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2011: The Year of the Fine

December 19, 2011
[ by Melanie Gretchen ] Investors were the top priority in 2011. Let's see how FINRA accomplished its goals - through fines... fines... fines. Significant 2011 achievements:
  • FINRA brought 1,411 disciplinary actions against registered individuals and firms, imposed fines exceeding $63 million, ordered more than $19 million in restitution to harmed investors and brought 1,411 disciplinary actions against registered individuals and firms.
  • FINRA expelled 17 firms from the securities industry, barred 317 individuals and suspended 432 brokers from association with FINRA-regulated firms.
  • FINRA referred 600 referrals matters involving potential fraudulent conduct to federal and state regulators and law enforcement agencies referred by FINRA's Office of Fraud Detection and Market Intelligence (OFDMI).
  • FINRA reconfigured its exam program to be more risk-based and ensure exam teams are more focused on investor safety.  In addition, it added resources and staff with more expertise, and strengthened FINRA's ability to identify high-risk firms, branch offices, brokers, activities and products through broader data collection and more comprehensive analysis.
  • FINRA Market Regulation is set to launch cross-market surveillance patterns to monitor FINRA, NYSE, and NASDAQ markets in 2012, supported by the expansion of OATS to include all NMS securities.
  • The expansion of the Trade Reporting and Compliance Engine (TRACE) to include securitized products to TRACE added 1.2 million asset- and mortgaged-backed securities to the current 70,000 TRACE-eligible securities.  FINRA also introduced securitized products benchmark pricing and aggregated data reports on FINRA's website to provide investors with greater insight into these products.
  • FINRA moved forward on rule proposals, including FINRA's Back Office Registration, Suitability and Debt Research Conflicts of Interest.
Real-time surveillance techniques. Using this strategy, OFDMI uncovered potential fraud and insider trading, and resulted in SEC referrals that enabled the Commission to take quick action to protect investors.  OFDMI, including FINRA's Office of the Whistleblower, referred 638 matters involving potential fraudulent conduct to the SEC and other federal or state law enforcement agencies for further investigation - including 290 fraud referrals from Fraud Surveillance and 286 insider trading referrals from Insider Trading Surveillance Section. Referrals. Through referrals to the SEC and federal and state law enforcement agencies, OFDMI's high profile cases include:
  • A tip provided to FINRA's Office of the Whistleblower and referred to the FBI involving Joseph Mazella, founder and president of the Great Atlantic Group, Inc.  He operated the alleged scheme from 2007 to 2010 involving some $12 million; he was arrested in April and charged with securities fraud, wire fraud and money laundering.
  • After OFDMI referred an insider trading matter to the SEC on an expedited basis, the Commission investigated suspicious trading around the takeover of Global Industries to the SEC in September, by French company Technip SA.  The perpetrators earned illicit profits of $1.7 million.
  • Last month, OFDMI sent an insider trading referral to the SEC identifying suspicious foreign trading within 2 days of the Pearson PLC's 11/21/11 announcement of plans to acquire Beijing-based Global Education & Technology Group Ltd.  This led to the freezing of $2.7 million in illicit profits held in foreign customer accounts by 4 Chinese citizens, suspected to have used non-public information to trade ahead of the merger announcement.
  • After FINRA's Office of the Whistleblower got a tip about an off-exchange foreign currency scheme and quickly referred it to the Commodity Futures Trading Commission, 3 people were charged in June with operating a $1.4 million fraudulent forex scheme.
  • FINRA's Office of the Whistleblower received a tip from an investor that her broker, Michael Serota, stole approximately $200,000 from her account, after which FINRA barred Serota 41 days later.
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Firm violations. Enforcement actions against firms for improper product promotion and/or the unsuitable sale of structured products to retail investors ran the gamut this year.  Sales practice violations included combinations of misrepresentation, material omissions, unsuitable recommendations, and inadequate supervision and training in principal-protected notes, reverse convertibles, and subprime investments. Disciplinary actions. FINRA actions against firms, included:
  • David Lerner & Associates, which was charged with misrepresentations, advertising and suitability violations concerning the sales of Apple REIT Ten targeted at unsophisticated and elderly customers.
  • Wells Fargo was charged with selling unsuitable reverse convertibles to customers - most over the age of 80 - with limited investment experience and low risk tolerance.  WFC agreed to a $2 million fine and to provide restitution to harmed customers.
  • Fines were levied against Credit Suisse ($4.5 million) and Merrill Lynch ($3 million) for allegedly misrepresenting subprime securitizations;  Chase agreed to pay a $1.7 million fine and was ordered to return $1.9 million to customers in light of unsuitable sales of certain financial products.
  • FINRA's Member Examination and Enforcement Departments worked together to sanction 10 firms and 17 individuals in cases involving selling interests in private placements in Medcap, Provident and DBSI, that resulted in $4 million in restitution.
  • UBS was fined $12 million for violations involving short sales and for failing to maintain adequate supervision of certain employees.  UBS Financial Service also was fined $2.5 million and ordered to pay $8.25 million to customers for issuing misleading communications regarding Lehman-issued notes.
  • Morgan Stanley was fined $1 million for charging excessive markups and markdowns on corporate and municipal bond transactions.  The bank also paid $371K in restitution.
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Exam program upgrades. FINRA enhanced its examination program to better detect potential fraud and to focus on areas of risk.  Regulatory matters that posed greater risks to investors were designated as "urgent" and expedited for review to make sure the appropriate level of resources and expertise are assigned to them, as well as to facilitate coordination and information sharing across departments. District office staff member were increasingly tasked with developing an in-depth and ongoing understanding of specific firms, and included real-time monitoring of business and financial changes.  This expansion enhanced FINRA's ability to evaluate available regulatory information and to target risk-based examinations. To date, 3,050 examinations have been conducted in 2011. The exam staff also increased focus on branch-level activity, leading to an increase in the number of branch exams.  FINRA also refocused exams at point-of-sale, spending more time on site at the branch offices and, depending on the firm, less time at the main office.  Compared to 2010, 350 more branch office exams to total almost 800. Expansion of equity market regulation. After the NYSE allocated FINRA primary surveillance responsibility for each of its equity and options markets, FINRA aggregated data across all FINRA, NYSE and NASDAQ equity markets, which account for 80% of equity volume.  Next, FINRA is developing cross-market surveillance patterns that are scheduled to examine trading activity across all markets at one time, rather than having multiple patterns survey each market separately. Set to launch in 2011, this consolidation toward integration into new cross-market surveillance patterns, that will enable FINRA to identify problematic trading activity more quickly, and to detect improper conduct and stop it before it spreads. To create a uniform order audit trail system to work as a foundation for cross-market surveillance, FINRA completed the expansion of OATS to all NMS securities in November of this year;  this enabled the NYSE to retire its Order Tracking System.  Currently, FINRA provides regulatory services to 10 exchanges covering 14 equity and options markets. Arbitration forum rule. To enhance investor confidence in FINRA's arbitration process, FINRA adopted a new rule that allows investors to choose all-public panels in all customer cases with 3 arbitrators.  In 2011, the most common issues in cases filed in FINRA's arbitration forum were breach of fiduciary duty, negligence, and misrepresentation. So far this year, approximately 4,378 cases filed in arbitration and 640 cases commenced in mediation. Education. Together, FINRA and the FINRA Investor Education Foundation sought to educate investors about potential harmful activity.  To date, FINRA issued 10 investor alerts focusing on such diverse topics as gold stock scams, non-traded REITS, and structured products. The FINRA Foundation, in partnership with Stanford University, launched the nation's first Research Center on the Prevention of Financial Fraud, an interdisciplinary resource for law enforcement, government and research groups studying financial fraud.

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