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Articles Posted in FINRA Regulatory Notice

Broker Sylvester King Jr. Sanctioned and Suspended by FINRA on silverlaw.com

Allegations of selling away and other policy violations have Wells Fargo broker in hot water

In a recent case drawing from allegations beginning in July 2009 and up to the year 2012, Sylvester King Jr. was accused of violating policies with his employer, Ft. Lauderdale Wells Fargo, in order to assist another broker in covering up more than $400,000 in loans made to three customers at the firms. In addition, King was named in connection with loaning another customer $25,000 without commission and participating in undisclosed private securities transactions known as selling away. This allowed eight customers to invest more than $3 million.

King became active in the securities industry in 1999. Between 2006 and 2009, he worked with Citi Group Global Markets Inc., between 2009 and 2010 he worked with Morgan Stanley and from 2011 until 2015 he was connected to Wells Fargo. Wells Fargo filed a termination form U-5 at the end of April in 2015, the same day that FINRA entered into an agreement with the broker accepting a fine and sanction stating the reasons that he was being discharged from the firm. His FINRA suspension at that time was 18 months. After this date, FINRA filed an additional regulatory action stating that King did not pay the $35,000 required within the settlement.

Giovanni Acevedo, of Voya Financial Advisors, Inc., Accused of Converting Funds by silverlaw.com

Disciplinary action pending against Wilton Manors, FL financial advisor

Giovanni Acevedo could be facing disciplinary action from FINRA after a complaint that he allegedly converted more than $160,000 in customer funds. According to the report, he allegedly told a customer he would invest a $68,000 check she wrote to the company according to her instructions. He allegedly told her to leave 21 blank signed checks with him, resulting in a total of $145,848.42 converted to what is purported to be his own personal account or one of which he is a beneficiary, according to FINRA.

The official complaint, which was filed on April 8, asks that upon the conclusion that the allegations are proven as fact Acevedo be subject to sanctions according to FINRA Rule 8310, namely disgorgement, but the FINRA manual also allows for suspension or expulsion of a member’s registration.

Christopher Veale Under Investigation From FINRA After Churning Allegations post by silverlaw.com

Disciplinary action Pending

In April, FINRA initiated a regulatory investigation after Christopher Frederic Veale, most recently employed by Legend Securities, Inc., allegedly refused to provide documents requested by the agency in response to alleged rule violations. The purported violations involve business and outside business activities, as well as a potential violation of FINRA disclosure requirements in regard to outstanding liens, of which he has a great sum, according to FINRA.

Veale’s 18-year career in the securities industry has been fraught with dispute, both with FINRA and with customers. He has been employed by 18 firms, seven of which have since been expelled by FINRA, according to its website. Amongst other firms, Veale has been employed at John Thomas Financial, Meyers Associates, LP, and Blackwall Capital Markets, Inc.

Last week, the Financial Industry Regulatory Authority (FINRA) filed charges against Newport Coast Securities, Inc. (“Newport Coast”) and some of its current and former registered representatives, accusing them of using margin and risky securities to artificially generate huge commissions for themselves while wiping out most of their customers’ investment capital.

Newport Coast, a New York-based broker-dealer, by and through brokers Douglas Leone, Andre LaBarbera, David Levy, Antontio Costanzo, and Donald Bartlet, allegedly churned the accounts of twenty four customers — many of whom are retirees — causing more than $1,000,000 in losses to the investor-clients.  “Churning,” as it is known in the industry, is the act of a broker who excessively and needlessly engages in trading in a client’s account primarily to generate commissions for the broker on each trade without regard for the client’s financial well-being.  Churning is an illegal and unethical practice that violates SEC rules and securities laws.  The brokers are also purported to have created new account forms for their victimized clients that misstated the clients’ net worth, investment experience, and objectives; and two of the brokers (Levy and Costanzo) attempted to dissuade several customers from cooperating with FINRA’s investigation into the matter — all of which was done to cover up the illegality of the brokers’ excessive activity in the client accounts.

According to FINRA, former Newport Coast supervisors Marc Arena and Roman Luckey saw what was transpiring but took no meaningful steps to curtail the misconduct.  To the contrary, the firm’s managers, supervisors, and the former President of the company allegedly profited through overrides on the churned accounts.

The Financial Industry Regulatory Authority (FINRA) has recently sponsored a new securities industry rule that makes the information included on customer account statements more transparent.  Transparent commissions will likely lower the total up-front commissions a broker can collect on certain popular securities as investors realize the steep fees they are paying.

Nontraded real estate investment trusts (REITs) are among the most popular investment products sold by registered representatives and their broker-dealers.  Typically sold for less than $10 per share, the commission to a rep and the firm in this $1.4 billion “alternative investment” sector of the retail investment market is 7%, though the amount that goes toward the total upfront commission is split amongst several different players involved in selling the REIT.  A problem for investors is that their account statements do not clearly show the breakdown of those commissions or the estimated per-share valuation of their investment — something that the current rules do not require be revealed to them until 18 months after the REIT sponsors stop raising funds.

Under FINRA’s proposed new rule, the time frame in which broker-dealers will have to show investors a true valuation of such purchases will be drastically sped up.  By accelerating that timetable, investors will be provided quicker and much greater transparency in seeing the commissions being charged to them; and industry experts anticipate that broker-dealers are likely to lower the fees they assess to investors on such alternative investments.  Both nontraded REITs and illiquid private placements known as “direct participation programs” (DPPs), which would also fall directly under this new rule, have frequently been criticized for high commissions.

FINRA rules establish the core supervisory system procedures which all broker-dealers must follow to protect investors.  A broker-dealer or other FINRA member may be sanctioned by FINRA for violating these rules and an investor may bring a FINRA arbitration claim against a brokerage firm for failing to properly supervise a financial advisor or for failing to have in place a reasonable supervisory system in compliance with these rules.  Although the systems may be different from one brokerage firm to another, the FINRA code establishes the minimum systems which must be addressed.  FINRA Rule 3110 has been revised to address supervision requirements by all FINRA members.  These rules codify rules addressing written supervisory procedures, designation of supervisory principals and customer complaints.   The rule was published in FINRA Notice to Members 14-10 and can be viewed on FINRA’s website.

The Stifel Nicolaus & Company story about financial advisors’ lack of training and supervision concerning exchange traded funds (ETFs) is not much different than other Wall Street giants, including Morgan Stanley, UBS, Citigroup and Wells Fargo who were fined for similar violations.  On December 17, 2013 Stifel Nicolaus & Company agreed to a Letter of Acceptance, Waiver and Consent (AWC) with the Financial Industry Regulatory Authority (FINRA) and fined $1 million for violation of FINRA rules related to the sale of non-traditional ETFs to retail investors.  FINRA determined in the AWC violations related to a failure to supervise the unsuitable investment advice provided by its financial advisors to retail investors.

Non-traditional exchange traded funds are investments designed to achieve investment returns that are a multiple (leveraged) of an underlying benchmark or the inverse (negative correlation) to an underlying benchmark.  The leveraged or inverse ETFs are designed to track an underlying basket of securities, indexes, currencies or commodities.  In order to achieve these investment results derivatives, swaps and futures contracts must be used which makes non-traditional ETFs complex investments rarely understood by the financial advisors who recommend them.

Non-traditional ETFs use derivatives, swaps and futures contracts to accomplish the intended performance objectives and requires a daily reset of the portfolio holdings which results in a tracking error over time.  In other words, most non-traditional ETFs are only managed to meet the investment objectives on a daily basis.   Due to the tracking errors over time and the effects of leverage, the performance of an ETF can differ greatly from the performance of the underlying basket of securities, indexes, currencies or commodities.  According to a FINRA regulatory notice, “While the customer-specific suitability analysis depends on the investor’s particular circumstances, inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.”  For buy-and-hold investors, non-traditional exchange traded fund investments have experienced investment results much different from the projections made by their financial advisors.

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