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CEO Failed to Catch Broker’s Double Mark-Ups on Customer Bond Trades
by Howard Haykin
In a default judgment against Further Lane Securities, the firm was fined $126,673.78 pertaining to FINRA charges that it charged excessive mark-ups on bond transactions over a 5-month period. FINRA entered separate settlements with the responsible registered rep and his supervisor. The individuals agreed to pay fines and rescissions to affected customers. (See further details below.)
BACKGROUND. NYC-based Further Lane Securities, a FINRA member since 1995, had branches in San Francisco, CA, Boerne, TX, and East Hampton, NY. The Firm withdrew its registration in May 2014.
EXCESSIVE BOND M-U’S. FINRA found that a single registered rep was involved in causing the excess mark-ups - James Collard, who as based in Further Lane's Texas branch. Collard was the registered rep for the account of a registered investment advisor. For each of RIA’s individual customers, Collard gave the RIA a proposal which identified the bonds that would form the customer's portfolio and the prices of the bonds to the customer. Collard placed limit orders with one of the Firm's traders to build those portfolios.
- The trader executed the trades, reported the execution price back to Collard, and moved the bonds from the trader's account to Collard’s account with a markup for the trader.
- Collard then sold the bonds to the RIA's retail customers with an additional markup.
- Thus, Collard caused the Firm to mark-up twice each security that the Firm sold to an ABC customer.
- During the span of 5 months, the Firm charged excessive markups in 53 of Collard's transactions with the RIA's individual customers.
- In addition, the Firm charged excessive markups in 2 transactions that Collard had with customers of another investment advisor.
- All told, markups on the 55 transactions totaled $46,673.78.
DEFICIENT SUPERVISION. FINRA found the firm’s supervisory system - including WSPs – to be deficient. As a result, the responsible supervisor - CEO Joseph Araiz – was never directed to conduct a reasonable review of the markups charged to customers. Had he been properly directed, Araiz would have at least taken into consideration, the following:
- type of security involved in each transaction;
- the security’s availability in the market;
- security’s price;
- amount of money involved in the transaction;
- whether the markup was disclosed;
- pattern of markups; and,
- nature of the firm’s business.
FINRA further found that the firm’s procedures did not address the practice in a branch office of charging a markup between the trader and the registered rep and a 2nd markup from the registered rep to the customer.
Finally, FINRA found that the firm did not establish any exception reports or automated surveillance programs to monitor for excessive markups.
FINANCIALISH TAKE-AWAYS. Let’s focus on one element in this case. The trader did not journal the purchased bond positions from his trading account to the customers’ accounts. NO. Instead he applied a mark-up before transferring the bonds to the broker’s account.
Proper protocol would have called for the broker to provide the trader with the customer account numbers and bond allocations. Instead, the broker insisted that the bonds be transferred into his account, in order for his to apply a second mark-up.
Permitting the positions to be journaled into an interim account should have been a red flag – for anyone who was watching. Which provides another lesson in supervision – journal entries should be carefully monitored because they can disguise a multitude of illegal activity.
This case was reported in FINRA Disciplinary Actions for May 2017.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2012034242501.