Bad Brokers

According to FINRA, Alan Scot Feigenbaum was fined $15,000 and suspended from association with any FINRA member in all capacities for five months for exercising discretion without written authority in customer accounts, using an unauthorized email account for securities-related communications, and m...

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According to FINRA, Alan Scot Feigenbaum was fined $15,000 and suspended from association with any FINRA member in all capacities for five months for exercising discretion without written authority in customer accounts, using an unauthorized email account for securities-related communications, and mismarking orders.

Feigenbaum was found in violation of multiple rules. First, he exercised discretion without written authorization in customer accounts, including those of senior customers. While the customers permitted Feigenbaum to exercise discretion and had not complained, none had given him written authorization to do so, and neither of his member firms had approved the accounts as discretionary. Feigenbaum exercised discretion despite having previously received a written letter of caution from a supervisor for similar misconduct, demonstrating a pattern of disregarding the rules. Additionally, Feigenbaum inaccurately stated on compliance questionnaires that he had not exercised discretion in any customer account.

Second, Feigenbaum caused one of his firms to create and maintain inaccurate books and records through his use of an unauthorized email account and by mismarking orders as unsolicited. Feigenbaum had an approved outside business through which he provided accounting and tax services to clients. He communicated with certain brokerage customers, including seniors, regarding securities-related matters over the email account he used for his tax preparation business. Because the firm was unaware of and had not authorized use of this email account, it was unable to supervise, preserve, or retain the securities-related emails. Feigenbaum inaccurately stated on compliance questionnaires that he had conducted all business-related communication over his firm email account.

Third, Feigenbaum marked trades in a particular exchange-traded product in customer accounts as unsolicited when he had actually solicited the transactions. Marking trades as unsolicited indicates that the customer initiated the transaction without a recommendation from the representative, which typically reduces the representative's and firm's supervisory obligations regarding suitability. Mismarking solicited trades as unsolicited circumvents these supervisory requirements.

The use of unauthorized email accounts is a serious violation because it prevents firms from supervising communications and detecting potential misconduct. Email surveillance is a critical supervisory tool, and when representatives use personal or outside business email accounts, they deprive firms of the ability to review their communications for red flags. This case demonstrates the importance of representatives conducting all securities business through approved communication channels and accurately completing compliance certifications.

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According to FINRA, E1 Asset Management, Inc. and its principal Ron Yehuda Itin were sanctioned for failing to reasonably supervise the fairness of mark-ups charged to retail customers on corporate bond transactions.

The case reveals a common compliance pitfall in the securities industry. While t...

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According to FINRA, E1 Asset Management, Inc. and its principal Ron Yehuda Itin were sanctioned for failing to reasonably supervise the fairness of mark-ups charged to retail customers on corporate bond transactions.

The case reveals a common compliance pitfall in the securities industry. While the firm had written supervisory procedures identifying factors relevant to reviewing mark-up reasonableness, in practice, Itin and the firm primarily checked whether mark-ups exceeded the five percent guideline without considering other critical factors. They failed to account for the type, availability, and price of securities being sold, or the firm's expenses in executing orders.

The result was that E1 Asset Management charged 3.75 percent mark-ups on widely available corporate bonds where the firm incurred minimal execution expenses. These mark-ups were not fair and reasonable under the circumstances, causing customers to pay $37,629.82 in excessive fees. Compounding the problem, the firm and Itin reviewed monthly TRACE reports comparing their mark-ups to those charged by other broker-dealers but took no investigative steps when discrepancies appeared.

This case highlights the importance of comprehensive supervision in securities firms. Having written procedures is not enough - firms must actually implement them in practice. For investors, this case demonstrates why it's important to understand the fees you're paying and to compare pricing across different brokers, especially when purchasing bonds. Fair pricing should reflect not just an arbitrary percentage, but the actual market conditions and effort involved in executing your trade.

The firm was ordered to pay full restitution plus interest to affected customers, while Itin received a one-month suspension from principal activities and must complete 20 hours of continuing education on supervisory responsibilities.

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According to FINRA, Scotia Capital (USA) Inc. was censured and fined for erroneously over-reporting its short interest positions due to the improper inclusion of non-reportable short positions from omnibus accounts.

Short interest reporting serves a critical function in securities markets by prov...

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According to FINRA, Scotia Capital (USA) Inc. was censured and fined for erroneously over-reporting its short interest positions due to the improper inclusion of non-reportable short positions from omnibus accounts.

Short interest reporting serves a critical function in securities markets by providing transparency about the level of short selling activity in particular securities. Accurate reporting helps market participants make informed decisions and helps regulators monitor for potential market manipulation. In this case, Scotia Capital's errors stemmed from including short positions that did not result from 'short sales' as defined in Regulation SHO Rule 200(a), and were not transactions marked long due to net long positions at the time of transaction.

The problem was compounded by supervisory failures. Scotia Capital lacked a reasonably designed supervisory system for ensuring accurate short interest reporting. The firm had no process to determine whether its reports included non-reportable positions and lacked a reasonable reconciliation process to identify potential inaccuracies. These system gaps allowed the reporting errors to continue undetected.

Following FINRA's findings, the firm has implemented new processes for short interest reporting and supervision to prevent future occurrences. This remediation is crucial because short interest data is widely followed by investors, analysts, and the media as an indicator of market sentiment and potential price movements.

For investors, this case serves as a reminder that the data they rely on for investment decisions depends on firms maintaining accurate reporting systems. While Scotia Capital's over-reporting didn't involve intentional misconduct, it demonstrates how operational and supervisory deficiencies can compromise market data integrity. The substantial fine reflects the importance regulators place on accurate reporting obligations.

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According to FINRA, Dealerweb Inc. was censured and fined for inaccurately reporting transactions in TRACE-eligible securities without the required 'No Remuneration' (NR) indicator.

Dealerweb operated an alternative trading system (ATS) and voice interdealer trading desk that customers accessed v...

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According to FINRA, Dealerweb Inc. was censured and fined for inaccurately reporting transactions in TRACE-eligible securities without the required 'No Remuneration' (NR) indicator.

Dealerweb operated an alternative trading system (ATS) and voice interdealer trading desk that customers accessed via non-transaction-based subscription fees. This meant transaction prices did not include commissions, mark-ups, or mark-downs - triggering the requirement to append the NR indicator to transaction reports. Because most of Dealerweb's subscribers were broker-dealers, most transactions qualified for the inter-dealer exception to the NR indicator requirement. However, in transactions with non-broker-dealer customers such as banks, the firm was required but failed to report using the NR indicator.

The TRACE system (Trade Reporting and Compliance Engine) provides transparency in the fixed income markets by disseminating transaction data to market participants. Accurate reporting, including proper use of modifiers and indicators, is essential for market participants to understand the true nature of reported transactions. The NR indicator specifically signals that reported prices represent actual transaction prices without embedded compensation, which is important information for price discovery.

Dealerweb's supervisory system failures allowed these reporting errors to continue undetected. While the firm performed reviews to identify late reported transactions, it had no process to check the accuracy of transaction information reported, including the NR indicator and other required modifiers. The firm was unaware of the issue until FINRA notified it.

Following the findings, Dealerweb implemented a daily review process for accurate reporting of transaction information and updated its written supervisory procedures accordingly. For market participants, this case highlights the technical complexity of regulatory reporting obligations and the critical importance of comprehensive supervisory systems that verify not just timeliness but also accuracy of regulatory reports.

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According to FINRA, Janney Montgomery Scott LLC was censured, fined, and ordered to pay $145,019 plus interest in restitution to customers for failing to reasonably supervise registered representatives who recommended unsuitably high concentrations of energy-sector securities.

This case illustrat...

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According to FINRA, Janney Montgomery Scott LLC was censured, fined, and ordered to pay $145,019 plus interest in restitution to customers for failing to reasonably supervise registered representatives who recommended unsuitably high concentrations of energy-sector securities.

This case illustrates a critical investment principle: concentration risk. The representatives recommended that customers purchase additional energy-sector securities even after their accounts were already heavily concentrated in that sector. Because these investments focused on a single industry, their value was highly sensitive to shifts in oil and gas prices, subjecting investors to substantial risk if energy prices declined - which ultimately occurred.

The firm had automated alerts designed to identify concentrated positions in particular market sectors, and trades in the affected customers' accounts generated many such alerts. However, Janney Montgomery Scott failed to take reasonable steps to understand the potential risks and rewards of these recommendations or determine whether they were suitable given the customers' investment profiles. The firm did not prevent the representatives from further concentrating customer accounts in energy securities, and as a result, customers suffered realized losses even after accounting for investment income generated.

Suitability obligations require that recommendations be consistent with a customer's investment profile, including their risk tolerance, investment objectives, and financial situation. When a portfolio becomes highly concentrated in a single sector, even relatively modest market movements can produce dramatic portfolio losses. This case underscores why diversification across sectors and asset classes is a foundational principle of prudent investing.

The firm has already paid restitution to eight of the eleven affected customers, with the ordered restitution covering the remaining customers. For investors, this case serves as a reminder to carefully evaluate portfolio concentration and to question recommendations that would substantially increase exposure to any single sector or industry.

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According to FINRA, Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. (RJFS) were sanctioned for multiple supervisory failures, including failing to have qualified principals authorize account name changes on equity orders and failing to supervise representatives who overch...

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According to FINRA, Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. (RJFS) were sanctioned for multiple supervisory failures, including failing to have qualified principals authorize account name changes on equity orders and failing to supervise representatives who overcharged institutional customers approximately $2.4 million in commissions.

The case reveals two distinct compliance breakdowns. First, both firms failed to have registered principals authorize changes to account names or designations on equity orders. A former RJFS representative exploited this gap by changing account designations between customer accounts and his own personal account without principal review, resulting in approximately $100,000 in customer losses. After self-reporting, the firms hired a third-party consultant for a multi-year backward-looking review, leading to identification and reimbursement of losses.

The second and more egregious violation involved RJFS representatives who engaged in a commission overcharge scheme. These representatives would place institutional customer orders, then contact the trading desk to increase commissions before or during order execution. To conceal their misconduct, they created their own trade confirmations with false information - including understated commissions and misstated share prices - which they emailed to customers.

The scheme involved systematic fraud, yet RJFS's email surveillance system flagged hundreds of emails containing the misleading confirmations as attachments. The communications surveillance team reviewed the flagged emails but failed to examine the attachments - a critical oversight. Had they done so, they would have discovered the misrepresentations. Additionally, during a branch inspection, compliance staff identified the representative-created confirmations but no one verified their accuracy.

For investors, this case demonstrates the importance of carefully reviewing trade confirmations and comparing them to market data. It also highlights why firms need robust, multi-layered supervisory systems. RJFS has since designated principals on trade desks to review account changes and has enhanced its communications surveillance procedures.

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According to FINRA, Raymond James Financial Services, Inc. (RJFS) was censured, fined $800,000, ordered to pay $48,574.79 plus interest in restitution, and required to certify completion of its review of policies, procedures, and systems regarding electronic communications monitoring.

This action...

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According to FINRA, Raymond James Financial Services, Inc. (RJFS) was censured, fined $800,000, ordered to pay $48,574.79 plus interest in restitution, and required to certify completion of its review of policies, procedures, and systems regarding electronic communications monitoring.

This action was part of a consolidated case involving both RJFS and Raymond James & Associates. RJFS's specific violations included failing to have qualified principals authorize account name or designation changes on equity orders, which enabled a representative to cause customer losses of approximately $100,000 by switching account designations without authorization.

More significantly, RJFS failed to reasonably supervise registered representatives who systematically overcharged institutional customers approximately $2.4 million in commissions. The representatives operated as a team, placing orders and then instructing the trading desk to increase commissions before execution. They concealed this fraud by creating misleading trade confirmations that understated commissions and misstated share prices, which they emailed directly to customers.

The supervisory failures were particularly troubling. RJFS's email surveillance system electronically flagged hundreds of emails containing the fraudulent confirmations for manual review. The communications surveillance team reviewed these flagged emails but failed to examine the attached confirmations. This represented a critical gap in the firm's supervisory process - the system correctly identified potentially problematic communications, but human reviewers failed to complete the investigation.

Additionally, during a branch inspection, RJFS compliance staff identified the representative-created confirmations and escalated the issue, but no one verified the confirmations for accuracy. The scheme only ended when RJFS flagged an unusually large order for review.

For investors working with institutional brokers, this case underscores the importance of independently verifying trade execution details and maintaining records that can be compared against broker confirmations. Most customers were previously compensated, with the ordered restitution covering remaining losses.

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According to FINRA, BNP Paribas Securities Corp. was censured and fined for over-reporting transactions in U.S. Treasury securities to TRACE and for having supervisory systems that were not reasonably designed to achieve compliance with TRACE reporting requirements.

The firm's over-reporting occu...

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According to FINRA, BNP Paribas Securities Corp. was censured and fined for over-reporting transactions in U.S. Treasury securities to TRACE and for having supervisory systems that were not reasonably designed to achieve compliance with TRACE reporting requirements.

The firm's over-reporting occurred due to a technical error in its data processing. BNP Paribas incorrectly relied upon a data field that did not contain full and complete firm affiliated entity information. As a result, certain internal trades within the firm and transfers between affiliates' portfolios - where no change in beneficial ownership occurred - were erroneously reported to TRACE. Such internal transfers should not be reported as they do not represent actual market transactions between separate parties.

Additionally, the firm incorrectly appended the '.S' modifier to Treasury transactions reported to TRACE. The '.S' modifier indicates that a transaction was part of a series and may not have been priced based on the current market. This inaccurate reporting resulted from the firm's reporting logic failing to interpret the data correctly.

TRACE reporting serves a critical function in bringing transparency to the fixed income markets, which historically operated with less price transparency than equity markets. Accurate reporting is essential for market participants to understand trading activity and for price discovery. Over-reporting can distort market data by making trading volume appear higher than it actually is, while incorrect use of modifiers can mislead market participants about the nature of reported transactions.

The supervisory failures compounded these technical errors. BNP Paribas had no procedures designed to achieve compliance with TRACE reporting requirements concerning over-reporting of transactions with affiliates or accurate use of the '.S' modifier. None of the firm's exception reports or reviews addressed either issue, meaning the firm had no mechanism to detect these errors.

For market participants, this case illustrates how technical system errors can lead to regulatory violations when not caught by adequate supervisory systems. It emphasizes the importance of comprehensive compliance procedures that address all aspects of complex regulatory requirements.

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According to FINRA, RBC Capital Markets, LLC was censured and fined for failing to have a supervisory system reasonably designed to timely review paper statements from employees' outside brokerage accounts.

Securities firms are required to monitor their employees' personal trading to prevent conf...

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According to FINRA, RBC Capital Markets, LLC was censured and fined for failing to have a supervisory system reasonably designed to timely review paper statements from employees' outside brokerage accounts.

Securities firms are required to monitor their employees' personal trading to prevent conflicts of interest, front-running, insider trading, and violations of firm policies. When employees maintain brokerage accounts at other firms, those firms typically send account statements to the employer firm for review. This case highlights what can happen when that review process breaks down.

RBC Capital Markets had no prescribed timeframe to track, reconcile, and review statements from employees' outside accounts. The manual nature of the review process, combined with personnel turnover and outdated technology systems, resulted in a backlog of approximately 8,950 unreviewed account statements. This represented a massive supervisory failure that left the firm unable to monitor employee trading for an extended period.

The problems extended beyond the backlog. The firm manually tracked receipt of paper statements but had no system to notify anyone that statements were missing and no procedure for following up on missing statements. In some instances, the firm never received statements for review. Even when statements were reviewed, the firm's review process was not reasonably designed to effectively monitor compliance with the firm's trading restrictions, including pre-clearance requirements, holding periods, and watch and restricted list policies.

These supervisory requirements exist because securities firm employees often have access to material non-public information and advance knowledge of firm trading activities. Without effective monitoring, employees could potentially exploit their positions for personal gain at the expense of firm customers or violate securities laws.

For those employed in the securities industry, this case underscores the importance of complying with employer policies on outside accounts and recognizes that firms must have robust systems to monitor compliance. The $360,000 fine reflects the seriousness of RBC's systematic supervisory failures over an extended period.

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