An LPL Financial Corp. broker, based in Ohio, will pay $25K and be suspended 75 days to settle FINRA charges he didn't have a reasonable basis for recommending a Stock to Cash ("STC) program to existing and potential customers, who ultimately pledged securities valued at nearly $4mn into the program. The RR's customers obtained about $3.5mn in loans - having borrowed up to 90% of the value of the pledged stock for a short period of time.

• Pledged stock would be transferred to the loaning entity’s securities account maintained at a clearing firm. 
• No payments were required during the term of the loan, but customers were required to pay the full principal and interest due at the end of the loan term.
• Loaning Entity used documentation that made it appear it was retaining the securities pledged and might use them to enter into hedging transactions;  in reality, customers conveyed full ownership to the entity, which routinely sold the securities upon receipt and often moved the money into its own bank account. 
• Loaning Entity became unable to make complete payments to customers with profitable portfolios and used the proceeds from the sale of securities new customers pledged to pay off its obligations to existing customers;  money also was diverted to pay for expenses not related to its operation.  
  • [C-I Note:  Some of the characteristics of a Ponzi scheme.]

    RR's Alleged Violations.   The RR didn't take adequate efforts to find out what happened to the stock conveyed to the lender and did not inquire into what would be done with the stock.  He failed to conduct due diligence into the lender’s financial condition but relied on unverified statements made by the promoter.  He told his clients they could receive their stock back at the end of the loan period.

Yet, by failing to verify information about how the stock was held or secured and whether the lender had the ability to fulfill its obligations, the RR didn't have a reasonable basis for recommending the STC program to customers and potential customers. 

At RR's recommendation and with his participation, customers initially used some or most of the proceeds to buy equity-based mutual funds along with other products in violation of Regulation U restrictions.    

This was FINRA Case #2007008935005 - reported in:  [FINRA Report of Disc. Actions - February]