The Financial Industry Regulatory Authority (FINRA) recently sanctioned and barred David Chu (Chu) concerning allegations Chu refused cooperate with requests made by FINRA in connection with an investigation into possible outside business activities and private securities transactions. Such activities are often referred to as “selling away” in the industry. According to FINRA BrokerCheck records Chu has no outside business activities listed. It is unclear what businesses or investments FINRA’s investigation concerns.
Chu entered the securities industry in 2004, when he became associated with NYLife Securities LLC (NYLife). Chu held a Series 6 license which is a license that only allows the broker to sell investment companies (i.e. mutual funds) and variable contracts products. On March 16, 2015, NYLife filed a termination notice (known as a Form U5) with FINRA disclosing that Chu was discharged from the firm under circumstances that included a notification from the SEC that the agency was reviewing Chu’s books and records including his outside business activities and private securities transactions. NYLife conducted its own review and believed that Chu’s activities exceeded the scope of his approved activities with the brokerage firm.
According to FINRA, in April 2015, the agency began investigating whether Chu had engaged in outside business activities by soliciting investments or promissory notes. As part of its investigation FINRA sent a request to Chu for certain documents and information. According to FINRA, Chu provided a partial response to FINRA but thereafter through subsequent communications stated on a call with FINRA staff that he will not cooperate with the investigation. Consequently, Chu was barred by FINRA.
The conduct alleged against Chu may lead to “selling away” securities violations. In the industry the term selling away refers to when a financial advisor solicits investments in companies, promissory notes, or other securities that are not pre-approved by the broker’s affiliated firm. However, even though the brokerage firm claim ignorance of their advisor’s activities, under the FINRA rules, a brokerage firm owes a duty to properly monitor and supervise its employees in order to detect and prevent brokers from offering investments in this fashion. In order to properly supervise their brokers each firm is required to have procedures in order to monitor the activities of each advisor’s activities and interaction with the public. Selling away often occurs in brokerage firm that either fail to put in place a reasonable supervisory system or fail to actually implement that system. Supervisory failures allow brokers to engage in unsupervised misconduct that can include all manner improper conduct including selling away.
In cases of selling away the investor is unaware that the advisor’s investments are improper. In many of these cases the investor will not learn that the broker’s activities were wrongful until after the investment scheme is publicized, the broker is fired or charged by law enforcement, or stops returning client calls altogether.
Investors who have suffered losses may be able recover their losses through securities arbitration. The attorneys at Gana LLP are experienced in representing investors in cases of selling away and brokerage firms failure to supervise their representatives. Our consultations are free of charge and the firm is only compensated if you recover.