FINRA Hearing Panel Fines Mutual Service Corp. More than $1.5 Million for Supervisory Failures, Falsifying Records Relating to VA Exchanges
Panel Bars Three Individuals, Fines and Suspends Three Others
Washington, DC — A Financial Industry Regulatory Authority (FINRA) hearing panel has fined Mutual Service Corporation (MSC) of West Palm Beach, FL, more than $1.5 million for failing to conduct timely reviews of variable annuity transactions, falsifying various books and records of the firm to make it appear that the variable annuity transactions were reviewed in a timely manner, and providing false and misleading information to FINRA during its investigation. The hearing panel sanctioned six current and former MSC personnel for their roles in the wrongdoing.
Three current or former employees — Denise Roth, a manager in MSC's operations department; Gari Sanfilippo, a former senior compliance examiner; and Kevin Cohen, a former compliance examiner — were permanently barred from the securities industry for falsifying the books and records of the firm. MSC's former Chief Administrative Officer and Executive Vice President, Dennis S. Kaminski; its Director of Operations, Susan Coates; and its former Chief Compliance Officer and Vice President, Michael Poston each were sanctioned for their supervisory failures. Kaminski and Coates each were fined $50,000 and suspended for six months from associating with any securities firm in a principal capacity. Poston was fined $20,000 and suspended from serving in a principal capacity for seven months.
Cohen and Sanfilippo have appealed the ruling to FINRA's National Adjudicatory Council (NAC), while the NAC unilaterally has called Kaminski's case for review of the sanctions. Sanctions against all three have been stayed pending a ruling from the NAC.
The hearing panel found that MSC has a history of failing to supervise sales and exchanges of variable annuities adequately. As part of a settlement with FINRA in 2001, MSC agreed to implement procedures to provide dedicated, heightened oversight of variable annuities transactions. Specifically, the firm created a "trade review team" (TRT) to review variable annuity exchange transactions that appeared on the firm's "red flag" blotter exception report, which captured exchange transactions that required further scrutiny.
According to the hearing panel, between March and June 2004, there was a "complete meltdown of MSC's supervisory system for the review of variable annuity transactions." During those months, Kaminski and Poston directed MSC compliance personnel to stop reviewing transactions that appeared on the firm's red flag blotter. Despite having oversight responsibility for all variable transactions and being aware of the supervisory failures, Coates failed to act decisively to correct the situation.
While the backlog of transaction reviews was developing, Kaminski, Poston and other MSC managers met in May 2004 with FINRA staff regarding the firm's review of variable annuity transactions. The hearing panel found that the MSC representatives misled FINRA about the firm's supervisory efforts relating to the red flag blotters and failed to mention that MSC had suspended review of the blotters. The hearing panel also found that the MSC representatives misled FINRA about the use of a prototype exception report that had not actually yet been utilized.
During the time that the review of the red flag blotter was suspended, 597 transactions that appeared on the red flag blotter between March 15 and June 1, 2004, were not reviewed by TRT in a timely fashion. Those transactions were not reviewed until August to October 2004.
To make it appear that these TRT reviews had been done in a timely manner, Roth, Sanfilippo and Cohen ensured that the trade review forms and the red flag blotters for the transactions were backdated to within one or two days of the transaction. In addition, the hearing panel found that Cohen created 49 fake letters in October 2004 and placed them in the firm's files to make it appear that a newly developed variable annuity exception report had been in use since January 2004. In actuality, this exception report was not used by the firm until October 2004. The hearing panel found that MSC, Roth, Sanfilippo and Cohen intentionally falsified MSC's records to deceive FINRA staff and termed those violations "egregious."
During the course of FINRA's investigation, after FINRA staff learned of MSC's failure to timely review the red flag blotters, FINRA requested documents and information relating to the backlogged transactions. The hearing panel found "incontrovertible evidence that MSC did not respond completely and truthfully to the request for information." Instead, MSC produced documents that had been changed to eliminate the backdating.
In determining MSC's sanction, the hearing panel cited several aggravating factors. It considered first the firm's disciplinary history of deficient supervision of variable annuity transactions, but found more disturbing the fact that MSC deceived FINRA staff regarding the status of its supervisory system and procedures. The hearing panel found that MSC's supervisory and record keeping violations were "egregious."
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