Bad Brokers

According to FINRA, Honeycomb Portal LLC was censured and fined $140,000 for violations related to its role as an intermediary in Regulation Crowdfunding (Reg CF) offerings.

The Pittsburgh, Pennsylvania funding portal knew or should have known that a separate funding portal affiliated with an iss...

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According to FINRA, Honeycomb Portal LLC was censured and fined $140,000 for violations related to its role as an intermediary in Regulation Crowdfunding (Reg CF) offerings.

The Pittsburgh, Pennsylvania funding portal knew or should have known that a separate funding portal affiliated with an issuer was improperly acting as an intermediary in two Reg CF offerings where Honeycomb was the designated intermediary.

Under Reg CF Rule 100(a)(3), crowdfunding offerings must be conducted exclusively through one intermediary. However, the affiliated funding portal was performing functions that only the designated intermediary should perform. Honeycomb lacked a reasonable basis to believe the issuer was complying with this single-intermediary requirement.

Additionally, Honeycomb failed to preserve certain required records, including electronic communications with the issuer related to the two offerings. The firm deleted or permitted the affiliated funding portal to delete these communications without retaining copies.

Regulation Crowdfunding allows companies to raise capital from the general public through online platforms, but includes important investor protections. The requirement that offerings proceed through a single intermediary helps ensure proper oversight and prevents confusion about which entity is responsible for compliance.

Record preservation requirements exist to allow regulators to investigate potential violations and to protect investors who may later have questions about how an offering was conducted.

For investors considering crowdfunding investments, this case highlights the importance of understanding who is serving as the intermediary for an offering and verifying that proper procedures are being followed. Crowdfunding investments carry significant risks, and the regulatory framework is designed to provide some protections—but only if intermediaries follow the rules.

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According to FINRA, Public Ventures, LLC, doing business as MDB Capital, was censured and fined $50,000 for failing to establish adequate supervisory systems to address conflicts of interest and prevent misuse of material nonpublic information (MNPI).

The Addison, Texas firm's written supervisory...

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According to FINRA, Public Ventures, LLC, doing business as MDB Capital, was censured and fined $50,000 for failing to establish adequate supervisory systems to address conflicts of interest and prevent misuse of material nonpublic information (MNPI).

The Addison, Texas firm's written supervisory procedures required trade blotter reviews but did not describe how reviews should be conducted or specifically address trading in start-up companies' stock. In practice, the firm's surveillance of such trading relied on reviews that did not clearly identify trades subject to certain conflicts of interest. Other supervisory reviews were conducted on an ad hoc basis without written criteria or documentation.

More concerning, the firm's supervisory system did not reasonably address the potential for misuse of MNPI when firm representatives served on the boards of start-up companies. Board members of companies often have access to material nonpublic information about earnings, business developments, and other matters that could affect stock prices.

The firm had a general "Need to Know" policy and required annual attestations, but these measures were insufficient. The attestation did not ask representatives whether they possessed or had possessed MNPI. The policy and procedures did not address situations where representatives served on company boards or establish reasonable procedures to prevent MNPI from being shared with colleagues and customers.

Instead of proactive controls, the firm relied on start-up companies and representatives to independently identify and notify the firm when they came into possession of MNPI—an approach that provides inadequate protection against insider trading.

For investors, insider trading undermines market fairness. When company insiders or those with access to inside information trade ahead of public announcements, other investors are disadvantaged.

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According to FINRA, Wells Fargo Clearing Services, LLC was censured and fined $150,000 for failing to establish and maintain adequate supervisory systems to safeguard customer information.

The St. Louis, Missouri firm had a process to notify insurance carriers when registered representatives left...

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According to FINRA, Wells Fargo Clearing Services, LLC was censured and fined $150,000 for failing to establish and maintain adequate supervisory systems to safeguard customer information.

The St. Louis, Missouri firm had a process to notify insurance carriers when registered representatives left the firm so that the carriers would remove the former representatives' access to customer variable annuity accounts. However, the firm only provided notice for representatives categorized as "producing" (those who sold products to customers) and not for "non-producing" representatives.

The problem arose because the firm miscategorized certain producing representatives as non-producing in its internal system. When these representatives departed, insurance carriers were not notified. As a result, former representatives continued to have access to firm customers' variable annuity accounts on carrier portals.

The information accessible included customers' names, addresses, account numbers, account balances, and in at least some instances, other nonpublic personal information such as dates of birth and social security numbers.

This type of continued access creates risks that former employees could misuse customer information for identity theft, unauthorized account access, or improper solicitation.

The firm has since notified the carriers of the formerly omitted representatives and modified its procedures to require notification for all departing representatives regardless of their producing or non-producing status.

For investors, this case highlights the importance of data security even after a representative leaves a firm. If you have variable annuities and your representative has left their firm, consider checking with the insurance carrier to confirm that only authorized individuals have access to your account information.

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According to FINRA, AAG Capital, Inc. was censured, fined $100,000, and ordered to pay $38,591.39 plus interest in restitution to customers for failing to adequately supervise recommendations of registered index-linked annuities (RILAs).

The Wesley Chapel, Florida firm failed to establish written...

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According to FINRA, AAG Capital, Inc. was censured, fined $100,000, and ordered to pay $38,591.39 plus interest in restitution to customers for failing to adequately supervise recommendations of registered index-linked annuities (RILAs).

The Wesley Chapel, Florida firm failed to establish written policies, procedures, and a supervisory system reasonably designed to comply with Regulation Best Interest for RILA recommendations to retail customers.

The firm did not reasonably supervise recommendations that customers exchange insurance policies, fixed index annuities, and variable annuities for RILAs. When reviewing these exchange recommendations, the firm failed to consider various disadvantages including relinquishment of death benefits or income riders and incurrence of surrender charges.

The documentation submitted for supervisory review included only limited comparative disclosures. It did not contain sufficient information to determine why customers would benefit from the recommended RILA despite the disadvantages of surrendering their existing investments.

The firm's supervisory system also failed to identify and follow up on red flags such as patterns of customers relinquishing valuable riders and benefits and incurring surrender charges as a result of exchange recommendations.

RILAs, sometimes called "buffer annuities," offer some downside protection while providing exposure to market gains. However, they may lack features available in other annuity types, such as death benefits or guaranteed income riders. When customers exchange existing annuities for RILAs, they may lose valuable benefits and incur surrender charges.

For investors considering an annuity exchange, carefully compare all features and costs of your existing product against the proposed replacement. Ensure you understand what benefits you may be giving up and what costs you may incur.

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According to FINRA, Calton & Associates, Inc. was censured and fined $75,000 for failing to disclose required mark-up and mark-down information on customer confirmations and for trade reporting violations.

The Tampa, Florida firm failed to disclose required mark-up and mark-down information on hu...

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According to FINRA, Calton & Associates, Inc. was censured and fined $75,000 for failing to disclose required mark-up and mark-down information on customer confirmations and for trade reporting violations.

The Tampa, Florida firm failed to disclose required mark-up and mark-down information on hundreds of retail customer confirmations for municipal securities and corporate and agency debt securities transactions. These failures stemmed from inadvertent errors made when personnel manually entered orders into the clearing firm's system.

Mark-up and mark-down disclosures help customers understand the cost of their fixed income transactions. When a firm buys a bond and sells it to a customer at a higher price, the difference is the mark-up. These disclosures allow investors to assess whether they're receiving fair pricing.

Additionally, the firm reported incorrect execution times for municipal and corporate bond transactions. The firm uniformly reported "00" in the seconds field for these transactions, even though its system could correctly report seconds and the actual execution time was known.

The firm's supervisory system was not reasonably designed for compliance with trade reporting rules. Until April 2021, the firm's procedures did not address the requirement to report time of trade to the second. Updated procedures explaining how to review report accuracy, review frequency, and documentation methods were not implemented until July 2024.

Accurate trade reporting supports market transparency. The Real-Time Transaction Reporting System for municipal securities and TRACE for corporate bonds rely on accurate time reporting to provide meaningful information about market activity.

For fixed income investors, always review your trade confirmations to ensure you understand the costs of your transactions, including any mark-ups or mark-downs.

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According to FINRA, Open to the Public Investing, Inc. was censured and fined $350,000 for paying social media influencers to promote the firm through communications that were not fair and balanced or that made misleading claims.

The New York firm paid influencers either a fee per post or a fee f...

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According to FINRA, Open to the Public Investing, Inc. was censured and fined $350,000 for paying social media influencers to promote the firm through communications that were not fair and balanced or that made misleading claims.

The New York firm paid influencers either a fee per post or a fee for every new account opened using a unique referral link. The firm did not limit how much compensation influencers could earn. The influencer posts were widely distributed, resulting in more than 23,000 new accounts being opened and funded using the referral links.

Influencers claimed the firm offered "commission free trades" without disclosing that other fees may apply or providing a link to the firm's fee schedule. Some promoted fractional share investing without disclosing limitations such as the inability to transfer fractional shares to another broker-dealer.

Several posts failed to clearly identify themselves as paid advertisements, which is required for sponsored content promoting financial services.

The firm did not have a registered principal review and approve all influencer posts before publication. It also failed to maintain copies of all posts or records of which principal approved which communication.

The firm's supervisory system was not reasonably designed to oversee influencer communications. As a result, the firm could not review and approve content before distribution or maintain required records.

The firm has since revised its procedures to enhance supervision of influencer communications.

For investors, this case is a reminder that social media content promoting investment platforms may be paid advertising. "Commission free" claims may not tell the whole story about costs. Always review a firm's fee schedule before opening an account, and understand limitations on products like fractional shares.

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According to FINRA, Firstrade Securities Inc. was censured and fined $85,000 for distributing retail communications about crypto assets that failed to make required disclosures and were not fair and balanced.

The Flushing, New York firm's communications concerning crypto assets offered by an affi...

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According to FINRA, Firstrade Securities Inc. was censured and fined $85,000 for distributing retail communications about crypto assets that failed to make required disclosures and were not fair and balanced.

The Flushing, New York firm's communications concerning crypto assets offered by an affiliate failed to prominently disclose that the crypto assets were not offered by the firm itself. The affiliate was not a registered broker-dealer or member of FINRA or the Securities Investor Protection Corporation (SIPC).

This distinction matters significantly for investors. When you invest through a registered broker-dealer that is a SIPC member, your securities are protected up to certain limits if the firm fails. Crypto assets held by an unregistered affiliate do not receive this protection.

Many of the communications also failed to prominently disclose the name of the firm or clarify which products were being offered by the registered broker-dealer versus the unregistered affiliate.

Additionally, most communications failed to provide balanced treatment of risks and potential benefits. They omitted that the crypto assets were speculative and involved a high degree of risk.

The firm's crypto affiliate has since ceased offering crypto assets, and the firm stopped distributing these communications.

For investors considering crypto assets through any platform, it is critical to understand which entity is offering the product and what protections, if any, apply. Crypto assets are speculative investments that can lose significant value rapidly. They generally do not receive the same protections as securities held at registered broker-dealers.

Always verify whether a product is offered by a registered, SIPC-member firm or by an unregistered affiliate, and understand the implications for your investment protection.

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According to FINRA, Barclays Capital Inc. was censured and fined $2,250,000 (with $303,000 payable to FINRA) for failing to establish adequate supervisory systems and risk management controls to monitor for potential layering and spoofing of options.

The New York firm sent millions of options ord...

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According to FINRA, Barclays Capital Inc. was censured and fined $2,250,000 (with $303,000 payable to FINRA) for failing to establish adequate supervisory systems and risk management controls to monitor for potential layering and spoofing of options.

The New York firm sent millions of options orders to exchanges without any surveillance for spoofing or layering. None of the firm's surveillances for these manipulative practices included options order activity, and its written supervisory procedures did not reference surveilling options for these purposes.

The firm also failed to maintain regulatory risk management controls and post-trade execution reports that would allow surveillance of options orders routed directly to exchanges.

Additionally, the firm's surveillance parameters for detecting manipulation were unreasonably designed. The parameters required that aggregated potentially manipulative order volume be at least 20 times greater than the average trade size—a threshold the firm later lowered after recognizing that layering and spoofing can occur with smaller orders.

For equities surveillance, the firm mistakenly designated two national securities exchanges as "dark" venues instead of "lit" venues when implementing a third-party surveillance system. This error caused all equities order flow to these exchanges to be excluded from layering and spoofing surveillance.

Layering and spoofing are forms of market manipulation where traders place orders they intend to cancel before execution to create a false impression of supply or demand. These practices harm other market participants who make decisions based on what appears to be genuine interest.

The firm has since corrected the exchange designations and begun surveilling the previously excluded order flow.

For investors, market manipulation surveillance by broker-dealers helps maintain fair and orderly markets. When firms fail to monitor for manipulation, it can harm market integrity.

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According to FINRA, General Securities Corp was censured and fined $25,000 for willfully failing to disclose disciplinary history in its customer relationship summary (Form CRS).

The North Kansas City, Missouri firm failed to respond "Yes" to the question about legal and disciplinary history when...

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According to FINRA, General Securities Corp was censured and fined $25,000 for willfully failing to disclose disciplinary history in its customer relationship summary (Form CRS).

The North Kansas City, Missouri firm failed to respond "Yes" to the question about legal and disciplinary history when it filed its initial Form CRS, despite the fact that the firm and two of its registered representatives had prior reportable legal or disciplinary history. The firm's Form CRS also omitted the required heading and conversation starters for Item 4.

Subsequently, the firm filed an amended Form CRS that responded "Yes" to the disciplinary history question. However, the amended form still omitted the required heading.

Form CRS is designed to help retail investors understand the nature of their relationship with a broker-dealer or investment adviser. The disciplinary history section is particularly important because it alerts investors to past problems that may be relevant to their decision to do business with a firm.

When firms fail to accurately disclose disciplinary history, investors cannot make fully informed choices. The "conversation starters" that were omitted are questions investors can ask to learn more about the firm and its services.

Investors can access any broker-dealer's Form CRS and detailed disciplinary history through FINRA BrokerCheck. Before opening an account, reviewing this information can help you understand whether there have been past regulatory issues.

The firm has been required to undertake corrective measures as part of the settlement.

For investors, always review a firm's Form CRS and check BrokerCheck before establishing a relationship. Don't rely solely on what the firm tells you—verify disciplinary history independently.

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According to FINRA, Mario L. Martinez of Miami, Florida was barred from association with any FINRA member in all capacities for failing to provide documents and information requested by FINRA during an investigation.

The investigation arose from a tip received by FINRA concerning allegations that...

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According to FINRA, Mario L. Martinez of Miami, Florida was barred from association with any FINRA member in all capacities for failing to provide documents and information requested by FINRA during an investigation.

The investigation arose from a tip received by FINRA concerning allegations that Martinez took a loan from a client, among other things. When FINRA requested documents and information to investigate these allegations, Martinez failed to provide them.

Borrowing from customers is a serious concern in the securities industry. FINRA rules generally prohibit registered representatives from borrowing money from customers except in very limited circumstances that require firm knowledge and, in most cases, approval. These restrictions exist because borrowing arrangements create conflicts of interest and can lead to customer harm if the broker cannot repay.

When Martinez failed to cooperate with the investigation, FINRA was unable to determine the full scope of the alleged conduct or whether customers were harmed.

A bar from the securities industry is a permanent sanction that prevents an individual from working with any FINRA member firm in any capacity. Failure to cooperate with FINRA investigations typically results in a bar because cooperation is a fundamental obligation of all registered persons.

For investors who may have had a relationship with Martinez, this bar and the underlying allegations should prompt a review of your accounts. If you loaned money to Martinez or have any concerns about your account, you may wish to consult with a securities attorney about your options.

Investors can verify any broker's current status and view regulatory history through FINRA BrokerCheck.

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