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FINRA Disciplinary Actions – April 2016

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FINRA Fines, Censures, Orders J.J.B. Hilliard, W.L. Lyons, LLC to pay restitution to customers

J.J.B. Hilliard, W.L. Lyons, LLC, a Louisville, KY brokerage firm has been censured, fined $175,000 and ordered to pay $328,491 in restitution to customers by FINRA.

In its announcement of the disciplinary actions FINRA disclosed that,  “Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to identify and apply sales-charge discounts to certain customers’ eligible purchases of UITs, which resulted in customers paying excessive sales charges of $328,491.”

The findings stated that the firm failed to establish, maintain and enforce a supervisory system reasonably designed to ensure that customers received sales-charge discounts on all eligible UIT purchases.

According to the FINRA disciplinary action J.J.B. Hilliard, W.L. Lyons, LLC relied primarily on its registered representatives to ensure that customers received appropriate UIT sales-charge discounts, despite the fact that the firm did not effectively inform and train representatives and their supervisors to identify and apply such sales charge discounts.

J.J.B. Hilliard, W.L. Lyons, LLC is a full-service wealth management firm headquartered in Louisville, KY, with offices in Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Missouri, North Carolina, Ohio, South Carolina, Tennessee, and West Virginia.

 

FINRA Fines Morgan Stanley Smith Barney LLC and orders brokerage firm to pay restitution to customers

Morgan Stanley Smith Barney LLC, New York has been fined by FINRA $125,000; ordered to pay $2,056.51, plus interest, in restitution to investors; and required to revise its WSPs.

In its announcement of the disciplinary actions FINRA disclosed that, “Without admitting or denying the findings, Morgan Stanley Smith Barney LLC consented to the sanctions and to the entry of findings that it failed to execute orders fully and promptly and failed to use reasonable diligence to ascertain the best inter-dealer market, and failed to buy or sell in such market so that the resultant price to its customer was as favorable as possible under prevailing market conditions.

The findings stated that the firm, when it acted as principal for its own account, failed to provide written notification disclosing to its customer the correct reported trade price. The findings also stated that the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance with respect to certain applicable securities laws and regulations, and/or FINRA rules, concerning the handling and execution of customer market orders and the accuracy of certain form language printed on the back of the firm’s customer confirmations.

 

Individuals Barred or Suspended

Giovanni L. Acevedo (CRD #2508321, Wilton Manors, Florida) submitted an Offer of Settlement in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the allegations, Acevedo consented to the sanctions and to the entry of findings that he converted more than $160,000 from individuals, including customers, for his own personal use. The findings stated Acevedo provided false information to FINRA during its investigation of his conversion of funds and failed to provide FINRA with requested information during the course of its investigation.
Stuart Horowitz (CRD #2795019, Coral Springs, Florida) submitted an AWC in which he was assessed a deferred fine of $100,000 and suspended from association with any FINRA member in any capacity for one year. Without admitting or denying the findings, Horowitz consented to the sanctions and to the entry of findings that he recommended and engaged in unsuitable trading in preferred notes of an unregistered limited partnership investment fund. The findings stated that his recommendations lacked a reasonable basis because he failed to adequately investigate red flags that the fund was not a viable investment.

Shortly after Horowitz’s association with his member firm, he began sending emails to firm personnel requesting a quick approval process for the preferred notes. Horowitz told the firm that it was urgent that there be a quick approval process so that he could begin selling the preferred notes because there may only be a short period in which they could be sold. The offering documents for the preferred notes did not specify a deadline by which conversion requests had to be completed, although they did set a cap on the amount of money that could be converted to preferred notes.

In addition, Horowitz attempted to persuade his customers to not participate in this conversion directly with the issuer even though they could have done so without the firm’s and Horowitz’s participation. Horowitz’s previous broker-dealer decided not to allow its representatives to sell the preferred notes to that firm’s customers due to concerns about the fund’s ability to generate income for investors.

Horowitz became aware of this decision soon after, while he was associated with his new firm. However, Horowitz’s new firm advised him that it was awaiting an independent third-party due diligence report before approving the preferred notes for sale by the firm. Horowitz then requested that he nonetheless be permitted to sell the preferred notes to his existing customers, notwithstanding that the firm had not received the third party report.

The following day, the firm agreed to allow Horowitz to offer the preferred notes for sale to existing investors in the fund. Thereafter, Horowitz recommended the conversion of his customers’ interests to the preferred notes although the firm had not obtained the third-party due diligence report and Horowitz had done nothing more than review the preferred notes offering documents and other written and oral representations the fund had made.

Horowitz was also aware of red flags that cast doubt on the veracity of the issuer’s representations and the continuing viability of the fund. Within months, Horowitz’s branch office converted just over $8 million of existing interests to the preferred notes, which required additional capital contributions from his customers of just over $2.5 million.

Horowitz was responsible for all but $137,500 of these conversions, and he was paid more than $200,000 in net commissions from the conversion process. The fund began making late payments to preferred note holders, and within months stopped making payments altogether.

The findings also stated that Horowitz did not apprise his firm of any of the red flags. Despite Horowitz’s increasing knowledge of severe problems the fund had experienced and was experiencing, he continued to recommend that his customers convert their interests to the preferred notes. Horowitz’s staff processed some conversions on behalf of his customers even after he had learned that distributions on existing interests had been reduced to zero.

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