Articles Posted in FINRA rulings

FINRA recently entered into a settlement with Gar Wood Securities LLC (the “AWC”) concerning allegations that Gar Wood facilitated the sale of restricted securities in violation of the Section 5 of the 1933 Act, and the Firm failed to identify “suspicious” activity in a customer’s account that should have warranted the filing of a Form SAR-SF.

Continue reading

Pillar close-upFollowing its broad ruling in UBS Financial Services v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013), the 4th Circuit has issued two recent decisions that somewhat lessen the impact of the UBS holding. In UBS, the court held that a customer of a FINRA firm is anyone “not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member’s business activities,” including “investment banking and the securities business.” But in two recent rulings, the Court refused to further extend that definition, enjoining two FINRA arbitrations in which claims were based on (1) losses resulting from bonds issued by a FINRA member where the claimants purchased those bonds in a secondary market transaction from an unaffiliated third party and (2) losses resulting from purchases of fraudulent securities that were recommended by an attorney informally associated with an advisor at a FINRA-member firm.

Morgan Keegan & Co. v. Silverman, 706 F.3d 562 (4th Cir. 2013)
The Defendants in Morgan Keegan suffered losses in bond funds that were distributed and underwritten by Morgan Keegan (“MK”). The losses were allegedly in part the result of MK’s failure to disclose certain information regarding the valuation of – and risk associated with – the bonds. In enjoining the arbitration, the 4th Circuit noted that no contractual relationship existed between the Defendants and MK – the Defendants had not purchased the funds through an IPO but in a secondary market transaction from Legg Mason, a FINRA member unaffiliated with MK. Continue reading

Depositphotos_9223427_xsLincoln Financial Securities Corp. recently settled with FINRA concerning supervisory deficiencies over a now-deceased rep (Kenneth Wayne McLeod) who purportedly ran a Ponzi scheme targeting retired government employees (Department of Enforcement v. Lincoln Financial Services Corp. – Case No. 2010025074101). A copy of the FINRA AWC can be accessed here: (FINRA AWC). FINRAs case is a follow-up to an SEC action which charged Kenneth Wayne McLeod’s estate and entities run by Kenneth Wayne McLeod with operating a Ponzi scheme promising investors with tax-free returns of 8% to 10% per year (Securities and Exchange Commission v. Estate of Kenneth Wayne McLeod, F&S Asset Management Group, Inc. and Federal Employee Benefits Group, Inc. – Case No. 10-22078, U.S. District Court, Southern District of Florida). A copy of the SEC Complaint can be accessed here: (SEC Complaint). Continue reading

Robert L. Herskovits, Herskovits PLLC, Herskovits PLLC Submits Comments to FINRA Proposed Rule on Recruitment Compensation PracticesOn January 30, 2013, we sent FINRA a comment letter concerning the controversial proposed rule which would require disclosure of all “enhanced compensation” – forgivable loans, up-front bonuses, back-end bonuses, and the like – to customers. For those opposed to the proposed rule, the comment period is open until March 5, 2013. The text of our comment letter is set forth below:

Marcia E. Asquith Office of Corporate Secretary FINRA 1735 K Street, NW Washington, DC 20006-1506

Re: Comment on Proposed FINRA Rule concerning Enhanced Compensation

Depositphotos_1913696_xs-thumb-300x256-57397Last week, the U.S. Court of Appeals for the 4th Circuit issued a favorable ruling on the arbitrability of suits against FINRA members. Traditionally, under FINRA Rule 12200 any “customer” may request arbitration of a dispute with a FINRA member. UBS and Citi argued that Carilion was an issuer of securities, not a customer, and thus did not have the right to arbitrate their claims against the banks, both of which are FINRA members. The 4th Circuit joins the U.S. Court of Appeals for the 2nd Circuit and several district courts that have recently defined “customer” broadly in the FINRA context. The case is UBS Financial Services v. Carilion Clinic, (3:12-cv-00424-JAG).


Carilion is a non-profit hospital administration group based in West Virginia that issued $308 million of municipal bonds through UBS/Citi to finance a series of renovations and improvements. $234 million of that debt was issued in the form of auction rate securities (“ARS”).

Person's hand signing documentIt is commonplace in the securities industry for reps to transition from one broker-dealer to another. If the rep is a big producer, it is typical for the hiring firm to offer the rep a “forgivable loan” as an inducement to join. Depending upon the size of the producer’s book, the forgivable loan can equal 100% to 200% of the producer’s trailing 12 month’s of production, and is typically forgiven in equal increments annually over a 7 to 9 year period.

FINRA just published Regulatory Notice 13-02, seeking comments on a proposed rule to require disclosure of “conflicts of interest” relating to recruitment compensation practices. The proposed rule, called “Enhanced Compensation”, has the following components:

  • For one year following the rep’s start date, the “recruiting” broker-dealer must disclose the “details” of the enhanced compensation “at the time of first individualized contact by the recruiting member or registered person with the former customer after the registered person has terminated his or her association with the previous firm.” That should make for an interesting first conversation with the customer.

tug of warTwo recent FINRA arbitration awards highlight increased focus by FINRA arbitrators concerning discovery abuses by litigants. FINRA’s rules require cooperation of the parties in discovery (Rule 12505) and specifically empower the arbitrators to issue sanctions for lack of cooperation, failing to comply with the discovery rules, or frivolously objecting to the production of documents or information (Rule 12511). Rule 12511 also permits the panel to dismiss a claim, defense or proceeding if prior warnings or sanctions have proven ineffectual.

Miriam Dean v. Wells Fargo Advisors, LLC (FINRA Arbitration No. 11-03911)

Although the power to dismiss a claim is in the rule book, until recently, you would be hard pressed to find an award which exercised that power. That changed with Miriam Dean v. Wells Fargo Advisors, LLC (FINRA Arbitration No. 11-03911), wherein the customer asserted claims in connection with an investment in a reverse convertible note. Apparently, the customer ignored the first discovery order. Somewhat miffed by the customer’s non-compliance, the arbitrator issued a second order giving the claimant the following 3 options:

FINRA recently released an Acceptance, Waiver and Consent signed by Deutsche Bank Securities, Inc. (FINRA Matter No. 2010023096302). The AWC is instructive because it speaks to supervisory review of electronic correspondence and should be considered by broker-dealers when crafting a lexicon-based search system for electronic correspondence.

Background Facts

Broker examining stock dropDeutsche Bank’s Private Client Services division has 16 offices with approximately 240 registered representatives. Deutsche Bank’s Boston office employed a registered representative who engaged in questionable conduct, including: borrowing $220,000 from a customer, issuing personal checks totaling $860,000 which were returned for insufficient funds, failing to repay the customer loan in full, failing to obtain Firm approval to borrow from a customer, and charging personal expenses to a corporate credit card.

In Fidelity Brokerage Services LLC v. Morgan Stanley Smith Barney LLC and Brian Wilder (FINRA Arbitration No. 11-03937), a FINRA arbitration panel found against respondents and annexed a 25 page Arbitrators’ Report to the Award which excoriated respondents for misappropriation of trade secrets (Fidelity’s customer list) among other violations. The Award stands out for various reasons, including the punitive damages awarded against Morgan Stanley and the sizable attorneys’ fees awarded to Fidelity. Most interesting, however, is the Arbitrators’ Report itself, which carefully applied the facts to the law and is a must-read for any broker who may be considering jumping ship from a firm which is not a signatory to the Protocol for Broker Recruiting.

Facts of the Case

The underlying facts are straightforward. The rep had an employment agreement with Fidelity which contained non-solicitation and confidentiality clauses. The confidentiality clause stated that customer lists and contact information were deemed to be trade secrets by Fidelity. Prior to leaving Fidelity, the rep met with counsel and created a list of customer contact information purportedly in conformity with the Protocol for Broker Recruiting even though Fidelity is not a signatory to the Protocol. Upon leaving Fidelity, the rep began calling his former customers to inform them of his new employment and sent ACAT forms to a sub-set of his former customers.