Failure to Supervise

Michael Kmetz Barred From Financial Industry for Alleged Private Securities Sales

September 5, 2013 | by Staff Attorney

Michael J. Kmetz (Kmetz) was barred by the Financial Industry Regulatory Authority (FINRA) over allegations concerning the sale of securities away from his member firm involving an elderly customer by accepting a bar from the securities industry.

On February 15, 2013, FINRA sent a letter to Kmetz requesting that he appear for testimony in connection with a complaint from an elderly investor who alleged that Kemtz had engaged in a variety of business activities and transactions. The customer’s complaint alleges that Kemtz sold securities away from Park Avenue. On March 12, 2013, Kemtz advised FINRA that he would not cooperate with the regulator’s requests for documents or testimony. Consequently, Kemtz was barred from the securities industry.

The accusations made against Kemtz are consistent with a “selling away” violation. Selling away occurs when a securities broker solicits securities that are not approved by the broker’s affiliated firm. Selling away is prohibited under FINRA Rule 3040, as well as other securities laws. The most common securities products solicited in selling away schemes are private placements and promissory notes.

Jason T. Knapp Accused of Selling Away Violations

September 4, 2013 | by Staff Attorney

At least one action has been initiated against Jason T. Knapp (Knapp) accusing the broker of running a Ponzi scheme. Knapp is a former broker of Dawson James Securities, Inc. (Dawson James) and operated under the company name Steeple Chase Group, LLC (Steeple Chase). Steeple Chase holds itself out as a real estate, financial lending, consulting, and investment related company.

From 2006 through September 2008 Knapp was a registered representative of Chicago Investment Group, LLC. From September 2008 through June 2012 Knapp was registered with Dawson James. Dawson James terminated Knapp citing that Knapp had falsified documents and solicited clients to purchase investments, presumably in Steeple Chase, that were not approved by the firm. In addition, an allegation was made by another client that Knapp engaged in an unauthorized transaction that Knapp could not provide the firm with a satisfactory explanation for.

In total two customer actions have been initiated against Knapp and Dawson James Securities for failing to supervise Knapp’s business activities. In March 2013, FINRA barred Knapp from the securities industry when he failed to respond to the agency’s request for additional information concerning the customer complaints and the circumstances of his termination.

Two Cantella & Co. Brokers Barred From the Financial Industry for Allegedly Misappropriating Customer Funds

September 2, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred Todd Lloyd Goedeke and Ronald W. Nichter from the financial industry after the brokers were accused of misappropriating funds from customers.

In March 26, 2004, Goedeke became a registered representative with Cantella & Co., Inc. (Cantella), a FINRA regulated broker-dealer. Goedeke remained associated with Cantella until his termination on June 18, 2010. On or about July 1, 2010, Cantella filed a Form U5 that stated that Goedeke had been terminated. On or about February 22, 2011 and March 16, 2011, Cantella filed amendments to their Form U5 disclosing allegations that Goedeke may have converted customer funds. Goedeke’s public disclosures also list that he is employed by Wealthcare & Retirement Solutions, a financial planning company that provides insurance, fixed annuities, and life insurance.

Ronald W. Nichter became registered in the securities industry in December 2008 with Cantella Nichter’s registration was terminated by Cantella on April 4, 2013.

ACGM, Inc. Settles Charges with FINRA Concerning Misleading Advertising

September 2, 2013 | by Staff Attorney

HKC Securities, Inc., known as ACGM, Inc. (ACGM), and Harold Kenneth Cohen (Cohen) of Palm Beach, Florida, reached a settlement the Financial Industry Regulatory Authority (FINRA) over the firm’s use of certain hedge fund sales material that allegedly failed to fairly present the risks and potential disadvantages of hedge fund investing. According to FINRA, the sales materials violated FINRA Rule 2210(d) by only highlighting the hedge fund’s positive features, not providing a sound basis for evaluating the investment, containing exaggerated language, failing to identify the basis for factual statements made, and containing an inadequate discussion of the performance of the funds.

The settlement states that between January 2008 and June 2011, the firm marketed hedge funds to large institutional investors such as educational and other endowment funds. The regulator found that ACGM’s procedures for the review and approval of hedge fund institutional sales material were not reasonably designed or implemented to achieve compliance with FINRA’s content standards for institutional sales material and were not appropriate for a business actively engaged in the third-party marketing of hedge funds. Cohen was the firm’s Chief Compliance Officer and the principal responsible for the review and approval of institutional sales material. The complaint alleges that Cohen failed to adequately supervise the review of sales materials in order to achieve compliance with FINRA’s content standards.

The settlement provided some examples of the alleged misleading and exaggerated content provided to investors. One example referred to a fund as having “significantly outperformed its benchmarks” or a fund’s performance as “remarkable.” Another summary document referred to the performance of the underlying fund managers for a fund of funds over 1-year, 3-year, and 5- year time horizons, even though the fund of funds had only been in operation for approximately three months at the time of the document. Other documents failed to identify the basis for factual statements made and only described the fund as the “#l hedge fund in Israel” and describing another fund as the “#l performing equity market neutral fund in the world in 2005.”

John S. Turo Settles With Regulatory Agency Concerning Allegations of Selling Unregistered Securities

August 30, 2013 | by Staff Attorney

John S. Turo (a/k/a James S. Turo) recently reached a settlement with the Financial Industry Regulatory Authority (FINRA) concerning allegations that he sold unregistered, nonexempt securities through general solicitation of the public in violation of Section 5 of the Securities Act of 1933 and in violation of NASD Rule 2110 and FINRA Rule 2010. The FINRA settlement result in a fine of $20,000. Turo became a registered securities representative and principal in 2003. From May 2005 until April 2007, Turo was associated with Innovation Capital, LLC. Starting in 2001, Turo was also associated with GT Securities, Inc. (GT Securities a/k/a Growthink Securities, Inc., Growthink, Inc., GTK Partners). Turo is the Managing Director and Chief Compliance Officer of GT Securities.

From 2008 and through 2010, Growthink issued securities to raise capital for GT Securities. In order to raise the capital, Turo sold private placements investments in Growthink to approximately 46 investors totaling $2,611,124. FINRA alleged that the private placement sales were nonexempt securities offerings that violated Rule 506 of Regulation D requiring registration and prohibits general solicitation of the investment to the public.

In order to sell the Growthink securities, FINRA alleges that Turo held webinars online on topics such as strategic business planning, entrepreneurship, and private equity investing that included general solicitations for investments in Growthink. The webinars were open to the general public. In addition, investors did not need a pre-existing relationship with Growthink or Turo in order to register and participate in the webinars. Thus, the webinars lacked a pre-screening process in order to limit the participants to only those who would qualify as accredited investors under the securities laws governing the sale of private placements. FINRA’s complaint alleged that the foregoing sales practices and the private placement offering itself violated various securities laws.

Karl Hahn Ordered by FINRA to Pay An Investor $11 Million

August 28, 2013 | by Staff Attorney

Former Merrill, Lynch Pierce, Fenner & Smith, Inc. (Merrill Lynch), Deutsche Bank Securities (Deutsche Bank), Inc., and Oppenheimer & Co., Inc. (Oppenheimer), broker Karl Edward Hahn (Hahn) was ordered by the Financial Industry Regulatory Authority (FINRA) to pay former clients over $11 million for misconduct in April 2013. Hahn was accused of common law fraud, negligent misrepresentations, and breach of fiduciary duties.

Hahn worked at Merrill Lynch from 2004 until 2008, at Deutsche Bank from 2008 to mid-2009, and at Oppenheimer from 2009 to early 2011. Hahn allegedly recommended various unsuitable investments to customers including covered calls, a premium financed life insurance policy, and $2.3 million fraudulent real estate financing project “involving East Coast” properties. Hahn allegedly recommended the life insurance policy for the the large commissions he stood to earn. Hahn also allegedly pocketed the money that was supposedly going to finance the East Coast properties.

Other claims made against Hahn include churning of investment accounts. Churning is a type of financial fraud where the broker engages in excessive trading in a client’s account for the purpose of generating commission but does not provide the investor with suitable investment strategy.

FINRA Charged Commonwealth Capital Securities Corp. and Kimberly Springsteen-Abbott With Misusing Investor Funds

August 27, 2013 | by Staff Attorney

On May 3, 2013 the Financial Industry Regulatory Authority (FINRA) filed a complaint against Commonwealth Capital Securities Corp. (CCSC) and Kimberly Springsteen-Abbott, owner, chief executive, and head of compliance for CCSC, for misusing investor funds. CCSC employs about 22 registered representatives and sells private placements and direct investments. Since 1993, CCSC marketed and sold 13 different equipment leasing funds raising $240 million for various technology equipment leases. The technology leases were supposed to have durations of 12 to 36 months.

Instead, according to FINRA, from December 2008 until February 2012, Kimberley Springsteen-Abbot misused investor funds to pay for various personal credit card charges and other expenses totaling at least $334,798. Some of those personal expenses include a $1,971 family vacation in 2010, and a $12,414 board of directors meeting in Hawaii in 2010. In total, FINRA alleges that 2,272 credit card charges related to misuse of funds.

In addition, FINRA alleges that during the agency’s examination in 2011, Kimberley Springsteen-Abbot and CCSC falsified and backdated a memo accounting for tickets to Disney World. Kimberley Springsteen-Abbot’s and CCSC’s manipulations of the records caused the brokerage firm’s books and records to be inaccurate.

vFinance Investments Inc. Settles Dispute Concerning Private Placements

August 26, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has settled a dispute with vFinance investments, Inc. (vFinance) concerning several violations of the securities laws including selling private placements in violation of the securities laws, failure to supervise, failure to disclose that the firm had worked with a statutorily disqualified person, and failure to retain and review email communications.

vFinance has been a FINRA member since 1998 has approximately 8 branch offices and employs about 40 registered representatives. The recent settlement is not the first time vFinance has been investigated by regulators. According to CRD records, there have been a total of 16 SEC, state, and FINRA regulatory actions initiated against vFinance in the past ten years.

The recent FINRA allegations concern several alleged violations. First, FINRA alleged that vFinance violated Regulation M. Regulation M is intended to prevent manipulative practices in the course of a securities offering by persons with an interest in the outcome by preventing conduct that could artificially influence a security’s market. In this case, FINRA alleged that vFinance representatives solicited nearly $6 million from investors for the PERF Go-Green Holdings, Inc. (PGOG) private placement. During the offering period, vFinance placed the PGOG’s common stock on the firm’s restricted list in order to avoid any potential conflict. However, despite the PGOG being placed on the firm’s restricted list, 22 customers of two representatives have been accused of selling 255,300 shares of the common stock of PGOG when the issuer was on the firm’s restricted list.

Broker-Dealers Settle with Massachusetts Securities Division Over the Alleged Improper Sales of Non-traded REITs

August 25, 2013 | by Staff Attorney

The Massachusetts Securities Division reached a settlement of $9.6 million with five independent broker dealers concerning allegations that the firms improperly sold non-traded real estate investments trusts (REITs) to hundreds of investors within the state. The firm’s fined include Ameriprise Financial Services Inc., Commonwealth Financial Network, Royal Alliance Associates, Inc. Securities America, Inc., and Lincoln Financial Advisors Corp. The Secretary of the Commonwealth of Massachusetts William Galvin announced that a part of the settlement would be used to distribute $6.1 million to investors as restitution.

A REIT is a security that invests in real estate directly either through properties or mortgages. REITs can be publicly traded on a national exchange or privately held. Private REITs are often referred to as non-traded REITs. Non-traded REITs have become increasingly popular as increased volatility in the stock market has led many investors to look for investment products that offer more stable returns. However, non-traded REITs may not be as safe and stable as advertised. Because non-traded REITs do not trade publicly the REIT itself determines its own asset values and only publishes updated valuations sporadically. Thus, a REITs volatility includes not only real estate market volatility but also management decisions and potentially leverage positions that investors may simply not be informed about.

Massachusetts alleged that the firms engaged in a “pattern of impropriety” selling these “popular but risky investments.” Massachusetts alleged significant and widespread problems with the firms’ compliance policies, practices, and procedures in the sale of non-traded REITs. In addition, Massachusetts alleged that the firms failed to only sell non-traded REITs to qualifying investors. Massachusetts allegations concerning each firm are as follows:

FINRA Files Complaint Against David Mickelson Over Private Placement Sales

August 24, 2013 | by Staff Attorney

David Mickelson has been accused by the Financial Industry Regulatory Authority (FINRA) of improperly selling approximately $8.3 million worth of various private placements to at least 71 customers without informing his brokerage firm (a practice known as “selling away“).

From 2004 through May 2011, Mickelson was associated with NFP Securities, Inc. (NFP). Mickelson’s private placement sales during this time included investments in Micro Pipe Fund I, LLC (Micro Pipe Fund), The Nutmeg Fund/Michael Fund LLLP, The Nutmeg/Fortuna Fund, LP, the Nutmeg/Patriot Fund, LLLP, and Lone Wolf, Inc. FINRA alleged that Mickelson created Micro Pipe Capital Management, LLC, Mickelson Investment Management, LLC, Hannahlu Ventures, LP, and DFM Agency, LLC in order to manage the various private placement offerings.

In order to promote his private placements, Mickelson allegedly marketed Micro Pipe Fund and other investments using misleading websites and advertisements communicated to customers using email accounts not monitored by NFP. Mickelson’s websites included: mickelsoninvestmentmanagement.com/mickinvest.com; astuteasset.com; and mickelsonlife.com. These websites contained securities-related communications including detailed discussions of private investment in public equity (PIPE) funds.