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FINRA Fines David Lerner Associates $2.3 Million

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David Lerner Associates, Inc. (DLA) of Long Island was fined $2.3 million by FINRA, the Financial Industry Regulatory Authority, for selling municipal bonds and collateralized mortgage obligations (CMOs) to retail customers at unfair prices, and for supervisory violations. In addition to providing restitution to customers, the firm’s head trader, William Mason is suspended and fined $200,000. The ruling resolves charges brought by FINRA’s Department of Enforcement in May 2010.

The panel found that from January 2005 through January 2007, DLA and Mason charged retail customers excessive markups in more than 1,500 municipal bond transactions and charged excessive markups in more than 1,700 CMO transactions from January 2005 through August 2007. FINRA rules require that the amount of a markup must be fair and reasonable, taking into account all relevant factors and circumstances, including the type of security involved, the availability of the security in the market and the amount of money involved in a transaction.

The hearing panel decision notes that DLA’s municipal bond and CMO trades reflected a pattern of intentional excessive markups. The municipal bonds and CMOs in the transactions were all rated investment grade or above, and were readily available in the market at significantly lower prices than DLA charged.

The panel noted that DLA charged markups on the municipal bonds ranging from 3.01 percent to 5.78 percent and charged markups on the CMOs ranging from 4.02 percent to 12.39 percent. Regardless of whether a DLA customer bought as much as $225,000 or as little as $8,000 of a CMO, the price was marked up “without consideration for the amount of money involved in the transaction.” The hearing panel concluded that as a result of the unfair markups, the customers received lower yields than they would have received if the markups had been fair and reasonable.

The panel also found that DLA’s supervisory system for its municipal bonds and CMOs was inadequate on several levels. DLA failed to establish and maintain adequate procedures to monitor the fairness of pricing for municipal bonds and CMOs, and failed to have adequate procedures in place to ensure that it recorded the time that the municipal bond orders were received from customers. DLA also failed to record the order receipt time of municipal order tickets.

In determining the sanctions, the panel took into consideration DLA’s relevant disciplinary history. Despite having received a Letter of Caution raising FINRA’s concerns about DLA’s markup practices after a 2004 exam, and after having received a Wells Notices concerning the matter in July 2009, DLA continued its unfair pricing practice. The panel’s decision notes that “in keeping with their unwillingness to accept responsibility, DLA has not taken any corrective measures to improve their fixed income markups policies and practices.”

Unless the hearing panel’s decision is appealed to FINRA’s National Adjudicatory Council (NAC), or is called for review by the NAC, the hearing panel’s decision becomes final after 45 days.

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

FINRA Fines Citigroup Unit for Excessive Markups

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The Financial Industry Regulatory Authority (FINRA) announced this week that it fined Citi International Financial Services LLC, a subsidiary of Citigroup, Inc., $600,000 and ordered more than $648,000 in restitution and interest to more than 3,600 customers for charging excessive markups and markdowns on corporate and agency bond transactions, and for related supervisory violations.

According to a FINRA release:

Thomas Gira, Executive Vice President, FINRA Market Regulation, said, “FINRA is committed to ensuring that customers who purchase and sell securities, including corporate and agency bonds, receive fair prices. The markups and markdowns charged by Citi International were outside of appropriate standards for fair pricing in debt transactions, and FINRA will continue to identify and address transactions that violate fair pricing standards, regardless of whether a markup or markdown is above or below 5 percent.”

FINRA found that from July 2007 through September 2010, Citi International charged excessive corporate and agency bond markups and markdowns. The markups and markdowns ranged from 2.73 percent to over 10 percent, and were excessive given market conditions, the cost of executing the transactions and the value of the services rendered to the customers, among other factors. In addition, from April 2009 through June 2009, Citi International failed to use reasonable diligence to buy or sell corporate bonds so that the resulting price to its customers was as favorable as possible under prevailing market conditions.

During the relevant period, Citi International’s supervisory system regarding fixed income transactions contained significant deficiencies regarding, among other things, the review of markups and markdowns below 5 percent and utilization of a pricing grid for markups and markdowns that was based on the par value of the bonds, instead of the actual value of the bonds. Citi International was also ordered to revise its written supervisory procedures regarding supervisory review of markups and markdowns, and best execution in fixed income transactions with its customers.

In concluding this settlement, Citi International neither admitted nor denied the charges.

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know invested in corporate or agency bond transactions sold by the Citi International Financial Services unit of Citigroup, Inc. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

ING Firms Fined $1.2 Million by FINRA for Account Violations

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Failure to retain or review millions of emails for periods ranging from two months to more than six years resulted in $1.2 million of FINRA fines for the following five indirect subsidiaries of ING Groep N.V.:

  • Directed Services, LLC
  • ING America Equities, Inc.
  • ING Financial Advisers, LLC
  • ING Financial Partners, Inc.
  • ING Investment Advisors, LLC

Brad Bennett, Executive Vice President and Chief of Enforcement, said, “As a result of broad systemic failures, these firms failed to capture and retain emails from hundreds of representatives and other associated persons, and failed to take adequate steps to ensure that their principals were fulfilling their responsibilities to review emails. Email retention and review continues to be an important regulatory responsibility and an issue of concern for FINRA.”

FINRA found that the firms failed to properly configure hundreds of employee email accounts to ensure that the emails sent to and from those accounts were retained and reviewed at various times between 2004 and 2012. In addition, four of the firms failed to set up systems to retain certain types of emails, such as emails using alternative email addresses, emails sent to distribution lists, emails received as blind carbon copies, encrypted emails and “cloud” email (emails sent through third-party systems). As a result of these failures, emails sent to and from hundreds of employees and associated persons were not retained; and because the emails were not retained, they were not subject to supervisory review.

In addition, four of the firms failed to review millions of emails that the firms’ email review software had flagged for supervisory review. At various times between January 2005 and May 2011, nearly six million emails flagged for review went unreviewed by supervisory principals because the email review software was not properly configured.

In concluding the settlement, the firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. FINRA found that the firms violated the recordkeeping provisions of the federal securities laws and FINRA rules, and supervisory requirements under FINRA rules.

FINRA also ordered the firms to conduct a comprehensive review of their systems for the capture, retention and review of email, and to subsequently certify that they have established procedures reasonably designed to address and correct the violations.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

Merrill Lynch Fined by FINRA Over Retention Bonuses

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Merrill Lynch failed to arbitrate retention bonus disputes with employees, according to recent charges by the Financial Industry Regulatory Authority (FINRA) that resulted in a $1 million fine.

According to a January 25, 2012 release:

“Registered representatives who participated in the bonus program had to sign a promissory note that prevented them from arbitrating disagreements relating to the note, forcing the registered representatives to resolve disputes in New York state courts.

FINRA found that Merrill Lynch, after merging with Bank of America in January 2009, implemented a bonus program to retain certain high-producing registered representatives and purposely structured it to circumvent the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any of the registered representatives who later left the firm. FINRA rules require that disputes between firms and associated persons be arbitrated if they arise out of the business activities of the firm or associated person.”

Over 5,000 Merrill Lynch registered reprentatives received retention bonuses as part of the Bank of America acquisition, according to the release.

Contact Fort Lauderdale securities attorney Howard N. Kahn, Esq., if you or someone you know was a Merrill Lynch registered rep who received a retention bonus. Mr. Kahn serves as a  FINRA arbitrator.

Read the full FINRA-Merrill Lynch press release.

FINRA Charges Charles Schwab with Rule Violations

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The Financial Industry Regulatory Authority (FINRA) accused Charles Schwab Corporation of limiting customers legal rights in a complaint filed on February 1, 2012.

FINRA’s complaint alleges that Charles Schwab & Company violates FINRA rules by requiring its customers to waive their rights to bring class action lawsuits against the firm.

Schwab reportedly modified its customer account agreement in October, 2011, to include a provision requiring customers to waive their rights to bring or participate in class action lawsuits where Schwab is named as a defendant.

Almost 7 million Schwab customers received the amended agreements.

According to a FINRA news release:

“The agreement also included a provision requiring customers to agree that arbitrators in arbitration proceedings would not have the authority to consolidate more than one party’s claims. FINRA’s complaint charges that both provisions violate FINRA rules concerning language or conditions that firms may place in customer agreements.

FINRA’s complaint seeks an expedited hearing because Schwab’s conduct is ongoing, as the firm has continued to use account agreements containing these provisions in opening more than 50,000 new customer accounts since October 2011.”

If you are an active stock market investor and have a Schwab account, this provision may apply to you. Contact Fort Lauderdale securities attorney Howard Kahn, Esq. at 954-321-0176 or via email to discuss your case.

Click here to read a copy of FINRA’s complaint against Charles Schwab.

Investor Options in Resolving Securities-Related Disputes

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Investors have several dispute resolution options when facing security-related disputes. The Financial Industry Regulatory Authority (FINRA) recommends that investors consider the dispute resolution techniques outlined below.

First, the investor should contact their brokerage firm and report the discrepancy or dispute, in writing, to the appropriate department or manager.  Often, the brokerage firm will have authority or insight on how to rectify the problem quickly and easily.

Next, the investor may want to initiate arbitration against the broker or the brokerage firm.  Arbitration is an efficient and inexpensive method of resolving disputes between parties by neutral, qualified individuals who serve as decision makers after hearing all facts from all parties involved.  Arbitration awards are final, binding and subject to court review only in limited situations.  Thus, pursuing claims through arbitration usually precludes investors from pursuing the same claims through the courts.

An investor may file a Request for Mediation to FINRA, at any time.  Once FINRA receives the request, they will contact all parties to explain the mediation process and seek their agreement.  Mediation must be agreed upon by all parties.

Other resolution alternatives include filing a complaint with the SEC, the FINRA Investor Complaint Center, or with state securities regulators.  If there is evidence of illegal or unethical activity by a broker or brokerage firm, investors may file a tip with FINRA’s or SEC’s Office of the Whistleblower.

Finally, if an investor is seeking arbitration it is advised to choose an attorney.  If an investor cannot afford an attorney, some law schools provide legal representation through securities arbitration clinics.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

Florida Entrepreneurs Await Crowdfunding

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A new source of Internet-based funding may soon be available to Florida’s more than 2 million small businesses. Crowdfunding (also known as crowd financing, equity crowdfunding, or hyper funding) is defined as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”

Entrepreneurs from Miami’s Latin American gateway, to Boca Raton’s growing list of corporate headquarters, as well as the I-4 corridor connecting Tampa and Orlando, should be aware of a voluntary Interim Form for Funding Portals designed for prospective crowdfunding portals under the JOBS Act.

Venture capitalists and entrepreneurs who want to launch a funding portal may now voluntarily submit information to the Financial Industry Regulatory Authority (FINRA) regarding their business on the interim form. The information received will help FINRA develop rules specific to crowdfunding portals.

FINRA and the SEC are engaging in an open dialogue about the rules that should apply to funding portals. Once the SEC and FINRA have adopted funding portal rules, FINRA will issue a final funding portal application for FINRA regulation. In applying for membership, crowdfunding portals will not be bound by the responses provided on the Interim Form.

“FINRA is committed to ensuring that the capital-raising objectives of the JOBS Act are advanced in a manner consistent with Congressional intent and investor protection. Crowdfunding portals that file this form will provide FINRA with important information regarding portal business models, which will inform our rulemaking,” said Thomas Selman, Executive Vice President, Regulatory Policy.

The Interim Form asks prospective funding portals to provide information including:

  • ownership;
  • funding;
  • management; and
  • business model and relationships.

FINRA is also asking prospective funding portals to supplement the information in the interim form with any additional information or documents that they believe would be helpful. FINRA will treat information that prospective portals file on the interim form as confidential.

Last year, FINRA solicited comments on the specific rules it should adopt for registered funding portals that become FINRA members. FINRA has also asked for comment on the application of existing rules to broker-dealers engaging in crowdfunding activities.

Florida ranked #2 in the country for its favorable business climate, behind only Texas, in Chief Executive’s 2012 eighth annual survey of CEOs. Crowdsourcing is likely to get a lot of attention in Florida, given the state’s commitment to expanding business opportunities.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.