Fictitious trades, handling of confidential information, and prospectus delivery recently caught FINRA's attention, along with 6 others violative actions by brokers and associated persons.  Follow the odyssey as Compliance-Insights sums up what "what went wrong" in these message cases.   [Case studies 1, 2, 3 appear after jump.]

1. Entering Fictitious Trades and Causing Inaccurate Firm Records.
2. Improper Transfer of Confidential and Proprietary Information.
3. Misrepresenting Information Regarding Prospectus Delivery.
4. Willful Failure to Disclose Material Information on a Form U4.
5. Misappropriation of Customer Funds and Failure to Respond to FINRA Investigation.
6. Improperly Engaging in Outside Business Activities and Failing to Respond to FINRA Information Requests.
7. Unsuitable Recommendations
8. Improper Exercise of Discretion, Unsuitable Recommendations and Failure to Disclose Risks.
9. Conversion of Customer Funds.

1. Entering Fictitious Trades and Causing Inaccurate Firm Records. A broker-dealer was in the business of securitizing Small Business Administration (SBA) loans and selling those SBA loan-backed securities to institutional customers.  Over the course of about a year, the firm’s inventory levels of SBA securities exceeded its inventory limit. What had happened was the head trader knowingly placed 4 fictitious trades valued at more than $82 million into the firm’s system to create the false impression that its inventory levels of SBA securities were lower than they actually were - i.e., the trader had sold SBA securities to institutional customers.  The trader also manipulated forward the settlement dates for the 4 fictitious trades to give him additional time to try to legitimately sell the SBA securities.  When firm personnel discovered a discrepancy in the firm’s records, the trader said he had mistakenly effected the trades and would correct them.

The trader settled FINRA charges he willfully violated Exchange Act Rule 10b-5 (federal securities fraud), NASD Rules 2120 (fraud), 2110 (ethical standards) and 3110 (books and records), and FINRA Rule 2010 (ethical standards), by accepting a $10K fine and 6-month suspension.

2.  Improper Transfer of Confidential and Proprietary Information. Over a 4-month period, an RR emailed his member firm’s proprietary and confidential information outside of the firm - for purposes other than firm business.  First, he emailed 2 monthly compliance reports to an individual at another member firm - containing information regarding 6 of the firm’s customers.  Later, after notifying his member firm of his intent to resign, the RR emailed to his personal email account 2 documents containing information about the firm and and about 70 of its customers.  Several days later, he emailed additional customer information, including home addresses, to his personal email account.

The RR, who not only violated firm policies, but caused the firm to violate SEC and other federal regulations, settled FINRA charges that he violated NASD Rule 2110 (ethical standards) and FINRA Rule 2010 (ethical standards), by accepting a $5K fine and 15-day suspension.

3.  Misrepresenting Information Regarding Prospectus Delivery. When dealing with IPOs, a broker-dealer required each RR to complete a syndicate worksheet evidencing his or her compliance with firm policies and procedures.  Among other things, the worksheet asked for the date and method of preliminary prospectus delivery to each customer.  The RR in this case, however, was caught misrepresenting that he had delivered preliminary prospectuses to 9 customers who intended to purchase IPO shares.  In fact, he had not. The RR later testified that he was not aware that he was responsible for delivering the preliminary prospectuses to customers because he understood that the firm would handle delivery.  The RR furhter testified that, when he advised the branch manager (BOM) that he had not delivered preliminary prospectuses to 9 customers for whom he had submitted order tickets to purchase IPO stock, the BOM advised him to nonetheless misrepresent on the syndicate worksheet that he had hand-delivered the prospectuses.  The branch administrative manager submitted information from all completed worksheets, including the information applicable to this RR - which, as we now know, was erroneous.

The RR agreed to settle FINRA charges he violated NASD Rules 2110 (ethical standards) and 3110 (books and records), by accepting a $5K fine.

For further details, go to:   [FINRA Quarterly Disciplinary Review, January 2012]