SEC, FINRA Enforcement: Advisors Get $3.6M Arb Award After Boss Faked Client Complaints

According to the complaint, the firm sold retirees illiquid real estate investments, ran off with the profits, securitized the properties involved and sold notes to other investors. It then started foreclosure proceedings on the properties, putting the first batch of investors at risk.

The scheme started in August 2003, the complaint said, when CIP began offering income-producing tenants-in-common investments (TICs). The complaint said that CIP bought "18 separate malls, business centers, and other real estate properties across the nation and structured these properties as securities." Then they sold interests in the TIC, an illiquid investment, to Massachusetts residents, most of them elderly, who were looking for retirement income. Massachusetts investors put more than $5 million into the TIC.

CIP, Cabot and Kroll misappropriated more than $9 million from investment proceeds, according to the complaint, via "wire transfers, material misrepresentations and omissions to investors, and misleading disclosures regarding investors' financial exposure."

Cabot and Kroll commingled rents, reserves and operating cash from the eight investments that made up the TIC and put the money into several CIP holding accounts, from which they wired millions into their own personal bank accounts and into the account of Cabot's wife. They subsequently used the money to fund a "lavish lifestyle in Manhattan."

Not only did they abscond with the money, but they also securitized the mortgages underlying the TIC into commercial mortgage-backed securities (CMBS), each of which was sold to a separate batch of investors as income-producing notes. The process put TIC investors' liability further at risk because aggressive special servicers were authorized to start foreclosure proceedings to expedite collection of funds.

Investors not only were told that their investments were safe and they would not be liable, but the truth about the investments was hidden from them — Cabot and Kroll had all communications concerning defaults and other actions forwarded to them instead of to the investors who were liable for the pair's actions.

The Enforcement Section of the Massachusetts Securities Division is seeking a cease-and-desist order, a permanent bar against the respondents, rescission offers to all Massachusetts residents who bought the securities and an administrative fine.

FINRA Censures, Fines Commonwealth for Botched Email Software Upgrade

Commonwealth Equity Services Inc., doing business as Commonwealth Financial Network, was censured by FINRA and fined $250,000 on findings that an incompatible software upgrade and subsequent failure to test the email supervisory system resulted in email surveillance failures.

According to the agency, Commonwealth updated the software that directs the flow of its registered representatives' emails to the firm's email retention server. However, the upgrade was not compatible with the surveillance tool the company uses for daily reviews of associated persons' emails.

Since the company failed to test the email supervisory system during the software upgrade, it didn't realize that the surveillance tool was neither surveilling the outgoing doing business as (DBA) emails of registered representatives in the firm's branch offices nor forwarding a sampling of those emails to the firm's compliance department for review.

During the first month the upgrade was in use, outgoing emails from half the DBA email domains maintained by the firm's registered reps were not reviewed. Three months later, the firm's supervisory system failed to perform a daily surveillance review of the outgoing emails from any of those DBA email domains.

Until the computerized supervisory system was fixed, registered representatives sent approximately 17 million emails; about 14 million of those outgoing emails were sent through the DBA domains. As a result, approximately 12.6 million of those outgoing emails, or about 90% of them, were not surveyed by the daily protocol.

FINRA also found that although the IT department had ongoing contact with the email vendor concerning the surveillance tool's remediation, it failed to ensure all the outgoing DBA emails were surveilled. It also failed to notify the legal and compliance departments about the email surveillance system's deficiencies until more than eight months after it learned of the problem with the surveillance tool. The firm's WSPs at that time did not require the IT department to notify the legal and compliance departments when it discovered problems with the firm's computerized supervisory system.

In addition, the firm discovered that its supervisory system also failed to monitor some representatives' emails, both incoming and outgoing. The supervisory system maintained a computerized "directory" of personnel, but was unable to identify some registered representatives who had multiple listings in the directory. Because of this additional supervisory system breakdown, the firm failed to review approximately 474,380 of its registered representatives' emails.

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Check out Retirees Suffer as 401(k) Rollover Boom Enriches Brokers on ThinkAdvisor.