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Summit Hits Bottom Over Supervisory Failures (Part 2)
by Howard Haykin
Summit Equities agreed to a $325K fine in part to settle FINRA charges that it failed to reasonably supervise a registered rep’s private securities transactions.
BACKGROUND. Summit Equities, a FINRA member since 1982, is based in Parsippany, NJ. The firm employs around 132 registered persons. Summit Equities has no relevant disciplinary history.
Donald Gross, a registered rep, had 27 years’ experience with 2 firms – Summit Equities (1989-2016) and Global Equity Holdings (2001-2014). Gross is currently serving a 2-year suspension (through November 2018) on charges he participated in a private securities transaction for compensation by selling approximately $6.2 million in limited partnership interests in a hedge fund that traded options, to investors, all of whom were his member firm's customers, without providing the required notice to or obtaining permission from the firm. The findings stated that the hedge fund collapsed, and investors lost approximately 95% of their investments.
FINRA FINDINGS. From 2001 through 2012, Summit Equities failed to reasonably supervise the private securities transactions (“PSTs”) of registered rep Donald Gross.
In 2001, Summit Equities allowed Gross to form a separate broker-dealer – Global Equity Holdings (“GEH”), to sell the securities of a hedge fund he controlled. The Firm placed two restrictions on Gross’ association with GEH:
- Gross would be permitted to sell through GEH only securities of the hedge fund he controlled.
- "That all sales or placement of any security product must be booked and received through Summit Equities, Inc."
Gross violated these instructions in two ways: (i) he used GEH to sell the securities of several hedge funds other than his controlled hedge fund; and, (ii) he never reported these sales to the Firm. For example, from June 2011 through September 2011, he sold around $6.2 million in limited partnership interests in IME Fund, a hedge fund that traded options, to 11 investors, all of whom were Summit Equities' customers. Gross never disclosed these sales to the Firm. In September 2011, the IME Fund collapsed, and investors lost about 95% of their investments.
Where did Summit Equities go wrong?
- Summit Equities, after a number of years, stopped examining GEH's books and records, and the Firm never reviewed DG's GEH emails or conducted an on-site visit of GEH's office.
- Summit Equities failed to take steps to supervise Gross’ sales activities through GEH or to ensure that Gross complied with the Firm's restrictions on his sales through GEH.
- Summit Equities failed to detect several “red flags” that should have alerted it to Gross’ activity with selling outside hedge funds:
- e.g., in May and July 2011, five of Gross’ customers requested $2.5 million in wire transfers from their accounts to fund their investments in the IME hedge fund. The firm approved 2 of the wire transfers, but never questioned the registered rep about these transactions.
This case was reported in FINRA Disciplinary Actions for July 2017.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2015043159201.