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Archive for January, 2018


Sandeep Varma – Encinitas, California

An AWC was issued in which Varma was fined $15,000 and suspended from association with any FINRA member firm in all capacities for 10 business days. Without admitting or denying the findings, Varma consented to the sanctions and to the entry of findings that he used a seminar slide presentation promoting a complex estate planning strategy involving the use of a charitable remainder trust (CRT), which failed to provide a sound basis for evaluating the CRT strategy, failed to provide a balanced discussion of the risks and rewards associated with the strategy, and contained claims that were exaggerated, promissory, and/or misleading. The findings stated that beginning in the early 1990s, Varma started employing a strategy with certain customers designed to avoid paying capital gains taxes on the sale of appreciated assets. Under the strategy, customers would typically sell appreciated real estate through a CRT, without immediately paying capital gains tax on the sale, and the proceeds from the sale could then be invested in various investment instruments held within the CRT. Typically, Varma recommended that the proceeds from the sale be invested in variable annuities held within the CRT.

At the time the CRT was created, Varma’s customers would also typically purchase some form of life insurance policy through an irrevocable children’s trust to replace the value of the appreciated asset for the customers’ heirs. Varma’s customers would then take periodic, required income from the CRT and use the income from the CRT to pay, in whole or in part, premiums associated with the life insurance policy Varma recommended to replace the value of the sold appreciated asset. The findings also stated that Varma conducted seminars promoting a strategy involving the use of CRTs that were attended Disciplinary and Other FINRA Actions 23 March 2018 by approximately 70 prospective customers.

Varma’s presentation repeatedly referenced the elimination of capital gains tax on the sale of appreciated assets by using the CRT strategy. The presentation failed to disclose, however, that the strategy only avoided capital gains tax at the time of the sale of the appreciated asset. Varma’s presentation depicted the purchase of a significant life insurance policy to replace, for the prospective customers’ heirs, the value of the appreciated asset sold to fund the CRT. The presentation, however, failed to disclose that the customers’ ability to pay the life insurance premiums using income from the CRT was dependent on the performance of the investments held by the CRT. The findings also included that the seminar presentation further failed to disclose the potential risk that the life insurance policy could lapse should customers be unable to afford to pay premiums associated with maintaining it, or that the life insurance policy payout was dependent on the claims-paying ability of the insurance provider.

The presentation depicted increased income and improved cash flow from employing the CRT strategy, as well as the increased amounts left to the customers’ heirs due to securing the substantial life insurance policy. In doing so, the presentation projected performance of assets held in the CRT in an exaggerated and promissory manner by projecting only positive performance and not clearly disclosing how negative investment performance could affect the strategy. The suspension was in effect from February 20, 2018, through March 5, 2018. (FINRA Case #2014040164801)

John William Bernard – San Luis Obispo, California

An AWC was issued in which Bernard was fined $5,000 and suspended from association with any FINRA member in all capacities for 20 business days. Without admitting or denying the findings, Bernard consented to the sanctions and to the entry of findings that he exercised discretion in the accounts of customers without having obtained the customers’ prior written authorization and without his member firm having accepted the accounts for discretionary trading. The suspension was in effect from January 2, 2018, through January 30, 2018. (FINRA Case #2015044696201)

Sandlapper Securities, LLC , Jack Charles Bixler and Trevor Lee Gordon – Greenville, South Carolina

The firm, Bixler and Gordon were named respondents in a FINRA complaint alleging that they participated in a fraudulent scheme and defrauded investors by selling investments in saltwater disposal wells at excessive, undisclosed markups through a middleman “development” company owned and controlled by the firm Bixler, a firm principal and Gordon, the firm’s CEO. The complaint alleges that the fraudulent markups totaled over $8 million. Investors were not informed, in the PPM or otherwise, that the fund would pay or had paid excessive markups for its purchases of interests in saltwater disposal wells from the development company. As a result, the firm, Bixler and Gordon willfully violated Section 10(b) of the Exchange Act and Rule 10b-5(a) – (c) thereunder, and FINRA Rules 2010 and 2020. The complaint also alleges that as managers of the fund, Bixler and Gordon owed fiduciary duties to the fund. Bixler and Gordon violated their fiduciary duties by causing the development company to usurp the fund’s investment opportunities and resell those investments to the fund at excessive prices, and by failing to take steps to ensure fair pricing to the fund, Bixler and Gordon used the development company to extract ill-gotten profits from retail investors who purchased interests in individual saltwater disposal wells outside the fund.

The development company purchased these interests and resold them to retail investors, sometimes through the firm, at undisclosed, excessive markups. The complaint further alleges that the development company was largely engaged in buying and reselling well interests, which were securities. Although this rendered it a dealer of securities, Bixler and Gordon failed to register the development company with FINRA or the SEC. By virtue of their ownership and control of the development company, Bixler and Gordon had the ability to cause the development company to register as a dealer but failed to do so. As a result, Bixler and Gordon willfully 38 Disciplinary and Other FINRA Actions November 2017 violated Section 15(a) of the Exchange Act and FINRA Rule 2010. In addition, the complaint alleges that despite deriving a substantial portion of its revenue from private offerings by affiliates, the firm failed to adopt or implement reasonable procedures to address conflicts of interest in transactions involving affiliates. In overseeing all the firm’s sales activities, including sales of fund interests and interests in individual saltwater disposal wells, Gordon labored under numerous and obvious conflicts of interest. Nonetheless, the firm failed to adopt or implement an alternate supervisory structure for offerings where Gordon was conflicted. Moreover, because Gordon and the firm were aware of the frauds being perpetrated in connection with sales of fund and well interests, and permitted registered representatives of the firm to sell the interests, Gordon and the firm failed to reasonably supervise the firm’s sales activities.

Gordon and the firm did not even acknowledge that individual well interests were securities and allowed them to be sold away from the firm for compensation without any supervision, other than requiring registered representatives to submit “outside business activity” disclosures. Gordon and the firm knowingly permitted, and expressly or tacitly approved, the firm’s registered representatives to sell interests in direct working interests marketed as “real estate” to retail investors, and to receive selling compensation for those transactions. In addition to allowing representatives to engage in private securities transactions in violation of the firm’s WSPs, Gordon and the firm failed to record the sales on the firm’s books and records, failed to supervise the sales as if the transactions were executed on behalf of the firm and failed to otherwise reasonably supervise the transactions. (FINRA Case #2014041860801)

Charles Bernard Lynch, Jr. – Corona, California

An AWC was issued in which Lynch was barred from association with any FINRA member in all capacities. Without admitting or denying the findings, Lynch consented to the sanction and to the entry of findings that he recommended an investment strategy that was unsuitable for certain retail customers by recommending Disciplinary and Other FINRA Actions 25 February 2018 an over-concentration in energy-sector securities, some of which were speculative, resulting in significant customer losses. The findings stated that due to the speculative nature of the recommended securities, the volatility of the energy market and the high level of concentration, this strategy exposed customers to significant potential losses. In many instances, Lynch failed to properly consider and failed to obtain accurate customer investment profile information to determine the suitability of his over-concentration strategy and the securities he recommended as part of that strategy. In this regard, Lynch recommended the strategy to customers without proper consideration of each customer’s individual investment experience, risk tolerance, investment time horizon, net worth, liquidity needs and income. Consequently, Lynch did not properly assess the significant potential risks associated with his recommended strategy for each of these customers. In certain instances, the potential risks were compounded because the over-concentration in speculative energy-sector securities exceeded 50 percent of the customer’s net worth (exclusive of personal residence). In 2015, when the energy market began a downturn, Lynch unsuitably recommended that certain of his over-concentrated customers adhere to his strategy without regard to their particular situations or ability to continue to sustain losses. By following Lynch’s recommendation, the customers suffered millions of dollars in aggregate losses. (FINRA Case #2015045713301)

Charles Henry Frieda – Anaheim, California

An AWC was issued in which Frieda was barred from association with any FINRA member in all capacities. Without admitting or denying the findings, Frieda consented to the sanction and to the entry of findings that he recommended an investment strategy that was unsuitable for certain retail customers by recommending an over-concentration in energy-sector securities, some of which were speculative, resulting in significant customer losses. The findings stated that due to the speculative nature of the recommended securities, the volatility of the energy market and the high level of concentration, this strategy exposed customers to significant potential losses. In many instances, Frieda failed to properly consider and failed to obtain accurate customer investment profile information to determine the suitability of his over-concentration strategy and the securities he recommended as part of that strategy. In this regard, Frieda recommended the strategy to customers without proper consideration of each customer’s individual investment experience, risk tolerance, investment time horizon, net worth, liquidity needs and income. Consequently, Frieda did not properly assess the significant potential risks associated with his recommended strategy for each of these customers. In certain instances, the potential risks were compounded because the over-concentration in speculative energy-sector securities exceeded 50 percent of the customer’s net worth (exclusive of personal residence). In 2015, when the energy market began a downturn, Frieda unsuitably recommended that certain of his over-concentrated customers adhere to his strategy without regard to their particular situations or ability to continue to sustain losses. By following Frieda’s recommendation, the customers suffered millions of dollars in aggregate losses. (FINRA Case #2015045713302)

Kenneth Stewart Tyrrell – Vienna, Virginia

An AWC was issued in which Tyrrell was barred from association with any FINRA member in all capacities. Without admitting or denying the findings, Tyrrell consented to the sanction and to the entry of findings that he participated in undisclosed private securities transactions without providing prior written notice to his member firm. The findings stated that Tyrrell participated in private securities transactions totaling more than $13 million with a customer involving the customer’s investment in private equity and debt securities in companies in a variety of industries as part of the customer’s overall financial plan. Although Tyrrell was not compensated for these transactions, he participated in them by, among other things, referring investments to the customer, conducting due diligence and relaying his views on the transactions at the customer’s request, helping the customer establish certain holding companies to make the investments, and facilitating transfers of funds from the customer’s firm accounts to the companies. The findings also stated that Tyrrell engaged in outside business activities without providing prior written notice to his firm. All of the outside business activities involved the same customer mentioned above, and three of the activities involved Tyrrell, at the customer’s request, serving as an officer of the holding companies the customer used to make his outside investments. A fourth was a company Tyrrell co-founded in which the customer invested. The fifth was a concierge services company owned by Tyrrell’s spouse 24 Disciplinary and Other FINRA Actions February 2018 with which Tyrrell was also involved. It was formed in part to provide personal services to Tyrrell’s customer. Between June 2013 and June 2016, Tyrrell caused approximately $498,000 to be transferred from the customer’s firm accounts to the concierge services company to pay for goods and services on the customer’s behalf. In June 2016, the customer raised questions about the concierge services company. Thereafter, Tyrrell performed an audit of the concierge company’s expenditures and returned approximately $130,000 to the customer’s firm accounts, consisting of the balance of the customer’s unspent funds held in the concierge service company’s bank account, and repayment of certain operating expenses the concierge services company had charged to the customer. The findings also included that Tyrrell provided his firm with compliance questionnaires that failed to disclose his participation in the private securities transactions and outside business activities. (FINRA Case #2016051259501)

Matthew Russell Nemer – Ross, California

An Offer of Settlement was issued in which Nemer was assessed a deferred fine of $20,000 and suspended from association with any FINRA member in all capacities for two years. Without admitting or denying the allegations, Nemer consented to the sanctions and to the entry of findings that he published multiple research reports on a company while engaged in employment discussions with that company and failed to disclose his conflict of interest, either to his member firm or in the research reports concerning the company. The findings stated that Nemer authored a research report on the company and failed to disclose in the research report that he had a financial interest in the company’s securities, as a result of his acceptance of an employment offer from the company that was inclusive of the company’s securities. Nemer did not disclose to his member firm his employment discussions with and acceptance of an employment offer from the company to,in part, preserve his ability to receive his annual bonus from the firm. As planned, Nemer resigned from the firm, after receiving his annual bonus with the intent to join the other company. The company rescinded its employment offer to Nemer during the employment retention period following his resignation from his firm. The findings also stated that Nemer failed to disclose material conflicts of interest in five research reports he authored. As a result of Nemer’s failure to disclose those material conflicts of interest, these research reports that were published were misleading. In addition, Nemer failed to disclose his financial interest in a covered company in a research report he authored that was published. As a result of Nemer’s failure to disclose his financial interest, that research report was misleading. The suspension is in effect from October 2, 2017, through October 1, 2019. (FINRA Case #2016051925301)

Gopi Krishna Vungarala – Decatur, Texas

Vungarala appealed an Office of Hearing Officers (OHO) decision to the National Adjudicatory Council (NAC). Vungarala was barred from association with any FINRA member in all capacities and ordered to pay $9,682,629, plus prejudgment interest, in disgorgement of commissions received. The sanctions were based on findings that Vungarala willfully violated Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and FINRA Rules 2020 and 2010 by making materially false and misleading statements to conceal his commissions on investments made by a Native American tribe he was employed by to manage its investment portfolio. The findings stated that Vungarala persuaded the tribe to invest in REITs and business development companies through a broker-dealer firm where he told the tribe he “parked” his registration. As a result, he received over $9 million in commissions. Through false and misleading statements, Vungarala led the tribe to believe that he did not receive commissions on its transactions and that he had no conflict of interest. The findings also stated that Vungarala willfully misled the tribe regarding its eligibility for volume discounts by failing to disclose to it that it was eligible to receive more than $3.3 million in volume discounts. Vungarala personally benefited because the discounts would have reduced his commissions. The sanctions are not in effect, pending review. (FINRA Case #2014042291901)

Jerry Lou Guttman – Scottsdale, Arizona

An AWC was issued in which Guttman was barred from association with any FINRA member in all capacities. Without admitting or denying the findings, Guttman consented to the sanction and to the entry of findings that he sold more than $7,000,000 worth of membership interests in at least six different limited liability companies to 31 customers of his member firm, and seven non-customers, without first disclosing the sales to the firm. The findings stated that Guttman participated in the sales of these membership interests by soliciting the membership interests to investors; communicating with investors about their investments; drafting, distributing and collecting the investment agreements from each investor; collecting and depositing investors’ checks into the companies’ bank accounts; and managing the companies as one of only two managing members. (FINRA Case #2017055800301)

Todd S. Kimm – Skaneateles, New York

An AWC was issued in which Kimm was fined $5,000 and suspended from association with any FINRA member firm in all capacities for six months. In light of Kimm’s financial status, a lower fine was imposed. Without admitting or denying the findings, Kimm consented to the sanctions and to the entry of findings that he recommended over 100 unsuitable short-term trades of long-term investment products and eight unsuitable mutual fund switches in a customer’s account. The findings stated that on numerous occasions, Kimm recommended that the customer sell municipal bonds shortly after buying them. All of the municipal bonds in question were income-producing products intended for customers with long-term investment time horizons, and carried substantial commissions. In addition, on numerous occasions, Kimm engaged in unsuitable short-term trading in the customer’s account with respect to closed-end funds and mutual funds. Of the trades at issue, many were income-producing closed-end municipal bond funds intended for customers with long-term investment time horizons. Other trades involved Class A mutual fund shares which are intended to be held long-term because they are front-loaded. Despite the long-term attributes of municipal bonds, closed-end funds and Class A mutual fund shares, Kimm recommended the purchase and subsequent sale of these products within a year of purchase. Nearly all of the short-term trades at issue involved holding periods of 90 days or less.

Kimm had no reasonable basis to believe that such short-term trading was suitable for any customer, particularly in light of the nature of the recommended transactions, the short holding periods and the transaction costs incurred. Kimm’s unsuitable trading also involved switching, where Kimm used the proceeds from the sale of Class A mutual fund shares to purchase other Class A mutual funds shares. Specifically, on at least eight occasions, Kimm recommended the sale of a mutual fund to purchase another mutual fund with identical or fundamentally similar investment objectives and underlying assets. As a result of Kimm’s unsuitable trading, the customer’s account incurred realized losses of approximately $200,000. The findings also stated that Kimm effected dozens of discretionary transactions, including municipal securities transactions, in the customer’s account without prior written authorization from the customer and without having the account approved as discretionary by his member firm. The suspension is in effect from January 16, 2018, through July 15, 2018. (FINRA Case #2014041587201)

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