Bad Brokers

According to FINRA, an Office of Hearing Officers decision found that Jason Lynn DiPaola should be fined $5,000 and suspended for 30 business days. Both DiPaola and FINRA appealed this decision to the NAC.

DiPaola was found to have failed to disclose an outside brokerage account in which he exerc...

Read More

According to FINRA, an Office of Hearing Officers decision found that Jason Lynn DiPaola should be fined $5,000 and suspended for 30 business days. Both DiPaola and FINRA appealed this decision to the NAC.

DiPaola was found to have failed to disclose an outside brokerage account in which he exercised discretionary authority. He traded with discretionary authority in his mother's securities account without her prior written authorization or approval from his member firm. While his mother gave him oral permission to trade in her account as he did in his own, oral permission is insufficient to properly authorize discretionary trading.

Additionally, DiPaola failed to disclose to the executing firm that he was exercising discretion and control over the trading in his mother's account while he was an associated person of another broker-dealer. This disclosure is required so the executing firm can properly supervise the account.

DiPaola also failed to accurately answer annual compliance questionnaire certifications. He disclosed his own outside brokerage accounts but failed to disclose his mother's account. DiPaola exercised de facto control over his mother's account by deciding the frequency and volume of trades he effected in the account.

The findings also included that DiPaola refused to appear and provide on-the-record testimony requested by FINRA. DiPaola had appeared and provided three on-the-record interviews about his trading, but failed to appear for a fourth interview.

The fact that both DiPaola and FINRA appealed the decision suggests disagreement about the severity of the sanctions. DiPaola may have believed the sanctions were too harsh, while FINRA may have believed they were too lenient given the multiple violations including refusal to testify.

Investors should understand that discretionary trading in accounts, even family member accounts, must be properly authorized in writing and disclosed to all relevant firms. The failure to disclose outside accounts prevents proper supervision and creates opportunities for misconduct to go undetected. Refusal to fully cooperate with regulatory investigations is an additional serious violation.

Show Less

According to FINRA, Suresh V. Kumar was named as a respondent in a FINRA complaint alleging multiple serious violations including operating an undisclosed outside business activity, making material misrepresentations, engaging in private securities transactions, and providing false information to FI...

Read More

According to FINRA, Suresh V. Kumar was named as a respondent in a FINRA complaint alleging multiple serious violations including operating an undisclosed outside business activity, making material misrepresentations, engaging in private securities transactions, and providing false information to FINRA.

The complaint alleges that Kumar operated an undisclosed outside business where he received hundreds of thousands of dollars from proprietary traders pursuant to agreements in which he promised to train them to pass the Series 57 exam, teach them to trade securities as part of his purported team at his member firm, and double the value of their initial trading deposit. One participant made a $50,000 deposit into a contingency fund. After failing the Series 57 exam twice, the participant requested a refund.

Under the agreement terms, Kumar was obligated to return $48,000 within three months. However, Kumar falsely told the participant that the firm held $100 million of Kumar's money and that Kumar could not repay the participant until the firm released Kumar's funds. In reality, Kumar had less than $2,500 with the firm at that time. Kumar knew he had spent the participant's contingency fund on personal expenses and to repay a purported loan, and knew he had no other liquid assets to repay the participant.

The complaint also alleges that Kumar neither notified his firm about this outside business nor received prior approval. Kumar allegedly participated in undisclosed private securities transactions by placing trades in brokerage accounts of two participants at broker-dealers outside the scope of his employment.

Additionally, the complaint alleges that Kumar falsely attested to his firm that he did not conduct outside business, did not engage in unapproved communications, and did not engage in private securities transactions, when he was in fact doing all of these things.

Furthermore, Kumar allegedly refused to provide FINRA with material information during testimony, provided false and misleading information about his agreements with participants, and deleted electronic communications that FINRA had requested.

As this is an unadjudicated complaint, these are allegations only and findings have not been made.

Show Less

According to FINRA, UBS Securities LLC was fined $250,000 for significant failures in its financial risk management controls and supervisory systems.

The firm provided market access to two affiliates without properly accounting for them in its financial risk management controls. UBS maintained bo...

Read More

According to FINRA, UBS Securities LLC was fined $250,000 for significant failures in its financial risk management controls and supervisory systems.

The firm provided market access to two affiliates without properly accounting for them in its financial risk management controls. UBS maintained both a proprietary and third-party order management system used for trading listed futures and options. The firm incorrectly believed that options orders from both systems came from a single affiliate, when in fact a firm employee was entering orders on behalf of two additional affiliates that had no credit thresholds or erroneous order controls established.

This oversight created significant risk exposure. Credit thresholds and erroneous order controls are critical safeguards that prevent trades from exceeding risk limits or reaching the market in error. Without these controls for two affiliates, the firm left itself vulnerable to potential trading losses and market disruptions.

Additionally, FINRA found that UBS failed to maintain reasonable supervisory systems for documenting reviews of credit limit changes and soft blocks. When the firm's controls triggered a soft block on an order, personnel were supposed to document specific factors before overriding it. However, the firm's documentation system offered only limited preset reasons that didn't capture the required factors from their own procedures.

For investors, this case demonstrates the importance of choosing firms with robust risk management and supervisory systems. Even major financial institutions can have gaps in their compliance infrastructure. The firm has since identified and corrected these issues, highlighting the value of regulatory oversight in maintaining market integrity. When evaluating where to custody investments, investors should consider a firm's regulatory history and whether it has demonstrated a commitment to maintaining strong internal controls and supervisory procedures.

Show Less

According to FINRA, Torch Securities LLC was fined $17,500 and censured for failing to conduct adequate due diligence before recommending private placement offerings to customers.

The firm's written supervisory procedures required completion of a due diligence checklist before recommending any pr...

Read More

According to FINRA, Torch Securities LLC was fined $17,500 and censured for failing to conduct adequate due diligence before recommending private placement offerings to customers.

The firm's written supervisory procedures required completion of a due diligence checklist before recommending any private offering, but these procedures had significant gaps. They contained no discussion of potential red flags that might arise during investigations, nor did they provide guidance on how to address such red flags or how to perform reasonable due diligence when investigating private placements.

More critically, the firm failed to conduct and document reasonable investigations of three specific private placement offerings before recommending them to customers. Rather than conducting independent investigations, Torch Securities relied almost exclusively on documentation and information provided by the issuers themselves. This approach fails to meet the independent verification standards required for broker-dealers.

Private placements carry heightened risks compared to publicly traded securities. They lack the same disclosure requirements and regulatory oversight as public offerings, making independent due diligence absolutely essential. When a broker-dealer simply accepts issuer-provided information without independent verification, investors are left vulnerable to misleading or incomplete disclosures.

For investors, this case emphasizes the importance of understanding that not all investment recommendations receive the same level of scrutiny. Before investing in private placements, investors should ask their financial professional detailed questions about what due diligence was performed, whether the firm independently verified issuer claims, and what specific risks were identified. The lower fine imposed in this case reflected the firm's limited financial resources, and the firm was required to certify implementation of improved supervisory systems and procedures going forward.

Show Less

According to FINRA, Roselaine Securities LLC was censured and fined $20,000 for failing to establish and maintain a reasonable supervisory system regarding outside business activities and private securities transactions.

The firm's written procedures had a fundamental flaw: they failed to identif...

Read More

According to FINRA, Roselaine Securities LLC was censured and fined $20,000 for failing to establish and maintain a reasonable supervisory system regarding outside business activities and private securities transactions.

The firm's written procedures had a fundamental flaw: they failed to identify anyone to whom the designated principals themselves were required to disclose their own outside business activities (OBAs) or private securities transactions (PSTs). This created a supervisory blind spot at the highest levels of the firm. When one designated principal orally disclosed PSTs and another orally disclosed OBAs, the firm failed to promptly follow up to obtain written submissions or additional details needed to evaluate potential conflicts with firm business or other issues.

The firm only pursued these details after receiving inquiries from FINRA, demonstrating a reactive rather than proactive approach to supervision. This is particularly problematic because principals set the tone for compliance culture within a firm. When those in leadership positions aren't subject to the same disclosure and supervisory requirements, it undermines the entire compliance framework.

Adding to the firm's violations, Roselaine Securities failed to search its records in response to information requests from the Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury. Responsiveness to regulatory inquiries is a fundamental obligation of registered broker-dealers.

For investors, this case illustrates that supervisory failures can exist at any level of a firm, including among its leadership. Outside business activities and private securities transactions can create conflicts of interest or divert attention from serving clients. Investors should feel empowered to ask their financial advisors about their outside activities and whether the firm has robust policies requiring disclosure and review of such activities. A firm's commitment to supervision and compliance starts at the top.

Show Less

According to FINRA, Spire Securities LLC was censured and fined $20,000 for failing to make timely filings with FINRA relating to private offerings it sold.

For the private offerings in question, the firm made required regulatory filings an average of 88 days late, or 103 days after the first sal...

Read More

According to FINRA, Spire Securities LLC was censured and fined $20,000 for failing to make timely filings with FINRA relating to private offerings it sold.

For the private offerings in question, the firm made required regulatory filings an average of 88 days late, or 103 days after the first sale of the offerings. These filing requirements exist for important regulatory purposes. They allow FINRA to monitor private placement activity, identify potential problems, and protect investors from fraudulent or unsuitable offerings. When firms fail to file on time, it delays regulatory oversight and may allow problematic offerings to continue selling to additional investors before issues are identified.

Private placements are already subject to less regulatory scrutiny than public offerings. The registration exemptions that allow private placements to skip full SEC registration come with specific conditions and filing requirements designed to maintain some level of oversight. When broker-dealers consistently miss these filing deadlines by such substantial margins, it suggests either inadequate compliance systems or insufficient attention to regulatory obligations.

The 88-day average delay is particularly concerning because it means that for over three months after sales began, regulators lacked visibility into these offerings. During this period, the firm continued to sell these securities without FINRA having the opportunity to review whether the offerings raised any regulatory concerns.

For investors, this case highlights the importance of understanding that even registered broker-dealers can have significant compliance deficiencies. When considering private placement investments, investors should inquire about when the offering was first sold, whether all required regulatory filings have been made, and whether the firm has a history of compliance violations. Timely regulatory filings are a basic requirement that reflects a firm's overall commitment to compliance and investor protection.

Show Less

According to FINRA, Electronic Transaction Clearing, Inc. was censured and fined $70,000 for failing to establish and maintain supervisory systems to comply with Regulation SHO's order marking requirements.

Rule 200(g) of Regulation SHO requires firms to properly mark sell orders as "long," "shor...

Read More

According to FINRA, Electronic Transaction Clearing, Inc. was censured and fined $70,000 for failing to establish and maintain supervisory systems to comply with Regulation SHO's order marking requirements.

Rule 200(g) of Regulation SHO requires firms to properly mark sell orders as "long," "short," or "short exempt." These markings are critical for regulatory oversight of short selling activity and help prevent abusive trading practices. However, Electronic Transaction Clearing had no supervisory system designed to verify it was correctly marking sell orders, and its written procedures didn't describe any process for reviewing or testing orders for compliance.

The firm later implemented a sampling system and updated its procedures with detailed review steps, but only after FINRA identified the deficiency. This reactive approach to compliance is problematic because it means violations may have occurred before the issue was discovered.

Additionally, the firm failed to reasonably monitor orders from customers using more than one Market Participant Identifier (MPID). When a customer trades through multiple MPIDs, their positions must be aggregated to determine the correct order marking. Without proper monitoring, orders could be incorrectly marked as "long" when the customer's aggregate position was actually short, potentially allowing improper trading activity.

Regulation SHO serves important market integrity functions, helping prevent naked short selling and other manipulative practices. When firms fail to maintain systems ensuring compliance with these rules, it can undermine market fairness and efficiency.

For investors, this case demonstrates that even operational and compliance matters that seem technical can have real implications for market integrity. While individual investors may not directly see the impact of order marking violations, these failures can contribute to market manipulation and unfair trading advantages. Investors should be aware that regulatory compliance extends beyond obvious customer-facing issues to include critical back-office and operational systems.

Show Less

According to FINRA, Aaron Capital Incorporated was censured and fined $20,000 for willfully violating Form CRS requirements, which help investors understand their relationship with financial professionals.

Form CRS (Client Relationship Summary) is a critical disclosure document designed to help r...

Read More

According to FINRA, Aaron Capital Incorporated was censured and fined $20,000 for willfully violating Form CRS requirements, which help investors understand their relationship with financial professionals.

Form CRS (Client Relationship Summary) is a critical disclosure document designed to help retail investors make informed decisions about the types of services and relationships they have with financial professionals. The SEC adopted Form CRS rules to provide clear, simple information about the services offered, fees charged, conflicts of interest, and legal standards of conduct.

Aaron Capital's violations were particularly egregious. Despite receiving three notices of noncompliance from FINRA, the firm waited over a year before filing its Form CRS through Web CRD. Even after eventually filing, the firm delayed an additional four months before posting it on its website or delivering it to existing customers. This meant that for an extended period, the firm's customers lacked access to basic information about their relationship with the firm.

The firm's compliance failures extended to its supervisory systems. Initially, its written procedures made no reference to Form CRS at all. Later, when the firm did add a Form CRS discussion to its procedures, it included no actual procedures regarding preparation, filing, or distribution of the document. This suggests a systemic lack of attention to regulatory obligations.

FINRA found these violations to be "willful," meaning the firm knew or should have known about its obligations but failed to comply. This finding has additional consequences beyond the fine, as willful violations can affect a firm's regulatory standing.

For investors, Form CRS is a valuable tool for understanding relationships with financial professionals. Investors should always request and review a firm's Form CRS before opening an account. This case illustrates that some firms may not take their disclosure obligations seriously, making it even more important for investors to be proactive in requesting and reviewing these required disclosures.

Show Less

According to FINRA, BIDS Trading L.P. was censured and fined $200,000 for overstating its advertised trade volume on Bloomberg and Thomson Reuters by hundreds of millions of shares.

The firm configured its systems to automatically advertise daily trading volume in numerous securities through thes...

Read More

According to FINRA, BIDS Trading L.P. was censured and fined $200,000 for overstating its advertised trade volume on Bloomberg and Thomson Reuters by hundreds of millions of shares.

The firm configured its systems to automatically advertise daily trading volume in numerous securities through these major market data providers. However, two separate system changes inadvertently triggered a programming defect in the trade advertising software. This defect caused BIDS Trading to submit multiple end-of-day volume reports for the same securities, resulting in massive overstatements.

Over time, the firm overstated its executed trade volume in 2,041 instances by 439,768,869 shares across 1,043 securities. These inflated volume figures were visible to market participants who relied on Bloomberg and Thomson Reuters data, potentially influencing trading decisions and perceptions of market liquidity.

To the firm's credit, it remediated the programming defect within one week of learning about the issue and reviewed historical data to confirm no other problems existed. However, FINRA found that BIDS Trading lacked a supervisory system reasonably designed to supervise the accuracy of its trade advertisements. The firm had no supervisory process or written procedures to verify that trade volume information reported to Bloomberg and Thomson Reuters was accurate. The firm only implemented such a supervisory process after discovering the overstatements.

Accurate volume reporting is essential for market transparency and fair trading. Participants rely on volume data to assess liquidity, make trading decisions, and evaluate market conditions. When volume is overstated, it can create false impressions about a security's trading activity and potentially influence investment decisions.

For investors, this case illustrates the importance of reliable market data infrastructure and the supervisory systems that should support it. While this violation involved technical and operational failures rather than intentional misconduct, the impact on data accuracy was substantial. Investors should be aware that the market data they rely upon depends on firms having robust systems and supervision to ensure accuracy.

Show Less

According to FINRA, J.W. Korth & Company, Limited Partnership was censured and ordered to pay $29,268 in restitution to customers for charging excessive markups and markdowns on municipal and corporate bond transactions. The SEC affirmed FINRA's disciplinary action and findings.

The firm charged ...

Read More

According to FINRA, J.W. Korth & Company, Limited Partnership was censured and ordered to pay $29,268 in restitution to customers for charging excessive markups and markdowns on municipal and corporate bond transactions. The SEC affirmed FINRA's disciplinary action and findings.

The firm charged customers excessive markups on 38 sales of municipal bonds, with markups ranging from 3.10 percent to 8.33 percent. These markups violated MSRB Rules G-17 and G-30, which require fair dealing and fair pricing in municipal securities transactions. Additionally, the firm charged excessive markups and markdowns on nine sales and four purchases of corporate bonds, with markups and markdowns ranging from 3.24 percent to 5.56 percent.

Markups and markdowns represent the firm's compensation for facilitating bond transactions when it acts as principal. While firms are entitled to reasonable compensation, FINRA and the MSRB require that such compensation be fair and reasonable considering all relevant circumstances. Factors include the type of security, its availability, price, amount of money involved, and the services rendered.

Markups in the 5-8 percent range are generally considered excessive, particularly for investment-grade bonds traded in active markets. These excessive charges significantly reduced the returns customers received on their investments. On a $100,000 bond purchase, an 8 percent markup means the customer paid $8,000 above a fair price, immediately reducing their investment value.

The SEC upheld FINRA's findings and sanctions, which included ordering the firm to retain an independent consultant to review its pricing procedures. This remedial measure is designed to help prevent future violations by improving the firm's systems for ensuring fair pricing.

For investors, particularly those investing in bonds, this case highlights the importance of understanding and questioning the prices paid for fixed-income securities. Bond pricing can be opaque, and excessive markups may not be immediately apparent. Investors should ask their financial professional how the firm is compensated on bond transactions, request disclosure of the markup or markdown, and compare prices to recent market transactions for similar bonds.

Show Less