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Dennis Ernest Beeby (San Diego, California)

An AWC was issued in which Beeby was assessed a deferred fine of $10,000, suspended from association with any FINRA member in all capacities for eight months and ordered to pay deferred disgorgement of commissions received in the amount of $55,000, plus interest. Without admitting or denying the findings, Beeby consented to the sanctions and to the entry of findings that he never disclosed his participation in private securities transactions in writing or otherwise to his member firm and never received its approval to participate in the transactions. The findings stated that the firm’s relevant WSPs prohibited representatives from engaging in any private securities transaction without its prior express written permission. Beeby recommended the purchase of securities in the form of oil and gas working interests in the development of an oil and gas lease by a corporation to several of his customers. The working interest securities were not offered through Beeby’s firm. Four customers purchased a sum total of $700,000 in oil and gas working interests. Beeby handled all aspects of the sales, including recommending the investment, providing paperwork for investors to sign, signing some of the transaction documents and managing ongoing communications regarding the investment. Beeby also received a commission of $55,000 for the sales.

The suspension is in effect from April 2, 2018, through December 1, 2018. (FINRA Case #2016052305501)

LPL Financial LLC (Boston, Massachusetts)

An AWC was issued in which the firm was censured and fined $375,000. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to implement a supervisory system reasonably designed to ensure that its registered representatives were trained on all material risks and features of brokered certificates of deposit (CDs) and that it adequately disclosed all material risks and features of the brokered CDs to customers. The findings stated that in particular, the firm failed to take reasonable steps to ensure that its registered representatives or fixed income desk employees received or had meaningful access to issuer-prepared disclosure documents prior to their sales of these products. In response to FINRA Notice to Members 02-69, the firm prepared and delivered to customers who purchased brokered CDs a generic CD disclosure statement that described the general risks and characteristics of brokered CDs. The firm, however, did not consistently provide its customers, prior to or at the time of sale, with issuer-prepared disclosure documents, despite the firm’s obligation to do so under its selling agreements with the brokered CD issuers, and did not otherwise have a process to disclose fully all material risks and features of the brokered CDs to customers. Because of the firm’s deficient supervisory system, one of the firm’s registered representatives made material misrepresentations to elderly customers regarding the limitations on the ability, upon death, of their estates to redeem their 20-year brokered CDs at par value. The elderly customers or their estates suffered losses of approximately $75,000 because they were unable to fully redeem the brokered CDs and had to sell the brokered CDs on the secondary market. The firm subsequently remediated these customers’ losses. (FINRA Case #2015045703001)

FINRA takes new enforcement action against Charles Acheson Laverty

Laverty was named a respondent in a FINRA complaint alleging that that during consecutive associations with several member firms, he borrowed $1,350,000 from an elderly married couple in violation of each firm’s policies. The complaint alleges that three of the firms prohibited their representatives from borrowing money from their customers.

Although a firm permitted loans between representatives and customers under limited circumstances, any such loan required the written approval of the chief compliance officer. The firm’s chief compliance officer never provided any such approval to Laverty. The complaint also alleges that Laverty concealed the loans from his firms and falsely stated on annual compliance questionnaires and on a heightened supervision attestation that he had not borrowed money from customers. For an example, Laverty lied on a firm’s compliance questionnaires concerning soliciting or accepting a loan from or making a loan to a client and having a judgment against him. On a firm’s annual compliance questionnaire, Laverty’s answers were false because earlier he had borrowed $45,000 from the elderly couple. Moreover, the Superior Court of California, County of Riverside, entered a judgment against Laverty for $114,456.25 in a lawsuit by the Security Bank of California against him arising from his failure to repay a promissory note. Laverty was aware of this judgment.

The complaint further alleges that Laverty concealed the loans from FINRA and provided false on-the-record (OTR) testimony during a previous FINRA investigation into his borrowing activity. During an OTR taken in that investigation, FINRA questioned Laverty about loans from five particular customers, and then asked, “Mr. Laverty, did you borrow from any other customers?” Laverty answered, “No” and insisted that he had only borrowed from these five customers. Laverty’s answers were false. Laverty had, in fact, also borrowed from the elderly couple. In addition, Laverty executed a $1.4 million promissory note for the loans that the elderly couple had extended to him and quickly breached the agreement by making none of the required monthly payments. The elderly couple filed a Statement of Claim against Laverty and the firms through which he registered. One of the firms filed a Form U5 Amendment disclosing the Statement of Claim and informing FINRA, for the first time, that Laverty had improperly solicited and accepted loans from the elderly couple. Neither of these elderly customers lived to see their claims resolved. Nevertheless, days before a scheduled arbitration, the elderly couple, through their successor in interest, settled their claim against Laverty. Soon thereafter, Laverty breached his obligations under the settlement by failing to make a required payment. FINRA suspended Laverty for failure to comply with the settlement. In addition, the complaint alleges that Laverty willfully failed to update his Form U4 to disclose an unsatisfied judgment entered in the Security Bank of California lawsuit and a federal tax lien.

FINRA Sanctions Fifth Third Securities, Inc., $6 Million

The Financial Industry Regulatory Authority (FINRA) announced today it has fined Fifth Third Securities, Inc., $4 million and required the firm to pay approximately $2 million in restitution to customers for failing to appropriately consider and accurately describe the costs and benefits of variable annuity (VA) exchanges, and for recommending exchanges without a reasonable basis to believe the exchanges were suitable. This is the second significant FINRA enforcement action against Fifth Third involving the firm’s sale of variable annuities.

Variable annuities are complex investments commonly marketed and sold to retirees or people saving for retirement. Exchanging one VA with another involves a comparison of the complex features of each security. Accordingly, VA exchanges are subject to regulatory requirements to ensure that brokers have a reasonable basis to recommend them, and their supervisors have a reasonable basis to approve the sales.

FINRA found that Fifth Third failed to ensure that its registered representatives obtained and assessed accurate information concerning the recommended VA exchanges. It also found that the firm’s registered representatives and principals were not adequately trained on how to conduct a comparative analysis of the material features of the VAs. As a result, the firm misstated the costs and benefits of exchanges, making the exchange appear more beneficial to the customer. By reviewing a sample of VA exchanges that the firm approved from 2013 through 2015, FINRA found that Fifth Third misstated or omitted at least one material fact relating to the costs or benefits of the VA exchange in approximately 77 percent of the sample. For example:

  •  Fifth Third overstated the total fees of the existing VA or misstated fees associated with various additional optional benefits, known as riders.
  • Fifth Third failed to disclose that the existing VA had an accrued living benefit value, or understated the living benefit value, which the customer would forfeit upon executing the proposed exchange.
  • Fifth Third represented that a proposed VA had a living benefit rider even though the proposed VA did not, in fact, include a living benefit rider.

FINRA found that the firm’s principals ultimately approved approximately 92 percent of VA exchange applications submitted to them for review. However, in light of the firm’s supervisory deficiencies, the firm did not have a reasonable basis to recommend and approve many of these transactions.

Susan Schroeder, FINRA’s Executive Vice President and Head of Enforcement, said, “FINRA remains vigilant in examining how member firms market variable annuities, which are complex products pitched to retirees and people saving for retirement. Returning $2 million in restitution to harmed investors is a key part of FINRA’s investor protection mission.”

In addition, FINRA found that Fifth Third failed to comply with a term of its 2009 settlement with FINRA. In the 2009 action, FINRA found that, from 2004 to 2006, Fifth Third effected 250 unsuitable VA exchanges and transactions and had inadequate systems and procedures governing its VA exchange business. For more than four years following the settlement, the firm failed to fully implement an independent consultant’s recommendation that it develop certain surveillance procedures to monitor VA exchanges by individual registered representatives.

In settling this matter, Fifth Third neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Clifton Stanley Ponzi scheme charges brought by SEC

On April 6, 2018, the Securities and Exchange Commission charged two Texas companies and their principals in a $2.4 million Ponzi scheme and in a related, $1.4 million offering fraud targeting retirees.

The SEC’s complaint alleges that, from 2010 to 2017, Clifton E. Stanley ran a Ponzi scheme through his retirement planning and real estate investment business, The Lifepay Group, LLC. Stanley is alleged to have lured at least 30 elderly victims to invest approximately $2.4 million of their retirement savings with baseless promises and claims of outsized investment returns. He kept the scheme afloat for years by paying early investors with later investors’ funds and by convincing investors to roll over their investments.  The SEC further alleges that Stanley pilfered from the estate of an elderly woman’s family trust, diverting nearly $100,000 to fund the Lifepay Ponzi scheme. In addition, the SEC’s complaint alleges that, beginning in 2015, Stanley and Michael E. Watts orchestrated a second offering fraud through a company they controlled, SMDRE, LLC. Stanley and Watts allegedly used a collection of misrepresentations and empty promises to convince a group of predominantly elderly victims to invest roughly $1.4 million in SMDRE.

Stanley is alleged to have used roughly $1.3 million of the Lifepay offering proceeds for personal expenses, including country club memberships, daily living expenses, travel, and entertainment expenses. In addition, Watts and Stanley allegedly engaged in shell game transactions so they could use the vast majority of SMDRE investor funds for personal expenses and to keep the Lifepay Ponzi scheme afloat.

The SEC’s complaint charges Stanley, Watts, Lifepay, and SMDRE with violating the registration and antifraud provisions of the federal securities laws. Stanley was also charged for conduct stemming from his role as an unregistered broker.

Wells Fargo under investigation by DOJ and SEC

With Wells Fargo’s credit card and savings divisions already disciplined by the Federal Reserve over a fake account scandal during which the bank opened bogus accounts on behalf of its customers, federal officials have begun an investigation into Wells Fargo Wealth Management to determine whether Wells Fargo’s investment wing inappropriately sold clients in-house investments using tactics similar to the illicit conduct that permeated the aforementioned credit card and savings scandal.

In its investigation of Wells Fargo Wealth Management, the Department of Justice and SEC seek to determine whether the firm breached its duty to investors and used incentives that were inadequately disclosed in order to sell in-house products that were more profitable for the firm, at the expense of its clients’ interests.

According to an InvestmentNews report, as recently as in 2016, Wells Fargo incentivized its advisers through quotas and bonus pay to steer investment clients into fee-bearing loans and brokerage accounts. The report states that Wells Fargo Wealth Management’s quotas and representative incentives were similar to the illicit scheme previously employed by the credit card, savings, and banking division in the company’s prior scandal, which had produced approximately 3.5 million potentially fake or otherwise improperly opened banking accounts.

Specifically, investigators will reportedly seek to determine whether Wells Fargo made inappropriate or unsuitable recommendations involving 401(k) rollovers, alternative assets, estates, and trusts. Investigators will also look into rewards and referral incentives, such as an alleged 15%-of-first-year-revenue reward in multi-million dollar accounts offered to some retail bank employees for referring wealthy clients to the firm’s brokerage arm.

Officials expressed concern that Wells Fargo’s investment business improperly steered clients toward in-house investments that may have been more profitable for the firm, at the expense of its clients’ best interests. In addition to suitability violations, this could possibly point to a widespread breach of fiduciary duty involving Wells Fargo Advisors and other related Wells Fargo Wealth entities.

For example, a Bloomberg review indicated that Wells Fargo Advisors personnel often ran simulations through Envision financial planning software, sometimes without clients present, and by “plugging in numbers they knew would recommend investments that clients already held.”

According to one former adviser, the Envision simulations would then confirm the clients’ investment strategy at Wells Fargo, making the clients much more likely to remain Wells Fargo customers and keep funds invested in products preferred by the firm. Wells Fargo disputes that charge, claiming that Envision did not disadvantage clients.

As a historical note, the SEC and US Commodity Futures Trading Commission in 2015 charged JP Morgan Securities and JPMorgan Chase Bank with improperly marketing JP Morgan-managed mutual funds to retail customers through a Chase Bank program, failing to disclose this practice and the associated conflict of interest to its clients.

Like Wells Fargo, JP Morgan stood accused of inappropriately recommending in-house investments that were more profitable for the firm, at the expense of its customers’ best interests.

JP Morgan and Chase Bank ultimately agreed to settle the charges by paying over $300 million in penalties, disgorgement, and interest.

SEC freezes Longfin (LFIN)

The U.S. Securities and Exchange Commission obtained an emergency freeze of $27 million in trading profits involving the CEO of cryptocurrency company Longfin and three other people, the agency said in a statement Friday.

Longfin’s stock was halted on the Nasdaq as of 10:01 a.m. ET on the SEC alert after jumping more than 47 percent. Shares had been halted numerous times throughout the week for volatility. The stock was worth more than $3 billion at one point in December after the company announced a cryptocurrency-related acquisition.

“We acted quickly to prevent more than $27 million in alleged illicit trading profits from being transferred out of the country,” Robert Cohen, chief of the SEC Enforcement Division’s Cyber Unit said in the statement. “Preventing defendants from transferring this money offshore will ensure that these funds remain available as the case continues.”

The SEC claims Longfin CEO and Chairman Venkat Meenavalli had the company issue unregistered shares to the three people so they could sell them, which they did.

The financial watchdog does allow people to own a certain amount of unregistered shares without having to go through what one lawyer calls a “very long” registration process. But those shares are restricted and cannot be sold during certain time periods.

Timary Delorme and Wedbush Securities, Inc.

The Securities and Exchange Commission announced charges against Wedbush Securities Inc. for failing to supervise employee Timary Delorme after the broker-dealer ignored numerous red flags indicating that Delorme was involved in a long-running pump-and-dump scheme targeting retail investors.  Delorme agreed to settle fraud charges stemming from the same scheme.  This is the second SEC action against Wedbush this year and the third since 2014.

The SEC’s investigation found that Delorme – a registered representative of Wedbush – received undisclosed benefits for investing her customers in microcap stocks that were the subject of a “pump-and-dump” scheme orchestrated by Izak Zirk Engelbrecht, who was previously charged by the Commission and criminal authorities in separate actions.  According to the SEC’s order, Wedbush ignored multiple signs of Delorme’s fraud, including a customer email outlining Delorme’s involvement in the scheme and multiple FINRA arbitrations and inquiries regarding her penny stock trading activity.  In response to these clear red flags, Wedbush conducted two flawed and insufficient investigations into Delorme’s conduct but failed to take appropriate action.

The SEC’s order instituting administrative proceedings against Wedbush charges that the broker-dealer failed reasonably to supervise Delorme with a view to preventing and detecting her violations.  The matter will be scheduled for a hearing before an administrative law judge, who will hear the case and prepare an initial decision.  A separate order finds that Delorme violated the antifraud provisions of the federal securities laws.  Without admitting or denying the findings, Delorme agreed to entry of the order, which requires her to pay a $50,000 penalty, imposes industry and penny stock bars, and orders her to cease and desist from future violations.

The SEC previously charged Engelbrecht, 15 other individuals, and several entities in the related manipulation scheme:

Eleven individuals, including Engelbrecht, pleaded or were found guilty in parallel criminal proceedings.

Broker Charged With Repeatedly Putting Customer Assets At Risk

The Securities and Exchange Commission today announced that Electronic Transaction Clearing (ETC), a registered broker-dealer headquartered in Los Angeles, has agreed to settle charges that it illegally placed more than $25 million of customers’ securities at risk in order to fund its own operations.

Among other things, the SEC found that ETC violated the Customer Protection Rule, which is intended to safeguard customers’ cash and securities so that they can be promptly returned if a broker-dealer fails.  It requires broker-dealers to maintain physical possession or control of customers’ fully paid and excess margin securities.

According to the SEC’s order, ETC put customer securities at risk numerous times in 2015.  ETC improperly transferred almost $8 million of fully paid securities belonging to cash customers to an account at another clearing firm to meet margin requirements on borrowed funds, and the firm used more than $17 million of securities of two customers to borrow funds without consent.  The order also finds that ETC improperly commingled customers’ securities and allowed a customer’s excess margin securities to be loaned out by the other clearing firm.

“The SEC has brought several recent cases charging violations of the Customer Protection Rule, which establishes critical protections to ensure that investors’ securities are kept safe by broker-dealers,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.  “As this case shows, no broker-dealer is allowed to use its customers’ securities to fund its own operations.”

The SEC’s order charged ETC with violating the Securities Exchange Act and Customer Protection Rule as well as other related rules.  Without admitting or denying the SEC’s findings, ETC agreed to entry of the order, to pay an $80,000 penalty, to cease and desist from committing or causing any similar violations in the future, and to be censured.  ETC cooperated with the SEC’s investigation and has taken remedial steps to prevent future violations.

Robert Mark Magee Settles Charges for Cheating Clients in Fraudulent Cherry-Picking Scheme

The Securities and Exchange Commission today announced settled charges against an Austin, Texas-based investment adviser for defrauding his clients through a “cherry-picking” scheme.  The adviser, Robert Mark Magee, who is the principal, sole owner, and sole employee of Valor Capital Asset Management LLC, has agreed to be banned from the securities industry and pay more than $715,000 to resolve the charges.

According to the SEC’s order, for almost three years, Magee traded securities in Valor’s omnibus account but waited to allocate the trades to client accounts until after the securities’ performance changed over the course of the day.  Magee then “cherry-picked” the trades, disproportionately allocating profitable trades to his accounts and unprofitable trades to his clients’ accounts, reaping substantial profits for himself at his clients’ expense. The SEC’s order found that for most of the three-year period there was less than a one-in-a-trillion chance that the outsized performance of Magee’s personal account, compared to that of his clients’ accounts, was due to chance.

“This case echoes the several actions our office has brought in recent months aimed at protecting unsuspecting retail investors from investment advisers who allegedly cheat their clients by cherry-picking profitable trades,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.  “The settled order here finds that Magee and Valor cherry-picked trades to their clients’ detriment for almost three years.”

The SEC’s order found that Magee and Valor each violated antifraud provisions of the federal securities laws.  Without admitting or denying the SEC’s findings, Magee and Valor agreed to the entry of a cease-and-desist order and to pay disgorgement, prejudgment interest, and civil penalties totaling $715,871.57. Magee also agreed to be barred from the securities industry.


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