Bad Brokers

According to FINRA, David Charles Levine was fined $10,000 and suspended for one month for attempting to recoup sales representatives' selling concessions in the absence of a penalty bid applied to the entire syndicate.

Levine's member firm acted as lead underwriter or co-manager for three Initia...

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According to FINRA, David Charles Levine was fined $10,000 and suspended for one month for attempting to recoup sales representatives' selling concessions in the absence of a penalty bid applied to the entire syndicate.

Levine's member firm acted as lead underwriter or co-manager for three Initial Public Offerings (IPOs). In his roles as the firm's chief executive officer during one IPO and sales manager during the other two IPOs, Levine participated in announcing the terms of the offerings to the firm's sales force. He directed members of the firm's syndicate department to send launch emails to its sales force in connection with the IPOs, which included flipper policies.

Despite the absence of a syndicate penalty bid, Levine directed the firm's branch managers and sales representatives that the firm would be implementing a flipper policy. Under this policy, the firm would track sales of the new issue for 30 days following each offering and recoup selling concessions from representatives whose customers flipped shares during that time frame.

A penalty bid is a mechanism used in underwriting syndicates where the managing underwriter may reclaim selling concessions paid to syndicate members when securities they sold are subsequently sold (flipped) shortly after the offering. However, penalty bids must be applied consistently across the entire syndicate. Levine's approach of imposing a flipper policy only on his own firm's representatives, without a syndicate-wide penalty bid, violated FINRA rules.

Flipping refers to the practice of purchasing IPO shares and quickly selling them for a profit, often on the first day of trading. While flipping itself is not illegal, underwriters discourage it because excessive flipping can harm price stability in newly public companies. However, the methods used to discourage flipping must comply with securities regulations.

By imposing a flipper policy without a proper syndicate penalty bid, Levine attempted to recoup selling concessions in a manner that wasn't properly structured or disclosed. This created unfair treatment of the firm's representatives compared to how such policies should be implemented in underwriting syndicates.

For investors, this case illustrates the complex rules governing IPO distributions and underwriting practices. While investors might view IPOs as straightforward investment opportunities, there are extensive regulations governing how underwriters can structure compensation, discourage flipping, and implement penalty provisions. These rules exist to ensure fair treatment and proper disclosure. The suspension is in effect from June 21, 2022, through July 20, 2022.

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According to FINRA, Philip Norris Smith was fined $5,000 and suspended for three months for making unsuitable recommendations for a family trust formed by a senior married couple. Restitution was not ordered because Smith's member firm compensated the trust in connection with settlement of an arbitr...

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According to FINRA, Philip Norris Smith was fined $5,000 and suspended for three months for making unsuitable recommendations for a family trust formed by a senior married couple. Restitution was not ordered because Smith's member firm compensated the trust in connection with settlement of an arbitration claim.

Smith and another registered representative at the firm recommended that the trust purchase a deferred variable annuity for approximately $540,000 and fund that purchase through two withdrawals from an indexed annuity owned by the trust. Smith was aware that funding the purchase of the variable annuity with withdrawals from the trust's existing annuity could result in negative tax consequences for the trust and was also aware that the recommendation to purchase the variable annuity would not be suitable if it caused negative tax consequences.

However, neither Smith nor the other representative researched how the trust might purchase the variable annuity without negative tax consequences. Instead, Smith recommended that the trust withdraw funds from the indexed annuity via two checks payable to the trust and immediately endorse the checks as payable to the firm to fund the purchase of the variable annuity. The trust, through its trustee, followed Smith's recommendations.

Smith mistakenly believed that having the trust immediately endorse the checks as payable to the firm would avoid adverse tax consequences, but he did not confirm that belief. The withdrawal of funds from the indexed annuity were, in fact, taxable events that resulted in negative tax consequences to the trust. The adverse tax consequences could have been avoided if Smith or the other representative had recommended the new variable annuity be purchased as a tax-free 1035 exchange, but they failed to research that option.

A 1035 exchange allows for tax-free exchanges of annuities and certain other insurance products. This well-established provision of the tax code exists specifically to allow policyholders to exchange annuities without triggering immediate tax liability. The representatives' failure to research and recommend this option when they knew tax consequences were a concern represents a serious lapse in their professional duties.

Smith's case is part of the same unsuitable transaction as Camille Cordova's case described earlier. Both representatives worked together on this transaction and both failed to properly research the tax implications. The fact that both representatives were aware of potential tax consequences but failed to research how to avoid them makes this violation particularly problematic. They knew they needed to avoid tax consequences for the recommendation to be suitable, yet they proceeded without confirming whether their approach would succeed.

For investors with trusts or other complex financial structures, this case emphasizes the critical importance of working with representatives who understand tax implications and take time to research proper transaction structuring. The suspension is in effect from June 21, 2022, through September 20, 2022.

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According to FINRA, Peter James Fetherston is facing charges that he converted and misused customer funds totaling $89,000.

The complaint alleges that Fetherston induced two customers, a married couple, to write him three checks totaling $89,000 by falsely representing that they owed him commissi...

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According to FINRA, Peter James Fetherston is facing charges that he converted and misused customer funds totaling $89,000.

The complaint alleges that Fetherston induced two customers, a married couple, to write him three checks totaling $89,000 by falsely representing that they owed him commissions and that he would use a portion of the funds to purchase additional investments in their account at his member firm. In reality, the customers did not owe Fetherston any commissions, and he never invested any of the funds on their behalf. Instead, Fetherston allegedly deposited the checks into his personal bank account and spent the funds on personal expenses, including paying off significant debt.

The complaint also alleges that Fetherston provided false or misleading information, documents, and testimony to FINRA during its investigation. In response to FINRA's request for information about his receipt and use of the $89,000, Fetherston allegedly falsely stated that the customers gave him the funds to help him pay his medical bills and expenses. He then allegedly provided FINRA with a handwritten note, purportedly drafted and signed by the customers, stating they gave him the three checks to help pay his medical expenses and associated costs.

However, the customers neither wrote nor signed any such note and did not give Fetherston any funds for medical expenses. During on-the-record testimony, Fetherston allegedly falsely testified that the customers gave him the money for medical expenses and that the customers wrote and signed the handwritten note.

Additionally, the complaint alleges that Fetherston failed to respond completely to FINRA's written requests for information. While he provided a partial response, it was incomplete because he failed to identify the medical expenses he supposedly paid with the money obtained from the customers.

These allegations, if proven, describe serious fraud involving conversion of customer funds, fabrication of documents, and false testimony. This represents a complete breakdown of the trust relationship between a financial professional and clients. The allegations suggest a deliberate scheme to defraud customers and then cover up the fraud by lying to regulators and fabricating evidence.

It is important to note that these are allegations in a complaint, and findings have not yet been made. Fetherston has the right to defend against these charges, and the complaint does not represent a decision as to the allegations. For investors, however, the allegations serve as a reminder to be cautious about writing checks payable to financial professionals personally rather than to the firm or investment custodian.

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According to FINRA, Matthew Howard Smith is facing charges that he twice failed to appear for on-the-record testimony requested by FINRA.

The complaint alleges that Smith failed to appear for testimony in connection with FINRA's investigation into allegations that he, among other things, may have...

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According to FINRA, Matthew Howard Smith is facing charges that he twice failed to appear for on-the-record testimony requested by FINRA.

The complaint alleges that Smith failed to appear for testimony in connection with FINRA's investigation into allegations that he, among other things, may have engaged in structuring of cash withdrawal transactions. Structuring involves breaking up cash transactions into smaller amounts to avoid reporting requirements. Financial institutions must report cash transactions exceeding $10,000 to the government under the Bank Secrecy Act. When individuals deliberately structure transactions to stay below this reporting threshold, it constitutes a federal crime.

The investigation into potential structuring is serious because this conduct is often associated with money laundering, tax evasion, or other financial crimes. Individuals who structure cash transactions may be attempting to hide income, avoid taxes, or conceal the movement of funds for illegal purposes.

Smith allegedly twice failed to appear for on-the-record testimony about these matters. Repeated failures to appear for testimony demonstrate particularly serious disregard for regulatory authority. While a single failure to appear might be explained by scheduling conflicts or misunderstandings, two failures suggest intentional refusal to cooperate.

On-the-record testimony is a critical regulatory tool that allows FINRA to investigate potential violations and protect investors. When individuals refuse to appear for testimony, they prevent FINRA from determining what happened and whether customers or the markets were harmed. The refusal to appear is particularly problematic when the underlying investigation involves potential criminal conduct like structuring.

It is important to note that these are allegations in a complaint, and findings have not yet been made. Smith has the right to defend against these charges, and the complaint does not represent a decision as to the allegations.

For investors, this case illustrates the importance of cooperation with regulatory investigations and the seriousness with which regulators view potential structuring and money laundering violations. Investors should be aware that financial professionals who engage in suspicious cash transaction patterns may be involved in illegal activity. Additionally, repeated refusals to cooperate with regulatory investigations are serious red flags that suggest an individual may be hiding misconduct. Investors should check BrokerCheck to review their financial professional's regulatory history and be alert for any indications of investigations into financial crimes or failures to cooperate with regulators.

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According to FINRA, Wefunder was fined $1.4 million for failing to comply with securities laws and rules designed to protect crowdfunding investors.

From 2016 through 2021, across 39 separate offerings, Wefunder raised approximately $20 million more than permitted under crowdfunding raise limits....

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According to FINRA, Wefunder was fined $1.4 million for failing to comply with securities laws and rules designed to protect crowdfunding investors.

From 2016 through 2021, across 39 separate offerings, Wefunder raised approximately $20 million more than permitted under crowdfunding raise limits. The funding portal did this by diverting excess funds raised in crowdfunding offerings to subsequent offerings conducted under a different exemption from registration. FINRA found that by doing so, Wefunder exceeded the scope of its permitted activities as a funding portal.

Funding portals are a special type of FINRA member created under the JOBS Act to facilitate crowdfunding offerings under Regulation Crowdfunding (Regulation CF). These portals have limited permitted activities and are subject to specific restrictions designed to protect the mostly retail investors who participate in crowdfunding. One key restriction is that funding portals cannot provide investment advice or recommendations.

FINRA found that Wefunder failed to promptly direct the transmission of funds to issuers or investors as required. The portal also improperly sent emails to hundreds of thousands of investors recommending and soliciting investments being offered on its portal, violating the rule prohibiting such solicitations. Additionally, Wefunder included misleading communications on its funding portal website.

The findings also stated that Wefunder failed to maintain a reasonable supervisory system to supervise its business, including its process for tracking investments. As late as 2021, the portal's own officers recognized in internal emails that its processes were flawed, with one officer criticizing another for failure to delegate.

As part of the settlement, Wefunder will be required to retain an independent consultant to make recommendations to improve its systems and procedures. This remedial measure is designed to address the systemic failures in the portal's operations and supervision.

Crowdfunding offers important opportunities for small businesses to raise capital and for retail investors to participate in early-stage investing. However, these investments carry substantial risks, and the regulatory framework is designed to provide investor protections. When funding portals violate these rules, they undermine investor protections and put crowdfunding participants at risk.

For investors, this case highlights the importance of understanding the limitations and risks of crowdfunding investments. Even registered funding portals can have significant compliance failures. Investors should carefully review offering materials, understand that funding portals cannot provide investment advice, and be skeptical of communications that appear to recommend particular investments.

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According to FINRA, StartEngine Capital was fined $350,000 for posting false or misleading communications on its crowdfunding portal website and failing to reasonably supervise issuer-prepared content.

Between November 2016 and January 2018, StartEngine included issuer communications on its fundi...

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According to FINRA, StartEngine Capital was fined $350,000 for posting false or misleading communications on its crowdfunding portal website and failing to reasonably supervise issuer-prepared content.

Between November 2016 and January 2018, StartEngine included issuer communications on its funding portal website that it knew or had reason to know were false or misleading. The portal also posted its own inaccurate counts of the number of investors in offerings on its portal and failed to reasonably supervise potentially misleading issuer-prepared content.

One particularly egregious example involved an issuer whose product was a home robot. The issuer exaggerated the robot's level of functionality in a demonstration video posted on the StartEngine website. The video depicted the robot independently performing various tasks including waking sleeping family members, teaching a child piano and art, projecting a recipe onto a cutting board, patrolling a home for intruders, adjusting a thermostat, and playing peek-a-boo with a child.

During the offering, StartEngine received information that caused it to know or had reason to know that these claims were exaggerated and misleading, but it failed to correct them. Although a disclaimer on the offering page noted that the robot was a work-in-progress, it was insufficient to remediate the misleading content. A generic disclaimer cannot cure specific false or misleading statements, particularly when they are presented in a compelling video format that suggests the robot's capabilities are real and functional.

Funding portals have a gatekeeping role in crowdfunding offerings. While they cannot provide investment advice or recommendations, they must ensure that communications on their platforms are not false or misleading. When portals know or have reason to know that issuer materials are misleading, they have an obligation to require corrections or remove the materials.

The false investor count information is also concerning because social proof, the number of other investors participating, can significantly influence investment decisions. When portals inflate investor counts, they may induce additional investments based on false information about the offering's popularity.

For investors, this case illustrates the risks of relying on information presented on crowdfunding portals. Even videos and demonstrations may not accurately represent a product's current capabilities. Investors should carefully read all disclaimers, be skeptical of claims that seem too good to be true, and understand that early-stage products often have significant development remaining before they achieve demonstrated functionality.

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According to FINRA, Glendale Securities, Inc. and its compliance officer Albert Raymond Laubenstein were sanctioned for significant failures in their anti-money laundering (AML) program related to their microcap stock liquidation business.

The firm was fined $155,000 and ordered to retain a consu...

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According to FINRA, Glendale Securities, Inc. and its compliance officer Albert Raymond Laubenstein were sanctioned for significant failures in their anti-money laundering (AML) program related to their microcap stock liquidation business.

The firm was fined $155,000 and ordered to retain a consultant to overhaul its AML procedures, while Laubenstein faces a combined 18-month suspension plus 15 business days, along with a $25,000 fine. The violations centered on their failure to detect and investigate suspicious trading activity involving millions of dollars in stock liquidations over nearly a year, despite numerous red flags suggesting potential promotional activity and pump-and-dump schemes.

Significantly, the firm and Laubenstein failed to properly implement their customer identification program (CIP). They relied heavily on a customer representative who opened multiple accounts without the firm meeting the actual customers in person or verifying identities through non-documentary means as their own procedures required. Additionally, they failed to conduct adequate due diligence on a Belize-based bank that introduced customers to the firm, essentially outsourcing their AML compliance obligations to an unvetted third party.

FINRA also found supervisory failures regarding a registered representative serving Asia-based customers. Laubenstein approved accounts and monitored emails using only English keyword searches, rendering his supervision ineffective for communications that may have been conducted in other languages or using translated documents whose accuracy was never verified.

This case illustrates the critical importance of robust AML programs, especially for firms engaged in high-risk business models like microcap liquidations. Investors should verify that their brokerage firms have adequate compliance systems and truly know their customers. The failure to investigate obvious red flags allowed misconduct that undermined market integrity and potentially facilitated fraud. Firms cannot simply rely on third parties or use ineffective monitoring tools—they must actively investigate suspicious patterns and maintain comprehensive oversight of all customer accounts and representative activities.

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According to FINRA, Newbridge Securities Corporation and its managing director Bruce Howard Jordan were sanctioned for failing to comply with escrow requirements and improperly handling contingency offerings, resulting in willful violations of Rule 10b-9 of the Securities Exchange Act.

The firm w...

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According to FINRA, Newbridge Securities Corporation and its managing director Bruce Howard Jordan were sanctioned for failing to comply with escrow requirements and improperly handling contingency offerings, resulting in willful violations of Rule 10b-9 of the Securities Exchange Act.

The firm was fined $30,000 and Jordan received a $5,000 fine plus a one-month suspension from principal capacities. The violations involved the firm acting as placement agent for contingency offerings where investor funds must be held in escrow until minimum investment thresholds are met. Instead of using a bank as required by their own procedures, the firm used a law firm as escrow agent and failed to use their standard escrow agreement. Jordan, who was specifically assigned responsibility for these offerings, failed to enforce the firm's written procedures.

In one particularly troubling instance, the firm improperly counted a non-bona fide investment toward the minimum contingency calculation and released funds from escrow. Without this questionable investment, the offering minimum would not have been met. The firm's procedures provided no guidance on what constituted a bona fide investment, and Jordan failed to investigate before declaring the offering sold and releasing investor funds.

In a second offering, when the minimum contingency was not met by the deadline, the firm extended the closing date without sending written reconfirmation offers to existing investors beforehand. Instead, investors received only a supplement telling them to contact the firm if they wished to opt out. No investors confirmed their continued participation in writing, yet the firm released all funds to the issuer after the extended deadline.

These violations demonstrate why escrow and contingency requirements exist—to protect investors from having their money tied up in offerings that fail to meet minimum thresholds. Investors participating in contingency offerings should verify that their funds are held in proper escrow at a bank, confirm the offering terms including deadlines and minimums, and ensure they receive proper written notice of any material changes. Firms and their principals cannot take shortcuts with these investor protection rules, even when issuers pressure them to close deals.

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According to FINRA, WestPark Capital, Inc. and its principal Richard Alyn Rappaport were sanctioned for making negligent misrepresentations and material omissions when selling promissory notes issued by the firm's parent company to customers, violating Sections 17(a)(2) and (3) of the Securities Act...

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According to FINRA, WestPark Capital, Inc. and its principal Richard Alyn Rappaport were sanctioned for making negligent misrepresentations and material omissions when selling promissory notes issued by the firm's parent company to customers, violating Sections 17(a)(2) and (3) of the Securities Act of 1933.

The firm was fined $250,000, ordered to offer rescission totaling $1,777,316 to customers who invested in the notes, and must extend compliance with FINRA's "Taping Rule" for six additional months. Rappaport received a $30,000 fine and concurrent suspensions of four months in all capacities and 15 months in principal capacities. The violations involved offering documents that failed to disclose that the parent company had defaulted on a $1 million line of credit, violated forbearance agreements with a bank, faced a lawsuit from that bank, and suffered net operating losses from 2012 through 2016.

The firm also provided investors with a misleading historical analysis document created by Rappaport that purported to show returns investors would have received on the notes from 2006-2010. However, the document failed to explain that the calculations were based on hypothetical returns from different investments, not actual returns from the notes themselves. Additionally, firm representatives told prospective investors they would share in pro-rata distributions of equity and profits from the firm, when in reality the notes entitled holders to distributions from the parent company, which had lower profits and fewer equity-producing opportunities.

The firm and Rappaport also failed to disclose that Rappaport had sole discretion over whether subsidiaries would make distributions to the parent company—a material conflict of interest. Beyond the misrepresentations, FINRA found supervisory failures, as the firm did not properly train representatives about the notes and failed to respond reasonably to customer questions that raised red flags about misinformation.

The case also involved violations of FINRA Rule 3170 (the "Taping Rule"), as the firm's recording system allowed representatives to terminate recordings at their discretion, and the firm failed to detect that at least three recordings with noteholders were terminated before calls ended.

This case highlights the severe conflicts of interest when brokerage firms sell securities issued by their parent companies. Investors should be highly skeptical of such offerings, carefully review all disclosure documents for completeness, and verify claims about returns and distributions independently. Material omissions about financial distress, defaults, and lawsuits constitute fraud, even without explicit false statements. When firms have built-in conflicts like control over distributions, full disclosure is essential.

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According to FINRA, Traderfield Securities, Inc. and its principal Mario Divita were sanctioned for failing to establish adequate supervisory systems to detect and prevent excessive trading, and for failing to reasonably supervise a registered representative who engaged in excessive trading that cos...

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According to FINRA, Traderfield Securities, Inc. and its principal Mario Divita were sanctioned for failing to establish adequate supervisory systems to detect and prevent excessive trading, and for failing to reasonably supervise a registered representative who engaged in excessive trading that cost customers $451,057 in commissions and $538,057 in losses.

The firm was ordered to pay $300,000 in partial restitution to customers and must revise its supervisory procedures. Divita was fined $5,000, suspended from principal capacities for three months, and ordered to complete 24 hours of continuing education on supervisory responsibilities. FINRA imposed no additional fine against the firm after considering its revenues and financial resources.

The firm's written supervisory procedures tasked supervisors with monitoring for excessive trading through trade blotters, account statements, exception reports, and commission reports, but failed to explain how to identify excessive trading or how to respond when discovered. Making matters worse, supervisors did not actually review the exception reports as required by the procedures. The firm's procedures also failed to designate a supervisor for the representative engaged in the excessive trading, leaving no one monitoring his activities initially.

When Divita eventually began supervising the representative, he failed to take reasonable steps to detect the excessive trading. Despite knowing the representative's customers were responsible for large trading volumes at the firm, Divita never reviewed exception reports for potential excessive trading. Instead, he only reviewed daily trade reports and focused merely on volume rather than analyzing whether the trading patterns were suitable. Critically, Divita failed to monitor the significant losses piling up in customer accounts, did not view high commissions as a red flag, and did not understand or analyze key metrics like turnover rates and cost-to-equity ratios that would have revealed the excessive trading.

The firm also failed to report customer complaints to FINRA about the representative's trading activity, including complaints about excessive commissions, account losses, and alleged unauthorized trading.

This case demonstrates that supervisory procedures must do more than assign tasks—they must provide meaningful guidance on how to identify problems and what actions to take. Investors should review their account statements regularly and be alert to high commission charges relative to account value, frequent trading that seems inconsistent with their investment objectives, and supervisors who seem unfamiliar with basic suitability metrics.

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