualification examination. While viewing test material on the computer, Lykos wrote information on his driver's license and between the fingers of his left hand. When the proctor asked for his identification during a break, Lykos had to return to his workstation to rub the writing off his license. However, he successfully concealed the writing on his hand by keeping it in his pocket during checkout.

During the break, Lykos went to a bank where he knew a teller and asked to use her office - an area unmonitored by test center staff or cameras. When attempting to re-enter the test center, Lykos tried to bring in a business card but tore it in half and discarded it when the proctor noticed it. Evidence showed that Lykos had writing between his fingers when he re-entered the test room. After returning from the break, Lykos spent approximately 14 minutes reviewing previously answered questions and changed his answers to two questions - the only time during the exam he changed any answers.

Qualification examinations exist to ensure that securities professionals possess the knowledge necessary to serve investors competently and ethically. Cheating on these exams undermines the entire regulatory framework designed to protect investors by ensuring minimum competency standards.

This case demonstrates that FINRA takes examination integrity seriously and will bar individuals who cheat, regardless of whether they ultimately passed the exam. Investors should feel confident that registered professionals have legitimately demonstrated their qualifications through proper examination procedures.

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