FINRA fined and suspended the president and CCO of a Boston-based broker-dealer for failing to detect or prevent one of his registered representatives from committing fraud.  Philip McMorrow, the president and CCO of Cantella & Co. was charged with allegedly missing numerous red flags;  however, his punishment from FINRA appeared to be lighter than other cases involving poor supervisory practices in similar situations. Where's the Supervisor? Mr. McMorrow was responsible for supervising a representative who was running a hedge fund.  The fund was losing money, yet unbeknownst to the firm or supervisor McMorrow, the rep was sending out quarterly investor statements that contained inflated values - in order to hide actual losses. FINRA found that McMorrow should have known how the representative was handling the funds - including sending out quarterly statements that apparently were not reviewed by Mr. McMorrow or some other supervisor.  Accordingly, McMorrow missed signs of mounting issues for the fund that continued to loss money.  Here are some examples:

Missed Flag. After trying to redeem a portion of his own personal investment in the fund, McMorrow requested documentation supporting the rep's valuation of the fund.  The representative never provided the documentation, and McMorrow never followed up. Missed Flag. McMorrow told the representative to obtain an independent audit of the fund.  The rep delayed and offered excuses, managing to stall the audit for nearly 2 years.  However, McMorrow never took this as a signal that he, himself, should scrutinize the fund more carefully. Missed Flag. McMorrow knew that the rep was producing account statements and newsletters but neither he nor his designee ever reviewed and approved them. The Punishment. For his failure to properly supervise the representative, his failure to heed red flags, and his acquiescense in allowing the representative to continue misleading investors while mismanaging the fund, McMorrow was fined $5,000 and suspended as principal for 10 days.  McMorrow has not been registered with Cantella & Co. since June 2009.   This is FINRA Case #2009018183201.   [Disciplinary Action for August 2011]