Two Registered Principals and two Registered Reps were sanctioned by FINRA for "inducing" customers to purchase unsuitable collateralized mortgage obligations that, not surprisingly, led to considerable losses in customers' retirement savings.  Customers were exposed to significant risks they did not understand;  risk all 4 brokers didn't quite understand themselves - or knew but chose to ignore.  It appears that all but one of the RR's were employed by Brookstreet Securities while the violations occurred. 

Principal Thomas Brough (Chicago, IL) was suspended 8 months;  Principal Eric Elliott (Miami Bch, FL) was ordered to pay $40K in fines and restitution, suspended 6 months;  RR Brian Falabella (Farmingdale, NY) was suspended 6 months;  and, RR Jonathan Sheinkop (Chicago, IL) was ordered to pay $30K in partial restitution, suspended 12 months.  All but Elliott were relieved of monetary sanctions given their financial statuses. 

    What Went Wrong.   All four signed off on FINRA charges that they employed misrepresentations and omissions to induce customers to invest in complex, illiquid and risky CMOs.  Customers were led to believe that CMOs provided consistently high annual returns, regardless of market conditions, and had the government's backing.  Instead, the 4 brokers ...

• Sold CMOs that were not government-guaranteed, were subject to price volatility, and provided uncertain cash flows and maturities - based on changes in interest rates.
• Failed to disclose material characteristics of, and risks associated with, different CMOs with substantially different payment structures and interest rate sensitivity.
• Failed to ensure that customers understood the characteristics and risks of CMOs.
• Failed themselves to adequately understand the CMO products they were selling.
• Didn't have reasonable grounds to believe that the individual CMO purchases were suitable for each customer.

    Also, Bought on Margin.  All except Brough magnified the customers' risk by recommending that the CMOs be bought on margin.  Elliott, Falabella and Sheinkop did so, even though they lacked reasonable grounds to believe the use of margin was suitable for customer CMO purchases. 

    Also, Used Unauthorized Discretionary Authority.  The four exercised discretionary authority in customer accounts - for which customers had not authorized and their member firms’ had not approved.(FINRA Case #2007011348301)    [FINRA Disciplinary Actions for November]