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Wedbush Securities Inc. fined $1.5 Million by FINRA

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Wedbush Securities Inc. $1.5 million for violating the Securities and Exchange Commission’s (SEC) Customer Protection and Net Capital Rules, and for related supervisory and books and records failures.

The SEC Customer Protection Rule creates requirements to protect customers’ funds and securities. To ensure that customers could recover their assets in the event of the broker-dealer’s insolvency, the rule requires the broker-dealer, which maintains custody of customer securities, to obtain and maintain physical possession or control over certain of those securities. These securities must be segregated in a “control location,” free of liens or any other encumbrance that could prevent customers from taking their possession. The rule also requires the broker-dealer to maintain a reserve of cash or qualified securities, in a bank account, that is at least equal in value to the net cash the broker-dealer owes its customers.

The SEC Net Capital Rule regulates the ability of broker-dealers to meet their financial obligations to customers by requiring broker-dealers to maintain a minimum amount of net capital and to compute their net capital in accordance with specified formulas.

FINRA found that, during a five-month period in 2015 and 2016, Wedbush was net capital deficient, ranging between $10.5 million and $59.4 million. The deficiencies resulted from Wedbush’s failure to take required deductions when valuing certain certificates of deposit for purposes of computing its net capital.

In addition, from 2011 to 2016, Wedbush failed to accurately calculate its customer reserve requirement on 84 occasions, causing the firm to underfund its customer reserve account 73 times, in amounts ranging from approximately $2 million to $77 million. Wedbush also included ineligible assets in its customer reserve account, causing it to underfund its reserve an additional 110 times, in amounts ranging from approximately $9 million to $375 million.

Also, from 2009 to 2016, Wedbush repeatedly violated the possession or control requirement of the Customer Protection Rule by creating and/or increasing deficits in the quantity of securities it was required to keep in its possession or control, and holding customer assets in locations that were not protected from claims by third parties.

“Firms have a fundamental responsibility to safeguard the securities of their customers,” said Susan Schroeder, FINRA’s Executive Vice President, Department of Enforcement. “The Customer Protection and Net Capital Rules are important components of investor protection, and member firms must have reasonably designed and maintained systems and supervision to ensure both that they comply with the rules’ requirements, and detect and remediate any weaknesses.”

Wedbush also failed to establish and maintain supervisory systems and procedures reasonably designed to ensure compliance with the Customer Protection and Net Capital Rules, which exposed customer funds and securities to risk and prevented the firm from detecting the deficiencies for nearly seven years. Their supervisory failures also caused the firm to maintain inaccurate books and records, and to file 37 inaccurate FOCUS reports.

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

SEC Charges Ameriprise With Overcharging Retirement Account Customers for Mutual Fund Shares

The Securities and Exchange Commission today announced that a Minnesota-based broker-dealer and investment adviser has agreed to settle charges for recommending and selling higher-fee mutual fund shares to retail retirement account customers and for failing to provide sales charge waivers.

According to the SEC’s order, Ameriprise Financial Services Inc. disadvantaged certain retirement account customers by failing to ascertain their eligibility for less expensive mutual fund share classes.  Ameriprise recommended and sold these customers more expensive mutual fund share classes when less expensive share classes were available.  Ameriprise also failed to disclose that it would receive greater compensation from the purchases and that the purchases would negatively impact the overall return on the customers’ investments.

“Ameriprise generated greater revenue for itself but lower returns for its retirement account customers by recommending higher-fee share classes,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “As evidenced by our recently announced Share Class Selection Disclosure Initiative, pursuing these types of actions remains a priority for the Division as we seek to get money back in the hands of harmed investors.”

Approximately 1,791 customer accounts paid a total of $1,778,592.31 in unnecessary up-front sales charges, contingent deferred sales charges, and higher ongoing fees and expenses as a result of Ameriprise’s practices.  Ameriprise cooperated with the Commission and voluntarily identified the affected accounts, issued payments including interest to the affected customers, and converted eligible customers to the mutual fund share class with the lowest expenses for which they are eligible, at no cost.

The SEC’s order instituting a settled administrative and cease-and-desist proceeding finds that Ameriprise violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  Without admitting or denying the findings, Ameriprise consented to a cease-and-desist order, a censure, and a penalty of $230,000.

Western International Securities, Inc. Fined $521,098 in Connection With Sales of Non-Traditional ETFs

On February 28, 2018, FINRA Enforcement entered into a settlement via Acceptance, Waiver and Consent (“AWC”) with Respondent Western International Securities, Inc. (“WIS”) (CRD# 39262).  Specifically, without admitting or denying any wrongdoing — WIS consented to paying a fine of $521,908, in addition to restitution to certain investors in the amount of $125,000 — in connection with FINRA’s findings of fact that from January 2011 – November 2015, WIS allegedly failed to supervise its registered representatives with regard to sales of certain leveraged, inverse, and inverse-leveraged Exchange-Traded Funds (“Non-Traditional ETFs”).

Non-Traditional ETFs are designed to return a multiple of an underlying benchmark or index (or both) over the course of one trading session (typically, a single day).  Therefore, because of their design, Non-Traditional ETFs are not intended to be held for more than a single trading session, as enunciated by FINRA Enforcement in its recent AWC as concerns Respondent WIS:

“[t]he performance of Non-Traditional ETFs over periods of time longer than a single trading session ‘can differ significantly from the performance… of their underlying index or benchmark during the same period of time.”  FINRA Regulatory Notice 09-31.

Pursuant to the AWC, FINRA’s findings of fact allege that WIS registered representatives solicited and effected Non-Traditional ETF purchases that were unsuitable for specific customers.  For example, in one instance, FINRA determined that a 73 year-old customer with a net worth of $200,000 and an investment objective of growth and a conservative risk profile was purportedly steered into five Non-Traditional ETFs.  As alleged by FINRA, this elderly investor held the Non-Traditional ETFs for an average of 356 days, resulting in a net loss of $20,232.

In another instance of purported unsuitable recommendations, FINRA Enforcement determined that a WIS customer with a net worth of $200,000 and an investment objective of growth and a conservative risk profile was also purportedly steered into five Non-Traditional ETFs.  As alleged by FINRA, this investor held the Non-Traditional ETFs for an average of 350 days, resulting in a net loss of $32,865.

Larry Martin Boggs – Ameriprise – Dallas, Texas

An AWC was issued in which Boggs was barred from association with any FINRA member firm in all capacities. Without admitting or denying the findings, Boggs consented to the sanction and to the entry of findings that he engaged in excessive and unsuitable trading in customer accounts. The findings stated that Boggs used his control over the customers’ accounts to excessively trade in them in a manner that was inconsistent with these investors’ investment objectives, risk tolerance and financial situations. Boggs engaged in a strategy that was predicated on short-term trading of primarily income-paying equity securities that were identified on a list of recommended securities by his member firm. Boggs would typically buy or sell these securities based on whether they were added to or removed from this list, and would frequently liquidate positions that increased or decreased by more than 10 percent. The findings also stated that Boggs improperly exercised discretion in these accounts without written authorization from the customers or the firm. The findings also included that Boggs caused the firm’s books and records to be incorrect by changing the investment objectives and risk tolerance for several of these customers in order to conform to his high-frequency trading strategy, even though the customers’ investment objectives and risk tolerance had not actually changed. (FINRA Case #2015045518901)

Energy losses with Wedbush Securities broker Mark Heiden?

Aidikoff, Uhl & Bakhtiari continues its investigation of the sales practices of Mark Heiden for his management of client accounts and the overconcentration of energy related stocks investments:

  • Energy XXI Bermuda Ltd.
  • Clearbridge American Energy MLP
  • Goldman Sachs MLP Energy
  • Arch Coal
  • Seadrill

We are currently investigating whether all material risks of the recommended investments were disclosed to clients as well as whether Wedbush broker, Mark Heiden, implemented an appropriate risk management strategy.

 

To discuss your options please contact an attorney below.

Aidikoff, Uhl & Bakhtiari represents retail and institutional investors around the world in securities arbitration and litigation matters. Attorneys for the firm have appeared before the Financial Industry Regulatory Authority (FINRA) and in numerous state and federal courts to resolve financial disputes between customers, banks, brokerage firms and other financial institutions.

Philip M. Aidikoff, pma@aublaw.com
Ryan K. Bakhtiari, rkb@aublaw.com
Aidikoff, Uhl & Bakhtiari
(800) 382-7969 Toll Free or (310) 274-0666
www.securitiesarbitration.com

William Fitzgerald White – San Diego, California

An Offer of Settlement was issued in which White was fined $12,500 and suspended from association with any FINRA member in all capacities for 16 months. Without admitting or denying the allegations, White consented to the sanctions and to the entry of findings that he willfully failed to timely amend his Uniform Application for Securities Industry Registration or Transfer (Form U4) to disclose a bankruptcy petition, tax liens, FINRA arbitrations and a civil litigation. The findings stated that White failed to timely respond to FINRA requests for documents and information during the course of an investigation into whether he disclosed certain reportable events on his Form U4. The findings also stated that White opened and traded in an outside securities account without giving prior written notice to his member firm and the executing firm. The suspension is in effect from October 2, 2017, through February 1, 2019. (FINRA Case #2015048104602)

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)


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