Broker Charged With Illegally Accepting $1M in Cash Kickbacks: Enforcement

The Securities and Exchange Commission charged a Wall Street stockbroker with illegally accepting more than $1 million in undisclosed kickbacks for giving certain customers preferential access to lucrative inital public offerings, enabling them to reap major trading profits in the secondary markets.

The SEC alleges that Brian Hirsch subverted allocation policies and procedures at two brokerage firms where he worked on the wealth syndicate desk, making long-running arrangements with certain customers to give them larger allocations of coveted public offerings being marketed by the firms. In most instances, the customers sold their stock into the market as soon as possible to turn a substantial profit at the expense of the firms' other brokerage customers and the issuers' interests in raising capital from long-term investors.

"Kickback schemes are pernicious and have no place in the securities markets," said Sanjay Wadhwa, senior associate director for Enforcement in the SEC's New York Regional Office. "As alleged in our complaint, Hirsch lined his own pockets by secretly sharing in customer trading profits that he engineered in violation of his obligations to his employers."

The SEC's complaint also charges Hirsch's customer Joseph Spera, who allegedly made approximately $4 million in trading profits on the offering allocations he received from Hirsch. Spera allegedly paid Hirsch approximately $1 million in cash.

The U.S. Attorney's Office for the District of New Jersey has filed parallel criminal charges against Hirsch.

Advisor Charged With Bilking Clients to Renovate Farm, Buy Art

The SEC charged a Raleigh, North Carolina-based investment advisor with running a Ponzi scheme that primarily targeted his clients, many of whom were retired and elderly.

The SEC alleges that Stephen Peters, through his firm VisionQuest Wealth Management, sold promissory notes issued by another one of his companies, VisionQuest Capital, to clients and other prospective investors while making false statements. These false statements included that proceeds would be invested into revenue-producing businesses with neither Peters nor his businesses receiving compensation. Peters allegedly claimed that the VisionQuest Capital notes presented little or no risk of loss and were "guaranteed."

According to the SEC's complaint, investor funds were not used as Peters claimed. Peters allegedly spent at least $4.4 million on such personal endeavors as remodeling a large farm in North Carolina, purchasing fine art for his home, and constructing a vacation home in Costa Rica. Peters also spent at least $4.9 million to make Ponzi payments to earlier investors.

The SEC seeks disgorgement of ill-gotten gains plus interest and penalties as well as injunctions. In a parallel action, the U.S. Attorney's Office for the Eastern District of North Carolina today announced criminal charges against Peters, including a charge that alleges that Peters attempted to withhold and conceal records from the SEC, fabricated records, and provided false testimony in the SEC's investigation of Peters' scheme.

FINRA Fines Raymond James $2 Million Over Emails

FINRA fined Raymond James Financial Services $2 million for failing to maintain reasonably designed supervisory systems and procedures for reviewing email communications.

In addition, Raymond James has agreed to conduct a risk-based retrospective review to detect potential violations evidenced in past emails.

FINRA found that during a nine-year review period, Raymond James' email review system was flawed in significant respects, allowing millions of emails to evade meaningful review. This created the unreasonable risk that certain misconduct by firm personnel could go undetected.

The combinations of words and phrases — otherwise known as the "lexicon" — used to flag emails for review were not reasonably designed to detect certain potential misconduct, FINRA says.

The firm also failed to devote adequate personnel and resources to the team that reviewed emails flagged by the system, even as the number of emails increased over time.

In addition, FINRA found that the firm unreasonably excluded from email surveillance certain firm personnel who serviced customer brokerage accounts. Raymond James also failed to apply its entire lexicon to the emails of approximately 1,300 registered representatives who worked in branches that hosted their own email servers.

In settling this matter, Raymond James neither admitted nor denied the charges but consented to the entry of FINRA's findings.

FINRA Fines Merrill $1.4M for Supervisory Deficiencies

FINRA fined Merrill Lynch $1.4 million for failing to establish a reasonable supervisory system and procedures to identify and evaluate extended settlement transactions, and for related rule violations.

Extended settlement transactions have a longer time between trade and settlement than routine securities transactions, and therefore involve an extension of credit and exposure to counterparty, credit and market risk. As a result of its supervisory deficiencies, Merrill failed to collect adequate margin to offset this risk, improperly extended credit to cash-account customers, and miscalculated its outstanding margin and net capital.

FINRA found that from at least April 2013 through June 2015, Merrill's customers engaged in extended settlement transactions with notional values of hundreds of millions of dollars across numerous firm product lines.

Despite the prevalence of these transactions, Merrill's supervisory system was not reasonably designed to identify and evaluate extended settlement transactions for compliance with margin and net capital rules. Consequently, Merrill's computation of margin requirements and net capital deductions for tens of thousands of extended settlement transactions was inaccurate, resulting in margin rule and net capital violations, as well as inaccurate books and records and FOCUS Report filings.

Merrill knew that its supervisory system was not reasonably designed to achieve compliance in connection with extended settlement transactions by April 2013. However, Merrill failed to implement any remedial measures until mid-2014. Moreover, Merrill failed to establish a firmwide supervisory system and written procedures to address extended settlement transactions until mid-2015. FINRA found that Merrill's failures to promptly address the deficiencies after it knew about them unreasonably delayed its compliance with applicable margin, net capital, and books and records rules.

In settling this matter, Merrill Lynch neither admitted nor denied the charges but consented to the entry of FINRA's findings.

— Check out 6 Ways to Avoid a Cryptocurrency Stock Scam: FINRA on ThinkAdvisor.