Securities Lawyers Blog

Broker Douglas Cmelik Sanctioned by FINRA Over Soliciting Penny Stock Purchases

July 10, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned broker Douglas Cmelik(Cmelik) concerning allegations that Cmelik improperly marked order tickets for penny stock purchases as “unsolicited” when the purchases were solicited. Cmelik’s conduct allegedly violated NASD Conduct Rule 3110 and FINRA Rule 2010.

Penny stocks are securities that carry significant investment risks. A “penny stock” is defined by the Securities and Exchange Commission (SEC) as a security issued by a company with less than $100 million in market capitalization. Penny stocks are also often called “low-priced securities” because they typically trade at less than $5 per share. Many penny stocks are very thinly traded and consequently liquidity for the stock can vary day-to-day.

Penny stocks are typically not suitable for many retail investors and consequently many firms prohibit their advisors from soliciting investments in these issuers. First, penny stocks may trade infrequently or very thinly making it difficult to liquidate a penny stock holding. Consequently, penny stocks often fluctuate wildly day-to-day. Penny stocks are often the target of unscrupulous individuals for fraudulent purposes. One scheme employed is the “pump and dump” scheme. In a pump and dump scheme, an unfounded hype for a penny stock the pumper already owns is created to boost the stock price temporarily. The penny stock pumper then sells their shares for a profit causing intense downward pressure on the penny stock and the security quickly loses value. The defrauded investors suffer huge losses as a result of the scheme.

Broker David Diehl Sanctioned by FINRA Over the Unauthorized Sale of Promissory Notes

July 9, 2014 | by Staff Attorney

Our law office is investigating potential customer complaints against David Diehl in the wake of the findings and sanctions by the Financial Industry Regulatory Authority (FINRA) concerning allegations that Diehl engaged in private securities transactions, often referred to as “selling away”, and an outside business activity without disclosing these activities to his firm, First Liberties Financial. According to FINRA, Diehl was able to raise approximately $480,000 from seven investors for a business which owned and operated three hamburger restaurants in the St. Louis, Missouri area. FINRA found that most of the investors were his brokerage firm client. By virtue of this conduct, FINRA determined that Diehl violated NASD Rules 3030 and 3040 concerning outside business activities.

Diehl has been registered with seven firms since 2004. From July 2010, through March 2012, Diehl was registered with First Liberties Financial (First Liberties). Thereafter, Diehl joined Sunbelt Securities Inc. but left that firm on shortly in April 2012. Diehl was also registered with investment advisors and established an RIA firm, Diehl Wealth Management Group, LLC, in October 2010, and terminated registration in August 2011. Diehl has had three regulatory findings against him including AWC (2012031952301) issued in December 2012 where Diehl was suspended in all capacities for four months and fined $7,500 for indirectly borrowing money from a customer without his firm’s approval and for failing to timely amend his Form U4 to disclose a tax lien totaling $292,965. A broker’s inability to manage his own finances is a relevant disclosure for investors and brokerage firm’s to apply heightened scrutiny the broker’s actions.

Here, FINRA found that Diehl was approached by a client who was a well-known sports figure who wanted to open local burger restaurants under the client’s name. FINRA found that during the latter half of 2010, Diehl participated in establishing the business, and the first of three restaurants opened in April 2011. The restaurants were managed by another individual brought into the business by Diehl. According to FINRA, the restaurant founders set up a corporate entity to own and operate the restaurants and two of Diehl’s close relatives were designated as corporate secretary and director. The address provided for the corporation was Diehl’s home address and the registration of a fictitious name for the restaurants identified Diehl’s office location as the address for the corporation.

Claus Foerster Barred Over Allegations Concerning Fictitious “S.G. Investments”

July 8, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned and barred broker Claus Foerster (Foerster) concerning allegations that Foerster solicited firm customers to invest in a fictitious fund “S.G. Investments” and converted approximately $3 million in funds from 13 customers for his personal use. FINRA rules provide that no person associated with a member shall make improper use of a customer’s securities or funds.

Foerster entered the securities industry in 1988 when he associated with J.C. Bradford & Co. Between 1997 and 2008, Foerster was associated with Citigroup Global Markets, Inc. (Citigroup). From 2008 until February 2013, Foerster was associated with Morgan Keegan & Co. Inc. Thereafter, and until June 2014, Foerster was last associated with Raymond James & Associates, Inc., (Raymond James) when his registration was terminated based on the conduct described by FINRA in the AWC.

FINRA alleged that beginning in 2000, Foerster solicited securities customers to invest in an entity called S.G. Investments. S.G. Investments was marketed by Foerster to investors as an income-oriented investment. As part of Foerster’s scheme, FINRA alleged that he instructed customers to move funds from their brokerage accounts to their personal bank accounts via wire or electronic funds transfer. After that, FINRA found that Foerster would then instruct the customers to write checks from their personal bank accounts payable to “S.G. Investments.” FINRA determined that S.G. Investments was not an investment fund but instead a bank account owned and controlled by Foerster. According to FINRA, Foerster hid his scheme by providing customers with fictitious account statements. In addition, FINRA found that in at least two instances Foerster provided customers with purported dividend payments on a monthly basis in typical Ponzi Scheme fashion. Through these actions, FINRA found that Foerster converted approximately $3 million from 13 customers.

Gana LLP Files Claim Against JHS Capital Advisors Concerning Broker Enver Alijaj’s Activities

July 7, 2014 | by Staff Attorney

On June 27, 2014, Gana Weinstein LLP filed a statement of claim against JHS Capital Advisors, LLC, formerly known as Pointe Capital Inc, on behalf of an Arkansas couple. The claims stem from the misconduct of Enver R. “Joe” Alijaj, a former Pointe Capital financial advisor who has worked at several different firms and has a record laden with customer complaints and FINRA violations. The statement of claim brought by Gana Weinstein LLP on Claimants’ behalf alleges (1) unsuitable recommendations, (2) failure to supervise, (3) breach of fiduciary duty, (4) fraudulent misrepresentation, and (5) breach of contract.

Around July 2008, Claimants, a couple from Arkansas nearing retirement, received a cold call from Mr. Alijaj—a broker with Respondent JHS. (A cold call is the solicitation of potential customers who were not anticipating such an interaction. Cold calling is a technique whereby a salesperson contacts individuals who have not previously expressed an interest in the products or services that are being offered). Mr. Alijaj aggressively pursued the Claimants’ business, promising them that he would preserve their retirement capital while providing them with increased returns.

Mr. Alijaj allegedly persuaded Claimants to give him approximately $250,000, which they believed was being safely and practically invested to accommodate their needs. Instead, Mr. Alijaj put all of Claimants’ funds into just three extremely thinly traded and highly volatile stocks. The three stocks were A-Power Energy Generation Systems Ltd. (“APWR”), Silicon Motion Technology Corp (“SIMO”), and Yingli Green Energy Holdings Co. (“YGE”). By January 2009, only five months after Mr. Alijaj made the purchases, APWR, SIMO, and YGE were each down 81%, 66%, and 59% respectively. At no point during this five-month freefall did Mr. Alijaj adjust the Claimants’ accounts or even communicate to them an explanation for the price depreciation or potential remedial action.

FINRA Sanctions Polar Investment Over Penny Stock Transactions

July 4, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned Polar Investment Counsel, Inc. (Polar Investment) concerning allegations from 2011 and 2012, a firm advisor of Polar recommended various low-priced securities (penny stocks) received a total of 14 purchase orders for those securities. FINRA alleged that the representative marked eight of the orders as “unsolicited,” meaning that the customer instructed the advisor to purchase the security without any prompting from the advisor. FINRA found that the unsolicited marking was incorrect given that the advisor had brought the securities to the customers’ attention. FINRA found that the mismarked orders caused the firm’s books and records to be inaccurate. In addition, FINRA determined that Polar Investments did not permit brokers to recommend penny stock transactions and mistakenly assumed that all 14 transactions were unsolicited and did not conduct a sufficient supervisory review of those transactions.

Polar Investment has been registered with FINRA since 1997, its main office is in Thief River Falls, Minnesota, and is also registered as an investment advisor with the SEC. Polar Investment has 18 registered representatives operating out of 12 branch locations.

FINRA alleged that throughout 2011 and 2012, Polar Investment’s written supervisory procedures prohibited representatives from recommending penny stocks to the firm’s customers. As a consequence, Polar Investments presumed that all penny stock transactions were unsolicited and the firm did not subject advisors to adequate supervisory review. Instead, FINRA found that the firm had the customer sign a penny-stock disclosure form. FINRA found that between June 2011 and April 2012, a Polar Investment advisor by the initials “MV” brought various penny stocks to the attention of some of his customers. The advisor’s actions, according to FINRA, resulted in at least 14 orders to buy those securities.

Moloney Securities Fined Over Supervisory Failures Concerning Non-Traditional (Leveraged) ETFs

July 3, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned Moloney Securities Company, Inc. (Moloney Securities) concerning allegations Moloney Securities failed to establish and maintain a supervisory system, including written policies, regarding the sale of leveraged, inverse and inverse leveraged exchange-traded funds (Non-Traditional ETFs) that was reasonably designed to meet the requirements under the securities laws.

ETFs attempt to track a market index, sector industry, interest rate, or country. ETFs can either track the index or apply leverage in order to amplify the returns. For example, a leveraged ETF with 300% leverage attempts to return 3% for every 1% the underlying index returns. Nontraditional ETFs can also be designed to return the inverse or the opposite of the return of the benchmark. In general, Leveraged ETFs are used only for short term trading. The Securities Exchange Commission (SEC) has warned investors that most Non-Traditional ETFs reset daily and are designed to achieve their stated objectives in a single trading session. In addition to the risks of leverage, Non-Traditional ETFs held over the long term can differ drastically from the underlying index or benchmark during the same period. FINRA has also acknowledged that leveraged ETFs are complex products that carry significant risks and ”are typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.”

FINRA found that from January 2011, through December 2012, Moloney Securities allowed its representatives to recommend and sell Non-Traditional ETFs to customers. At this time, FINRA found that Moloney’s written supervisory procedures did not address the sale or supervision of Non-Traditional ETFs. In addition, FINRA alleged that Moloney Securities did not conduct due diligence of Non-Traditional ETFs before allowing financial advisors to recommend them to customers. Despite the unique features and risk factors of Non-Traditional ETFs that FINRA has noted, FIRNA found that Moloney Securities did not provide its brokers or supervisors with any training or specific guidance as to whether and when Non-Traditional ETFs would be appropriate for their customers. FINRA also found that Moloney Securities did not use any reports or other tools to monitor the length of time that customers held open positions in Non-Traditional ETFs or track investment losses occurring due to those positions.

Infinex Investments Fined Over Unsuitable Sale of Non-Traditional (Leveraged) ETFs

July 2, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned Infinex Investments, Inc. (Infinex Investments) concerning allegations that from April 2009, through March 2011, Infinex Investments permitted 35 registered representatives who received minimal training on inverse and inverse-leveraged Exchange-Traded Funds (Non-Traditional ETFs) to sell them to customers. FINRA alleged that the firm and brokers failed to perform reasonable due diligence to understand the risks and features of the product necessary in order to recommend 229 customers approximately 835 transactions in these products. In addition, FINRA also found that some of the recommendations were also unsuitable on a customer specific basis. Finally, FINRA also found that Infincx Investments also failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable FINRA rules relating to the sale of Non- Traditional ETFs.

Infinex Investments has been a FINRA firm since 1994, is a full service broker-dealer with its primary business being the retail sale of mutual funds and variable annuities. The firm employs approximately 400 registered representatives located in approximately 500 branches.

As a background, ETFs attempt to track a market index. ETFs can be either attempt to track the index or apply leverage in order to amplify the returns of an underlying stock position. A leveraged ETF with 300% leverage will attempt to return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse or the opposite of the return of the benchmark. Leveraged ETFs are generally used only for short term trading. The Securities Exchange Commission (SEC) has warned that most Non-Traditional ETFs reset daily and are designed to achieve their stated objectives on a daily basis. In addition to the risks of leverage the performance of Non-Traditional ETFs held over the long term can differ drastically from the underlying index or benchmark during the same period. FINRA has also acknowledged that leveraged ETFs are complex products that carry significant risks that are typically not suitable for retail investors.

Gilford Securities Fined by FINRA Over Deficient Supervisory Procedures

July 1, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Gilford Securities, Inc. (Gilford Securities) concerning allegations that from April 2010 through March 2012, Gilford Securities failed to: (i) make certain disclosures in research reports; (ii) have approval of certain research reports; (iii) implement written supervision policies reasonably designed to comply with NASD Rule 2711; (iv) establish and enforce written supervisory control policies concerning the supervision of producing managers; and (v) implement a reasonably designed Anti-Money Laundering Compliance Program (AMLCP).

Gilford Securities has been a FINRA member since January 1980, has eight branch offices, and 78 registered representatives. Gilford Securities’ principal place of business is New York, New York.

FINRA rules require disclosure of any material conflict of interests of the research analyst of which the research analyst knows or has a reason to know in the publication of the research report. FINRA found that from April 2010, through March 2012, Gilford Securities published 503 research reports. FINRA found that each of those reports failed to disclose that the research analyst received compensation of commissions on transactions the analyst’s customers made in the securities covered in violation of the FINRA Rules.

Dawson James Securities Sanctioned Over Alleged Supervisory Failures

June 30, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Dawson James Securities, Inc., (Dawson James) concerning allegations that the firm did not provide for supervision reasonably designed to comply with certain applicable securities laws and regulations.

FINRA has stated that at a minimum, written supervisory procedures should describe: (a) identification of the individual responsible for supervision; (b) supervisory steps and review procedurals to be taken by the supervisor; (c) the frequency of reviews; and (d) the documentation of reviews. FINRA found that the Dawson James’ written supervisory procedures failed to provide for one or more of the four above-cited minimum requirements for adequate written supervisory procedures for conduct concerning: (1) disclosure of potential conflicts of interests to clients; (2) trading in the opposite direction of solicited customer transactions; (3) certain broker sales practice concerns such as unauthorized trading, suitability, excessive trading, and free-riding; (4) concentration of securities in clients’ accounts; (5) the sharing of profits and losses in clients’ accounts; (6) wash transactions; (7) coordinated trading; and, (8) the review of representatives’ electronic communications, among other violations.

FINRA alleged that the firm failed to investigate numerous ”red flags” relating to the activities of one registered representative referred to by the initials “DM”, including: (1) numerous exceptions generated on the firm’ s supervisory reports which included commissions charged to DM’s clients; (2) high concentrations of one security in DM’s clients’ accounts; and, (3) numerous cancel rebill requests for DM’s clients’ accounts. FINRA also found that James Dawson failed to enforce its written supervisory procedures that required electronic correspondence be reviewed on a daily basis. FINRA also found that from January 2007 through February 2008, the firm failed to ensure that the firm’s Head Trader, referred to as the initials “AE” carried out his delegated supervisory responsibilities relating to proprietary trading; trade reporting; clock synchronization; short sale compliance; compliance with the manning rule; mark ups and mark downs; and, compliance with inventory guidelines.

JP Turner Sanctioned Again By Financial Regulator

June 27, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker-dealer J.P. Turner & Company, L.L.C. (JP Turner) concerning allegations JP Turner failed to establish and enforce reasonable supervisory procedures to monitor the outside brokerage accounts of its registered representatives. In addition, FINRA alleged that JP Turner failed to establish an escrow account on one contingency offering and broke the escrow without raising the required minimum in bona fide investments.

This isn’t the first time that FINRA has come down on JP Turner’s practices and that our firm has written about the conduct of JP Turner brokers. Those articles can be accessed here (JP Turner Sanctioned By FINRA Over Non-Traditional ETF Sales and Mutual Fund Switches), here (JP Turner Supervisor Sanctioned Over Failure to Supervise Mutual Fund Switches), and here (SEC Finds that Former JP Turner Broker Ralph Calabro Churned A Client’s Account).

JP Turner has been FINRA firm since 1997. JP Turner engages in a wide range of securities transactions including the sale of municipal and corporate debt securities, equities, mutual funds, options, oil and gas interests, private placements, variable annuities, and other direct participation programs. JP Turner employs approximately 422 financial advisors and operates out of 185 branch offices with principal offices in Atlanta, Georgia.