FINRA's 2011 Activities Highlight Commitment to Investor Protection
Ordered $19 Million in Restitution to Harmed Investors
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) has taken important actions to protect investors from fraudulent schemes, products and practices, and to bring new levels of transparency to financial markets. By realigning its resources to quickly escalate issues involving fraud and customer harm, FINRA was better positioned to take swift action to ensure the securities industry operated fairly and honestly for investors.
Significant 2011 achievements:
- FINRA, year-to-date, brought 1,411 disciplinary actions against registered individuals and firms, levied fines totaling more than $63 million and ordered more than $19 million in restitution to harmed investors. In addition, FINRA expelled 17 firms from the securities industry, barred 317 individuals and suspended 432 brokers from association with FINRA-regulated firms. All of these numbers are an increase from 2010.
- FINRA's Office of Fraud Detection and Market Intelligence (OFDMI) referred more than 600 matters involving potential fraudulent conduct to federal and state regulators and law enforcement agencies.
- FINRA reconfigured its exam program to be more risk-based and ensure exam teams are more focused on those areas critical to investor safety; and added resources and staff with more expertise, and strengthened FINRA's ability to identify high-risk firms, branch offices, brokers, activities and products through broader data collection and more comprehensive analysis.
- FINRA's Market Regulation Department made substantial progress in developing cross-market surveillance patterns that will canvas all FINRA, NYSE and NASDAQ markets (80 percent of equity markets) and plans to launch these patterns in 2012. FINRA expanded the Order Audit Trail System (OATS) to include all NMS securities to create a uniform order audit trail to serve as a foundation for the cross-market surveillance program.
- FINRA further enhanced market transparency by expanding the Trade Reporting and Compliance Engine (TRACE) to include securitized products, which added more than 1.2 million asset- and mortgaged-backed securities to the current 70,000 TRACE-eligible securities; and introduced securitized products benchmark pricing and aggregated data reports on FINRA's website to provide investors with greater insight into these products.
- FINRA moved forward on important rule proposals, including Back Office Registration, Suitability and Debt Research Conflicts of Interest.
"Our top priority is to protect investors," said Richard Ketchum, FINRA's Chairman and CEO. "We are continually incorporating measures designed to root out products and practices that harm investors, as well as providing information and tools that help investors save and invest for their future and avoid costly mistakes. We remain committed to ensuring that those who engage in fraudulent or other activities posing a threat to investors are held accountable."
Real-time surveillance techniques enabled OFDMI to uncover potential fraud and insider trading. OFDMI partnered closely with the SEC to refer such matters on an expedited basis so the Commission could take quick action to better protect investors. Year-to-date, OFDMI, which includes FINRA's Office of the Whistleblower, has referred 638 matters involving potential fraudulent conduct to the SEC and other federal or state law enforcement agencies for further investigation, including 290 fraud referrals from the Fraud Surveillance Section and 286 insider trading referrals from the Insider Trading Surveillance Section to the SEC.
OFDMI expeditiously brought to light numerous high-profile cases in 2011 through referrals primarily to the SEC and federal and state law enforcement agencies.
- Uncovered and referred a potential Ponzi scheme to the FBI after a tip involving Joseph Mazella, Founder and President of the Great Atlantic Group, Inc., a Staten Island company, was provided to FINRA's Office of the Whistleblower. Mazella operated the alleged $12 million Ponzi scheme from 2007 to 2010, and was arrested in April and charged with securities fraud, wire fraud and money laundering.
- Referred an insider trading matter on an expedited basis to the SEC in September that involved suspicious trading around the takeover that same month of Global Industries, Ltd., by French company Technip SA. As a result of the referral, the SEC obtained a court order and froze assets within a week of the merger announcement. In its Litigation Release, the SEC said that "unknown purchasers" had bought 685,840 shares of Global Industries the week before the deal became public and then sold them the day of the announcement, realizing a $1.73 million profit.
- Sent an insider trading referral to the SEC identifying suspicious foreign trading within two days of the Pearson PLC's November 21 announcement of plans to acquire Beijing-based Global Education & Technology Group Ltd. The quick referral resulted in a temporary restraining order obtained by the SEC on December 5 that froze $2.7 million in alleged illicit profits held in foreign customer accounts by four Chinese citizens. All four of the Chinese citizens are alleged to have used non-public information to trade ahead of the merger announcement.
- FINRA's Office of the Whistleblower received a tip about an off-exchange foreign currency scheme and quickly referred it to the Commodity Futures Trading Commission. As a result, the three individuals involved were charged in June with operating a $1.4 million fraudulent forex scheme.
- FINRA's Office of the Whistleblower received a tip from an investor that her broker, Michael Serota, stole approximately $200,000 from her account. FINRA barred the broker 41 days later.
Given the growing complexity of the structured products market, FINRA also brought notable enforcement actions against firms for improper product promotion and/or the unsuitable sale of structured products to retail investors. Sales practice violations included combinations of misrepresentation, material omissions, unsuitable recommendations, and inadequate supervision and training in principal-protected notes, reverse convertibles and subprime investments.
The following descriptions of disciplinary actions reflect the broad scope of 2011 activity.
- Issued a complaint against David Lerner & Associates, charging the firm with misrepresentations, advertising and suitability violations concerning the sales of Apple REIT Ten – an illiquid, non-traded $2 billion REIT – and for targeting unsophisticated and elderly customers.
- Fined Wells Fargo $2 million for unsuitable reverse convertible sales to customers, most of whom were over 80 years old with limited investment experience and low risk tolerance; Wells Fargo agreed to provide restitution to harmed customers.
- Fined Credit Suisse $4.5 million and Merrill Lynch $3 million for misrepresenting subprime securitizations; also fined Chase $1.7 million and ordered the return of $1.9 million to customers in light of unsuitable sales of certain financial products.
- Sanctioned 10 firms and 17 individuals in cases involving selling interests in private placement offerings in Medcap, Provident and DBSI. These actions resulted in almost $4 million restitution to investors and were the result of coordinated efforts by FINRA's Member Examination and Enforcement Departments.
- Fined UBS $12 million for violations involving short sales and for a failure to maintain adequate supervision of certain employees; additionally fined UBS Financial Services $2.5 million and ordered the firm to pay $8.25 million to customers for issuing misleading communications regarding Lehman-issued notes.
- Brought a number of actions against firms for excessive and misleading commissions. Firms disguised commissions through excessive charges for routine services, such as postage and handling.
- Fined Morgan Stanley $1 million and ordered restitution of $371,000 to harmed investors for excessive markups and markdowns charged on corporate and municipal bond transactions.
FINRA has also enhanced its securities firm examination program to help better detect potential fraud and to focus on areas of risk. Regulatory matters posing the greatest risk to investors are designated as "urgent" – and expedited for review to ensure that the appropriate level of resources and expertise are assigned to them, as well as to facilitate coordination and information sharing across departments. FINRA also has increased the number of staff in district offices who are tasked with having an in-depth and ongoing understanding of specific firms, including increased real-time monitoring of business and financial changes. This expansion has enhanced FINRA's ability to evaluate available regulatory information and to target examinations based on that information. FINRA conducted more than 3,050 examinations in 2011.
FINRA exam staff also placed greater focus on branch-level activity – increased the number of branch exams, and refocused our exams at point-of-sale, spending more time on site at the branch offices and, depending on the firm, less time at the main office. There were approximately 350 more branch office exams conducted this year compared to 2010, bringing the total branch office exams to nearly 800.
In the area of market regulation, FINRA dramatically expanded its equity market regulation program. As a result of the NYSE's historic decision to allocate FINRA primary surveillance responsibility for each of its equity and options markets, FINRA aggregated data across all FINRA, NYSE and NASDAQ equity markets, which account for 80 percent of equity volume. As a next step, FINRA is developing comprehensive cross-market surveillance patterns that are scheduled to be launched in 2012 that will examine trading activity across all markets at one time, rather than having multiple patterns survey each market separately. This consolidation of market data for integration into new cross-market surveillance patterns will help FINRA identify problematic trading activity more quickly. Having access to uniform, consolidated data means FINRA will be better equipped to detect improper conduct and stop it before it spreads. To provide for a uniform order audit trail system to serve as a foundation for cross-market surveillance, in November 2011, FINRA completed the expansion of OATS to all NMS securities, which also enabled the NYSE to retire its Order Tracking System. FINRA provides regulatory services to 10 exchanges covering 14 equity and options markets.
In another important 2011 achievement, FINRA implemented a rule in its arbitration forum allowing investors to choose all-public panels in all customer cases with three arbitrators. Providing this option was an important step to enhance confidence in FINRA's arbitration process. In 2011, the most common issues in cases filed in FINRA's arbitration forum were breach of fiduciary duty, negligence and misrepresentation. To date, approximately 4,378 cases were filed in arbitration and 640 cases commenced in mediation.
In 2011, FINRA and the FINRA Investor Education Foundation deployed its resources to educate investors about potential harmful activity. FINRA issued 10 investor alerts focusing on such diverse topics as gold stock scams, non-traded REITS and structured products. The FINRA Foundation, in partnership with Stanford University, launched the nation's first Research Center on the Prevention of Financial Fraud, an interdisciplinary resource for law enforcement, government and research groups studying financial fraud.
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FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing and enforcing rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our website at www.finra.org.