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Regulatory Sanctions

Suitability, De Facto Control: Failing to Heed Early ‘Smoke’ Signals

December 27, 2018

 by Howard Haykin


While some may accuse me of playing “Monday morning quarterback,” I think it’s reasonable to expect firms to identify and investigate suspect trading in customers’ accounts at very early stages – given the technological resources that are readily available. This would include ferreting out potential instances of unsuitable investing, excessive trading, undue concentration, and/or de facto control. In the case below, it took 5 months before the broker-dealer initiated its inquiries into suspect trading in a customer’s IRAs. By then, much of the damage had been done.



In September 2011 and December 2012, an administrative employee with Ameriprise opened 2 IRAs. With “growth” as the investment objectives, her risk tolerance as "aggressive" in one account and "conservative/moderate" in the other. As of December 2012, the IRAs represented nearly all the individual’s liquid net worth and, prior to February 2014, her accounts were invested in various mutual funds.


Starting in February 2014, her registered rep (“RR”) at Ameriprise recommended that the individual sell 100% of the mutual fund positions in her IRA accounts and invest the proceeds in 2 penny stocks focused on the marijuana business - Fusion Pharm, Inc. ("FSPM") and Hemp, Inc. ("HEMP").

  • The transactions were solicited in violation of the Firm's policies prohibiting the solicitation of penny stocks.
  • From 2/12/14 to 7/17/14, the registered rep mismarked 16 solicited trades as unsolicited in the individual’s accounts.
  • Shortly after the SEC suspended all trading in FSPM's stock for 2 weeks, the registered rep - who­ had already heavily invested the individual’s accounts in FSPM - purchased an additional $23,000 in FSPM stock in the individual’s account.
  • By July 2014, the registered rep had concentrated 100% of the individual’s portfolio in FSPM and HEMP.


In July 2014, when Ameriprise FINALLY inquires about the trading in the individual’s IRAs, the registered rep convinces the individual to close her Ameriprise accounts and transfer them to an existing account at Credit Suisse. From there, the registered rep gains online access to the account and proceeds to aggressively trade the individual’s account – making short-term, in-and-out trades in FSPM, HEMP, and various speculative energy stocks. At no time did the registered rep disclose his exercise of discretion in this 3rd party account to Ameriprise or Credit Suisse.


In May 2016, the individual complained to Ameriprise, asserting $89,000 in damages and from lost opportunity to participate in market gains during the same period. Ameriprise settled for $67,000, which the registered rep is obligated to pay back to the Firm.


POST SCRIPT.    As of December 26, 2018, both FSPM and HEMP are still trading publicly – FSPM closed at $0.001/share (down $0.009), while HEMP closed at $0.034/share (up $0.0019).



This case was reported in FINRA Disciplinary Actions for July 2018.

For details the case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2017053342601.