Securities Lawyer Blog

The Financial Industry Regulatory Authority (FINRA) is going on the offensive to protect the investing public against email hacking attacks in which fraudulent transfers are being made. Issuing both a Regulatory Notice 12-05 and an Investor Alert that is aptly titled: Email Hack Attack? Be Sure to Notify Brokerage Firms and Other Financial Institutions, the agency has blanketed the subject due to what it says are increased reports of email and account invasion by hackers that are leading to investors' funds being stolen.

At first glance, the scenario is similar to other email scams, but these attacks differ in a significant way. In past instances, customers are sent emails asking for private information that is then used to fraudulently obtain information that allows outsiders to gain access to accounts.

As noted in the Regulatory Notice executive summary, the scheme has several steps that make it appear that the transfer requests are legitimate. But in fact the perpetrators have gained access to an investor's email and contact lists and that information is then used to instruct firms to make transfers into accounts controlled by third parties, not the investor. In some instances, these fraudulent "instructions" might include what are also fraudulent letters of authorization that attempt to pressure firms into releasing funds prior to a follow-up phone authorization.

The FINRA warning is intended to inform the public to avoid these circumstances by safeguarding assets. The Regulatory Notice is also intended to halt this trend by helping firms understand that allowing or accepting email instructions is fraught with risk. The hope is that firms will reassess their policies with regard to instructions, which should help protect against this fraudulent practice on the part of hackers.

Once an individual is aware of or suspects that email has been compromised, FINRA is asking that investors immediately inform their brokerage firms or financial institutions of this problem.

Referring generally to NASD Rule 3012 and NYSE Rule 401, RN12-05 reminds firms that they must establish, maintain and enforce written supervisory control policies and procedures that are reasonably designed to review and monitor the transmittal of funds or securities from customer accounts to third-party accounts. These requirements and their scope have been delineated in Regulatory Notice 09-64, which "highlighted a number of questions firms should consider in assessing the adequacy of their policies and procedures for verifying the validity of requests to withdraw or transfer customer funds."

This increase of fraudulent email activity serves as a reminder that firms should be vigilant in assessing and establishing policies and practices as to electronic communications with investors. Assessing the risks involved with the way in which investors are permitted to communicate instructions for the withdrawal or transfer of funds through electronic means, including verification and follow-up, are recommended.

The lawyers of Wall Street's Gusrae Kaplan Nusbaum PLLC are experienced advisors to firms and broker-dealers in all areas of compliance. Contact our law firm for more information on our wide range of services, including litigation and enforcement representation. We are a firm comprised of experienced former senior level regulators and securities and compliance litigators, providing advisory services to our clients in regulatory compliance.

The Securities Lawyer Blog has recently posted on rulemaking and regulatory enforcement matters that are related to conflicts of interest in several contexts. As we noted in discussing FINRA Regulatory Notice 10-54, Dodd-Frank and related SEC mandates are intended to address the underlying obligations of broker-dealers and investment advisers "to facilitate simple and clear disclosures of material conflicts by both broker-dealers and investment advisers."

Conflict of interest allegations can arise in various circumstances in the securities industry. Earlier this month, Citigroup Global Markets, Inc., settled conflict of interest allegations with the Financial Industry Regulatory Authority (FINRA) that arose in the context of research reports and research analyst's public appearances. The firm has agreed to pay $725,000 for the resolution of the allegations against it.

FINRA claimed that Citigroup did not disclose potential conflicts of interest that were relevant to business relationships that it maintained. At issue in the matter were research reports that the firm published from early 2007 through the first quarter of 2010. Part of the problem was alleged by FINRA to have been due to supervisory failures that otherwise might have caught the lack of required disclosures.

Additional allegations made by FINRA in this situation related to several issues. First, the firm did not disclose its management or co-management of public securities offerings; second, the firm did not disclose that it made a market in the securities of, and/or had a one percent or greater beneficial ownership in, covered companies from which it received revenues, and; third, the firm failed to disclose this in research reports.

Added to these allegations is the claim by FINRA that in public appearances, research analysts did not disclose potential conflicts when allegedly conflicted companies were discussed. According to FINRA's Executive Vice President and Chief of Enforcement, Brad Bennett, these alleged failures " 'prevented investors from being aware of potential biases in its research recommendations.' "

A major factor in the disclosure failures was stated by FINRA to be problematic databases that were used by the firm to manage and identify conflicts of interest. In this case, as in many others we have posted in the past, the databases were claimed to have been either inaccurate and/or incomplete. These database problems are alleged to have derived from what were deemed to be "technical deficiencies."

Wall Street's Gusrae Kaplan Nusbaum PLLC represents broker-dealers in regulatory and enforcement matters. We regularly advise clients and defend industry members before all regulatory entities in matters involving a broad spectrum of issues for broker-dealers and firms. These issues include maintaining adequate supervision and providing marketing materials that properly disclose potential conflicts of interest. Contact our law firm to consult with one of our attorneys and to learn more about our law practice.

As 2011 comes to a close, the Financial Industry Regulatory Authority (FINRA) has issued a look-back at the year. The agency posted some interesting statistics on activities in the areas of investor protections, fraud avoidance and various efforts to "ensure the securities industry operated fairly and honestly for investors." Noting the achievements of this past year, the agency has certainly been proactive in this charged environment that carries with it not only investor expectations, but a greater public focus on financial markets and their stability.

Advising and representing broker-dealers and firms, the lawyers of the Securities Lawyer Blog are well aware of the proactive regulatory and enforcement environment. FINRA's numbers are noteworthy. In the area of disciplinary actions for example, FINRA brought over 1400, involving both firms and registered individuals. The fines resulting from these amounted to over $63 million. Restitution to investors amounted to over $19 million.

The Securities Lawyer Blog has also posted throughout the year on expulsions and suspensions that have resulted from various enforcement actions and settlements. FINRA notes that its numbers are up from 2010 in this regard, with the suspension of over 430 brokers and the barring of nearly 320 individuals from association with regulated firms. The agency reports that it expelled 17 firms from operating within the securities industry.

The year-end review for FINRA's Office of Fraud Detection and Market Intelligence (OFDMI) included referrals to other regulators in over 600 matters. The breakdown of those referrals between federal and state regulators and law enforcement is not delineated in FINRA's statistics.

Coordinated efforts with the Securities and Exchange Commission in the area of real-time surveillance is noted to have made it possible for the OFDMI to expedite matters that involved potential fraud and insider trading. Nearly 640 matters were referred out by OFDMI for further investigation when real time surveillance pointed to potential issues. These matters were referred to various enforcement agencies, including the SEC, state and federal agencies.

Over the year, the Securities Lawyer Blog has also kept our readers informed of the many matters involving firms and broker-dealers in the area of retail product promotions and unsuitability issues involving structured products. FINRA notes that it has been very active during the year highlighting its activities in the area of 'sales practice violations" that include a broad spectrum of issues, such as "misrepresentation, material omissions, unsuitable recommendations, and inadequate supervision and training in principal-protected notes, reverse convertibles and subprime investments."

We will continue the year-in-review with the area of examinations and market regulation in our next post. The lawyers of New York's Gusrae Kaplan Nusbaum, PLLC are pleased to bring our readers the Securities Lawyer Blog. Please contact our New York or Florida offices to learn about our law practice and speak with one of our highly-experienced attorneys.

We wish you all a good and productive year in 2012.

Recently, the Financial Industry Regulatory Authority (FINRA) announced that it has settled two separate and unrelated enforcement matters involving Barclays Capital Inc. (Barclays) and Wells Fargo Investments, LLC, (Wells Fargo) which together resulted in fines totaling about $5 million.

The matter involving Barclays which was settled for $3 million, centered around allegations that the firm misrepresented delinquency data with regard to certain investments and provided inadequate supervision with regard to their offering and sale. The Securities Lawyer Blog has posted on other matters in the recent past involving failures to adequately supervise as alleged in regulatory and enforcement actions.

The Barclays matter and settlement involved the issuance of residential subprime mortgage securitizations (RMBS). FINRA alleged that for a period of about three years, from 2007 through 2010, the firm allegedly misrepresented the historical delinquency rates for certain subprime RMBS that it offered. Noting that "historical delinquency rates are material to investors," both in assessing RMBS value and potential future returns based on the potential for mortgage payment failures, the firm allegedly misrepresented these rates for three of the RMBS underwritten and sold by Barclays.

Specifically, FINRA claimed that the firm posted delinquency data on its website that was inaccurate. The errors in this historical information was said to have been significant, so much so that it could impact investor's ability to evaluate the investment value and "subsequent securitizations."

The issue related to supervision involved FINRA's allegation that the firm did not have in place a system that would ensure that its website disclosures were maintained and updated. Without supervision of these critical components, the delinquency data could well be inaccurate, making it difficult if not impossible for investors to assess future RMBS investment performance.

The matter involving Wells Fargo, which was settled for $2 million, involved alleged activities with regard to one broker and 21 of the firm's customers. The firm was alleged through this broker to have provided "unsuitable sales of reverse convertible securities." In addition, it was also alleged that customers eligible for sales charge discounts on Unit Investment Trust (UIT) transactions were not provided those discounts. Under the settlement, these customers will now be given restitution for the non-payment of discounts and the unsuitable transactions.

FINRA also filed a complaint against the registered representative who was alleged to have been involved in the recommendation and sale of unsuitable reverse convertibles. He was also alleged to have been involved in dealing improperly with customer accounts, including deceased customers, and making unauthorized trades. These investments were recommended to the very elderly (many over the age of 80) and low-risk tolerance investors and were held in disproportionately high concentrations in these accounts.

The lawyers of Wall Street's Gusrae Kaplan Nusbaum PLLC, are experienced advisors to firms and broker-dealers in all areas of compliance and representation. Contact our law firm for more information on our wide range of services, including regulatory and enforcement representation, broker-dealer advisory services and securities litigation. We are a firm comprised of experienced former senior level regulators and securities and compliance litigators, providing advisory and litigation services and representation before all regulatory agencies.

The Securities Lawyer Blog has posted in the past on compliance issues that have arisen concerning programs and policies for broker training and supervision at various firms. Recently, The Financial Industry Regulatory Authority (FINRA) settled a matter concerning the training and supervision of brokers in the sale of Unit Investment Trusts (UIT's).

The settlement was reached with Chase Investment Services Corporation (Chase) for $3.6 million in reimbursements and fines with regard to the sale of UIT's. Brokers who were part of what was WaMu Investments, Inc., acquired by Chase two years ago, were also alleged to have been involved in the sales activities that led to this matter. Customer losses were said to have resulted from the alleged sales recommendation of various investments that were later determined to be unsuitable.

The investigation by FINRA centered on the recommendations brokers of the firm made with regard to UITs and floating rate loan funds. It was said that these customers were not only unsophisticated, but had conservative risk tolerances and that due to these factors, reasonable grounds for the recommendation.

Suitability with regard to higher risk investments has been a major issue in enforcement, especially since the financial crisis began as losses have become more common. One of the main issues in this matter was FINRA's contention that the firm "failed to implement supervisory procedures" that would have ensured the supervision of the sales of these higher-risk investments.

The investors involved in this matter were those with little or no investment experience. It was alleged that the firm's brokers recommended these investments to about 260 customers.

Specific investments on Chase's list of approved products included those with many assets that were held in closed-end funds with high-yield or junk bonds. FINRA concluded that due to the investors lack of experience and to the obligation to determine suitability of higher risk investments for conservative risk customers, the firm had failed in its obligations in this regard as these customers invested outside their risk tolerance. These customers sustained losses of about $1.4 million in what were deemed to be unsuitable investments.

Other customers suffered losses of about $500,000 in risky, potentially illiquid and high credit risk floating rate loan funds. These customers also had conservative risk tolerances. Although these customers sought preservation and liquidity, the investments were recommended.

New York City's Gusrae Kaplan Nusbaum PLLC, represents broker-dealers in all aspects of compliance -- counseling them in their programs and policies and before all industry regulatory agencies. Please contact our law firm for a confidential consultation with one our lawyers regarding representation and our litigation and advisory practice. Our highly-respected, preeminent lawyers have decades of experience and expertise representing broker-dealers.

The Securities Lawyer Blog has previously posted on Regulation SHO and this past week, FINRA announced that another Reg SHO matter has been settled. UBS Securities LLC has agreed to pay $12 million in fines for the alleged violations. The firm also settled claims that it had failed to supervise securities short sales, something that was not detected by the firm until FINRA's investigation brought various alleged failures to light.

Among other things, Reg SHO provides for specific requirements for broker-dealers in short sale transactions. FINRA alleged that in the UBS matter, the broker-dealer's Reg SHO violations led to "millions of short sale orders" that were "mismarked and/or placed to the market without reasonable grounds to believe that the securities could be borrowed and delivered."

Specifically, since short sales involve the sale of securities that the seller does not own, Reg SHO protects the buyer in that it requires that the broker-dealer have reasonable grounds to believe the security involved in the short sale can either be purchased or borrowed at the time of delivery. The "reasonable grounds" must be present before the broker engages in the short sale and the broker should not accept the short sale order unless these reasonable grounds are present.

Under Reg SHO, broker-dealers are required to designate an equity securities sale as either long or short. It is intended to protect buyers from a potential failure of delivery of equity securities -- this is why the broker-dealer must secure and also document the "locate" information prior to the short sale.

Allegedly, UBS's supervision of these critical aspects of compliance with Reg SHO were lacking in that locates and marking of sale orders were not sufficiently monitored. This in turn led to Reg SHO failures in the firm's equity trading business which is the scenario that Reg SHO is intended to protect against.

Without locates at the time of the short sale order, the risk of failure is increased significantly. When selling securities that are difficult to borrow, this makes the likelihood even greater. That is one way in which FINRA alleged the UBS system was flawed. FINRA noted that the locate violations were found throughout the UBS system, stating that they "extended to numerous trading systems, desks, accounts and strategies."

The violations were also alleged to have extended to the firm's procedures and technologies, as well as its operations. UBS short sales orders were alleged also to have been mismarked as long, rather than short which violated the locate requirement in Reg SHO. UBS was also alleged to have had "significant deficiencies related to its aggregation units" which was suggested to have possibly resulted in the extensive order-marking and locate violations.

FINRA's investigation uncovered systems and a lack of supervisorial procedures for short sales in the UBS system prior to 2009, which it has had an opportunity to correct and redesign to ensure compliance with Reg SHO in the future.

Gusrae, Kaplan & Nusbaum, PLLC represents broker-dealers in regulatory and enforcement matters. Establishing policies and procedures that are designed to comply all regulatory requirements is critically important for broker-dealers. Our lawyers include highly-experienced former regulators and experienced litigators that help our broker-dealer clients with all aspects of securities laws, rules and regulations. Please contact our New York law firm to consult with one of our attorneys at any time.

The Securities Lawyer Blog has previously posted on various internal activities that have been missed by supervisors of major broker-dealers within their own firms. Examples of this include registered representatives who have been able, for a time, to engage in improper conduct with the firm's clients and their investments.

This week, FINRA announced a settlement of an alleged supervisory failure in a branch office of a large brokerage firm. Merrill Lynch, Pierce, Fenner & Smtih Inc. will pay $1 million for alleged supervisory failures in its San Antonio, Texas office. In this matter, it is alleged that a registered representative engaged in a Ponzi scheme in which 11 investors provided funds amounting to $1 million over a period of nearly one year.

The branch office Merrill Lynch supervisors were said to have approved the opening of a business account by the registered representative, which is a common occurrence. But FINRA alleged that the firm then failed to supervise the funds in the account which the representative was able to withdraw to carry out a Ponzi scheme without the firm knowing this was occurring. The registered representative was permanently barred from the securities industry by FINRA in December 2009. In addition, the investors who unknowingly were part of what was a Ponzi scheme, have all been reimbursed by Merrill Lynch.

What was left unresolved, was the underlying lack of adequate supervisory systems that enabled the activity to go forward in the first place. The allegations included a failure to adequately monitor employee accounts for improper conduct. Now Merrill Lynch has settled this portion of the matter with FINRA.

The situation is instructive for all broker-dealers. The problem with the Merrill Lynch system apparently was as follows. Accounts opened with an employee social security number were picked-up by the system and automatically monitored by the firm. However, where the system fell short was if an employee opened an account using a social security or other tax identification number, the employee had to manually put the account into the system for supervision.

In addition, according to FINRA, for a period of about four years, the firm failed to monitor "40,000 employee/employee-interested accounts, which were not reported for certain periods of time and therefore not available on the supervisory system." FINRA's Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, cautions that
"[f]irms must ensure their supervisory systems are designed to properly monitor employee accounts for potential misconduct" and that Merrill Lynch's inadequate supervisory system and the firm's excessive reliance on employee self-reporting enabled [the representative] to facilitate his Ponzi scheme to the detriment of investors."

The Wall Street law firm of Gusrae Kaplan Nusbaum PLLC provides legal counsel and representation to broker-dealers in establishing and maintaining proper supervisory systems and all related compliance with FINRA and SEC rules and regulations. Please contact our law firm to talk with us about our broker-dealer advisory services and representation, as well as our expertise and experience before all regulatory agencies and courts in the field of securities law.

As all broker-dealers are aware, the Financial Industry Regulatory Authority (FINRA) has cast a wide net in monitoring and enforcing industry compliance with rules and regulations. Aftera "targeted review of improper fees charged by broker-dealers," FINRA has announced sanctions and settlements with several firms that it found were charging customers excessive or improper fees.

The review resulted in settlements with five broker-dealers. In each case, the firms had not properly stated the total commissions charged for trade confirmations. What were allegedly commissions for trades, were actually represented as handling charges and were therefore mischaracterized. But FINRA determined that the firms were using the "handling fees" as additional commissions and as such, were in excess of the actual handling services provided by these firms.

Some of the firms involved in the review, earned handling fees of as much as $100 for each transaction which amounted to a large percentage of revenue. In the stern words of FINRA's Executive Vice President and Chief of Enforcement, Brad Bennett "[t]rade confirmations and fee schedules must clearly reflect commission charges, and firms cannot disguise commissions by improperly describing them as charges for ancillary services." He also cautioned that, "FINRA will continue to look closely at any firms that engage in these practices."

The firms that were found to have engaged in this practice were fined amounts from $300,000 to $60,000 and are located in Florida, New York and Illinois. In some instances, FINRA found that firms had not only mischaracterized these fees as handling charges, they had also engaged in deficient supervisory controls and recordkeeping, among other things.

The firms involved have agreed to correct these problems to ensure that in the future they not only properly disclose specific services that they have performed for customers, but also properly disclose any related fees on trade confirmations and communications with customers that relate to fees and commissions. Commissions will be stated as such and will no longer be categorized as fees, when in fact they are transactions-based commissions.

In addition, the firms have agreed that revisions will be made to written supervisory procedures to clarify these issues. Training for registered representatives and other personnel will now include substantive training on what is appropriate remuneration for transactions, how fees should be categorized and determined and provide training to the firms' registered representatives and how all of these should be disclosed to customers. Proper records retention policy and procedure is also part of the supervisory and training process and these settlements.

Broker-dealers should be aware that a thorough review of policies and procedures in all areas of practice, is the best protection to ensure compliance. The lawyers of Wall Street's Gusrae Kaplan Nusbaum PLLC, are experienced advisors to broker-dealers in all areas of compliance. Contact our law firm for more information on our wide range of services, including litigation and enforcement representation. We are a firm comprised of experienced former senior level regulators and securities and compliance litigators, providing advisory services to our clients to ensure regulatory compliance.

Late last month, the Securities and Exchange Commission (SEC) filed a complaint in the U.S. District Court for District of New Jersey against a hedge fund manager and his firm claiming insider trading.

The securities that were the subject of the insider trades were in three companies including Moldflow Corporation, Autodesk, Inc. and Salesforce.com, Inc. Others charged in the scheme, which is alleged to have reaped $3.9 million in ill-gotten gains, were friends and relatives of the manager.

The former director of business development for Autodesk is alleged to have tipped the hedge fund manager and another involved in thhe scheme that a tender offer was about to be made by the tech company for Moldflow. The company had not yet announced its intended merger with Moldflow at the time of the tip.

The SEC claims that the hedge fund manager "traded on the information in his personal accounts, his family members' accounts and the account of his hedge fund." He then furthered his alleged misconduct by suggesting to others that they also purchase stock in Autodesk's tender target. They did so, and are thus claimed to have used the insider information to benefit their personal accounts. In these transactions alone, $2.3 million is alleged to have been gained by these trades in Moldflow stock prior to Autodesk's acquisition.

In other related insider trading transactions, the SEC claims that Autodesk's earnings were also provided to the hedge fund manager prior to the company's public earnings announcement. And this information is said to have then been shared with others with the specific recommendation that friends and relatives not only short sell Autodesk stock, but also purchase put options on Autodesk stock.

One of the individuals involved in the insider trading was the former recruiting technology manager for Salesforce. He is alleged to have tipped the hedge fund manger with earnings information prior to the company's public announcement for the same quarter as the Autodesk earnings were tipped by the insider there.

The alleged illegal behavior continued with the hedge fund manager trading for gains in his personal accounts and those of his family within his own fund firm. Recommendations to purchase and to call options were made with regard to Salesforces' stock. The SEC alleges that all of this resulted in "illicit gains of nearly $500,000 from their trading in Salesforce securities."

The SEC's complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties. Two of the defendants have consented to final judgments in the case including disgorgement of ill-gotten gains and pre-judgment interest.

New York City's Gusrae Kaplan Nusbaum PLLC, represents brokers before all regulatory agencies. Please contact our law firm for a confidential consultation with one our lawyers regarding representation and our litigation and advisory practice. Our highly-respected, preeminent lawyers have decades of experience and expertise representing broker-dealers.

Earlier this week, Citigroup Global Markets, Inc, agreed to settle a matter involving alleged supervisory failures with The Financial Industry Regulatory Authority (FINRA). The firm will pay a penalty of $500,000 for its alleged failure to identify the activities of one of its registered sales assistants who is no longer with the firm. The situation is alleged to have taken place over an 8-year period of time and occurred in one of the firm's branch offices, specifically in Palo Alto, California.

FINRA claimed that the employee was involved in misappropriation of 22 customer accounts which amounted to $749,978 in customer funds over this period of time. The activities included falsification of account records and unauthorized customer account trades.

As regulatory and enforcement securities lawyers, we suggest that the facts surrounding this situation are instructive to all firms and broker-dealers to ensure that supervisory lapses do not occur. In this case, the employee is alleged to have taken advantage of "Citigroup's supervisory lapses" at the Palo Alto branch in which elderly and ill customers were targeted. The sales assistant apparently targeted those customers whom she knew would be less likely to read their account statements.

Two years ago, FINRA took action to bar the sales associate from further activities. According to the agency, it is still in the process of investigating others involved in supervising her. Citigroup has paid restitution to the customers involved in these incidents.

In this matter, Citigroup is alleged to have "failed to detect or investigate a series of 'red flags' that upon further inquiry should have alerted the firm to [the assistant's] improper use of customer funds." We have previously posted on the impact of similar failures when firms ignore red flags.

Here, FINRA said these red flags included "exception reports highlighting conflicting information in new account applications and customer account records reflecting suspicious transfers of funds between unrelated accounts." It is also alleged that the firm's systems and controls in supervision and review made it possible for the sales assistant to falsify various records.

Specific instances involved suspicious discrepancies with customer addresses and phone numbers, which the sales assistant tried to explain away to her supervisors. FINRA says the explanation was not reasonable and the firm should have looked further.

FINRA also claims that the firm ignored suspicious activity involving transfers and disbursements in various accounts that the sales assistant was able to access, enabling her to use the funds for her own purposes. She was even able to open an account in her father's name to further her activities with no repercussions from the firm. Her activities also included accounts of deceased customers and others that went undetected by Citigroup, even when red flags were present.

Ensuring proper supervision and compliant systems enables firms to avoid regulatory action. Please contact the experienced securities lawyers at New York's Gusrae Kaplan Nusbaum PLLC, PLLC, for more information about our law practice and how we can support your firm's compliance and provide legal counsel in regulatory and enforcement proceedings.

Over the summer months, many of us welcome house guests. But for one host, a friend's visit became a temptation for insider trading that was recently concluded by regulators.

Last month, the Securities and Exchange Commission (SEC) settled an action against an individual for alleged insider trading in the securities of Brink's Home Security. The individual involved, Mr. Robert Doyle, did not admit or deny the allegations in the settlement. The facts of the case are interesting because Mr. Doyle is alleged to have obtained the information in an unusual way.

The Commission alleged in its complaint, that the defendant had obtained material nonpublic information regarding the buyout of Brink's by Tyco International, Inc. (Tyco) that was to occur. One of the key members of the team evaluating the acquisition by Tyco was an employee of Tyco's investment bank, named "the Banker" in the Commission's Statement of Facts.

The Banker happened to be a friend of the defendant and stayed with him during the Summer of 2009. He had mentioned to the defendant that he was flying on Tyco's corporate jet, but did not say why. While staying at the defendant's home during August 2009, he worked on the a presentation of the acquisition for Tyco. The presentation had identified the acquirer and the target by name, so the identity of the parties was not in doubt. The Banker did not provide the defendant with inside information.

After the Banker happened to leave a copy of the presentation at the defendant's home, which the defendant found in December 2009, he apparently also found the temptation too great. He began trading on the information after learning from the unsuspecting Banker about travel plans that would have tipped off the defendant that the acquisition was imminent. The defendant's insider trading included the purchase of Brink's securities call options, which purchases were alleged to have "breached a legitimate expectation of confidentiality held by the Banker."

As a direct result of the insider trading, the defendant is alleged to have earned $88,555. In the settlement, he is disgorged of these profits, plus $4,288.66 prejudgment interest and civil penalties amounting to $44,277.50. The defendant has also consented to a final judgment permanently enjoining him from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5.

New York City's Gusrae Kaplan Nusbaum PLLC, represents brokers before all regulatory agencies. Please contact our law firm for a confidential consultation with one our lawyers regarding representation and our litigation and advisory practice. Our highly-respected lawyers have decades of experience and expertise representing broker-dealers.

Auction Rate Securities (ARS) have cost firms a great deal in settlements with both investors and regulatory authorities. Although many firms have completed settlements with regard to these securities, some are just now completing their troubled ARS histories with regulatory settlements.

Earlier this week, SunTrust Robinson Humphrey, Inc. (SunTrust RH) and SunTrust Investment Services, Inc. (SunTrust IS) agreed to settle with The Financial Industry Regulatory Authority (FINRA) for $4.6 million related to Auction Rate Securities sales and marketing.

The firm has been repurchasing millions of dollars of the failed ARS from their customers, as have many other broker-dealers. The firm will continue to settle with its investors and participate in FINRA's special arbitration program in which some investors are able to make their case for payment of consequential damages.

The settlement was reached to resolve claims made by the agency that SunTrust RH had failed adequately to disclose such issues as risks associated with theses securities and the potential for auction failures. These allegations are similar to those that have been made against many firms that sold ARS. In addition, FINRA alleged that the firm had not supervised or trained sales personnel. The related entity SunTrust IS, was fined $400,000 for an alleged deficiency with regard to sales material, as well as deficiencies with sales training and procedures.

The FINRA findings included allegations that the firm was aware of the potential for ARS failures, but that some sales people continued to sell the firm's ARS issues, hoping to reduce inventory. In addition, SunTrust RH sales personnel represented that these issues were safe and liquid. And finally, the firm stopped supporting these auctions, aware that they were likely to become frozen.

Detailed information on ARS procedures and background, for both investors and industry professionals, can be found on FINRA's website.

New York City's Wall Street law firm, Gusrae Kaplan Nusbaum PLLC, represents brokers and traders before all regulatory agencies. Please contact our law firm to talk with one our lawyers about representation and our litigation and advisory practice. The expertise and experience, as well as the regulatory background of our preeminent lawyers, is invaluable in dealing with a wide variety of legal matters and issues.

The Securities Lawyer Blog often posts on SEC and FINRA enforcement proceedings that involve marketing materials and supervision issues. This week, Morgan Keegan & Company, Inc. has reached a settlement with both the SEC and FINRA for claims involving various bond funds. The firm has agreed to pay $200 million in restitution to their customers who invested in seven affiliated bond funds.

The allegations involved in this matter were that for a period of nearly two years, the firm used "sales materials that contained exaggerated claims, failed to provide a sound basis for evaluating the facts regarding the fund, were not fair and balanced, and did not adequately disclose the impact of market conditions in 2007 that caused substantial losses to the value" of several affiliated bond funds.

The major affiliated fund in question included structured products, specifically "mezzanine and subordinated tranches of structured securities" that included sub-prime mortgage-backed and asset-backed securities. In early 2007, the firm became aware that the fund's holdings were not stable and were subject to the volatility in the mortgage-backed securities market. The firm is alleged to have "failed to adequately disclose those risks in the sales materials or internal guidance" when in fact, over 50 percent of the fund's portfolio was invested in these problematic subprime products.

Noting the importance that firms "ensure that their marketing materials fully and accurately describe the products they sell, including the attendant risks and any relevant information about market conditions that may impact those products," Brad Bennett, FINRA Executive Vice President and Chief of Enforcement went on to say that the firm's failure to fully disclose these risks gave the impression that the fund was "a safer investment than it was."

The allegations against the firm included that it did not "adequately describe the nature, holdings and certain risks" of the fund and that when the market began adversely impacting the fund's holdings, the firm did not alter its sales and marketing materials to let investors know of those risks. The firm will now be required to ensure compliance with NASD rules regarding supervisory systems as well.

The New York securities regulation and enforcement attorneys at Gusrae Kaplan Nusbaum PLLC represent broker-dealers in regulatory and enforcement matters. We regularly advise clients and defend industry members involving a broad spectrum of issues, such as maintaining adequate supervision and providing marketing materials that properly disclose risks. Contact our law firm to consult with one of our attorneys.

A recent investor alert issued jointly by FINRA and the SEC's Office of Investor Education and Advocacy is directed at informing the public about the risks of structured notes -- even when they carry principal protection. In the investor alert that is entitled, Structured Notes with Principal Protection: Note the Terms of Your Investment, investors are warned that these investments are not as secure as they might seem given their "reassuring names."

Calling them "complex financial products," the SEC/FINRA alert states that these investments combine a zero-coupon bond that does not pay interest until maturity with either an option or other derivative product. One major concern is that the underlying asset value can vary and may be tied to assets, benchmarks or an index that could also carry a cap or limitation on the upside exposure.

If held to maturity, most investors will receive back some of their investment regardless of whether there is a reduction in value of the underlying asset, index or other benchmark. However, due to the fact that these products have varying levels of protection, the alert warns that "any guarantee is only as good as the financial strength of the company that makes that promise."

The concern about these complex investments is that the "payout structures" can be difficult for investors to fully understand. Lori J. Schock, Director of the SEC's Office of Investor Education and Advocacy, stated in the joint press release on this matter that the alert "... is a 'must read' for investors considering these products, especially those with the mistaken belief that these investments offer complete downside protection."

As investors look for higher yields, the concern is that investors might be drawn to these investments not knowing that in fact their investment could in fact be "expensive, risky, complex and illiquid investment," in the words of FINRA Senior Vice President for Investor Education John Gannon.

One of the major concerns for investors is that both the risk assessment and the growth potential are not easily assessed. It is important that investors review the alert before investing in these products.

Given the focus on these products by the SEC and FINRA, we suggest that broker-dealers carefully assess their current marketing materials and risk disclosures to their investors. When these entities jointly issue an investor alert, it is possible that these products will also be targeted for enforcement scrunity.

The New York securities regulation and enforcement attorneys at Gusrae Kaplan Nusbaum PLLC represent broker-dealers in regulatory and enforcement matters. Our lawyers advise clients and defend industry members in matters involving a broad spectrum of issues including compliance with regulatory requirements and rules. Contact our law firm to consult with one of our attorneys.

Northern Trust Securities, Inc. will pay a fine of $600,000 to FINRA for alleged lack of proper supervision in the areas of collateralized mortgage obligations (CMO's) and high-volume securities trades. FINRA claims that the firm did not monitor nearly 45% of their business over a year and one half time frame.

The allegations regarding lack of supervision and monitoring of customer accounts centered on a three-year period between 2006 and 2009. The claim is that due to the firm's alleged issues with monitoring, some accounts ended up with CMO's in concentrations that were not suitable for the account holders.

The underlying reason was stated to be because the firm "used an exception reporting system that failed to capture or analyze substantial portions of the firm's business, including all CMO transactions, certain trades of 10,000 equity shares or more, and certain trades of 250 or more of fixed-income bonds."

Without the appropriate systems in place to monitor equity trades at certain levels (10,000 shares, for example or large numbers of bonds in fixed income) the firm is alleged to have allowed trades to occur that were not monitored for suitability, concentration and other issues such as the rate of mark-ups and commissions.

Overall, FINRA pointed to a lack of monitoring that, according FINRA's Executive Vice President and Chief of Enforcement Brad Bennett, "allowed more than 40 percent of its transactions to proceed without review, which in turn left vulnerable investors exposed to the risk of losing all or a substantial portion of their principal through potential over-concentration in CMOs." The firm has consented to the settlement without an admission or denial of the charges.

Appropriate monitoring and supervision have been the subject of prior posts by the lawyers at the Securities Lawyer Blog. Compliance in this area continues to be important for broker-dealers.

Our New York securities litigation firm advises broker-dealers to ensure that they have proper systems in place to comply with industry rules and practices. We also represent industry members before all regulatory agencies. For more information on our law practice and representation, or to speak with one of our experienced securities litigators, please contact Wall Street's Gusrae Kaplan Nusbaum PLLC.