Articles Posted in FINRA

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On June 26, 2015, Lax & Neville LLP, a leading national securities arbitration law firm, won a FINRA arbitration award on behalf of two retail investors (the “Retail Investors”), through Ontonimo (OMO) Limited (“Ontonimo”), against BNP Paribas Securities Corp. (“BNPP”) for the sale and marketing of an unsuitable security to the Retail Investors.  A highly sophisticated and experienced three (3) person Arbitration Panel rendered the arbitration award after a ninety-five (95) day arbitration hearing (186 hearing sessions), which is the longest customer FINRA arbitration hearing in the last twenty (20) years and the second longest ever.  The Arbitration Panel awarded the Retail Investors, through Ontonimo, $16.1 million in compensatory damages, inclusive of interest.  This award of compensatory damages represents 100% of the net out-of-pocket loss plus interest and is one of the largest FINRA arbitration awards of compensatory damages in a customer dispute.  Significantly, in addition to that relief, after winning six (6) Motions For Sanctions and five (5) Motions To Compel, the Arbitration Panel awarded $500,000 in sanctions for attorneys’ fees for BNPP’s failure to comply with the Arbitration Panel’s various discovery orders.  This is the largest amount of sanctions awarded in a customer FINRA Arbitration in at least the last ten (10) years.  To view this Award, Ontonimo (OMO) Limited vs. BNP Paribas Securities Corp. – FINRA Case No. 10-04744, click here.

The single investment at issue was a Resetable Strike Equity Option Transaction, which is a highly speculative and leveraged derivative call option.  BNPP recommended that the Retail Investors invest approximately $14.3 million, which is more than 60% of their investable assets, into this one unsuitable security.  Because BNPP had a policy that prohibited the sale of this product to retail customers, BNPP required the Retail Investors to form a corporate entity, Ontonimo, through which the Retail Investors would purchase the investment in order to circumvent BNPP’s own compliance rules.  Further, BNPP required one of the Retail Investors to become a so-called “investment advisor” for Ontonimo by mandating that he execute a sham investment advisory agreement, even though he had no prior professional financial services experience and no securities licenses.  In less than one and one-half years, the Resetable Strike Equity Option Transaction became worthless and the Retail Investors lost their entire $14.3 million investment.  The Retail Investors paid BNPP in excess of $2.3 million in fees and costs for this investment.  BNPP further retained approximately $700,000 of the value of the Resetable Strike Equity Option Transaction after its expiration.

The Arbitration Panel’s message was clear:  The Retail Investors should never have been marketed and sold this unsuitable security.

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On June 22, 2015, the Financial Industry Regulatory Authority, Inc. (“FINRA”) announced that it had reached a near $1 million settlement with Morgan Stanley Wealth Management (“Morgan Stanley”) and Scottrade Inc. (“Scottrade”) for failing to supervise wire transfers.  Brad Bennett, Executive Vice President and Chief of Enforcement at FINRA, commented on the settlements and stated, “Firms must have robust supervisory systems to monitor and protect the movement of customer funds. Morgan Stanley and Scottrade had been alerted to significant gaps in their systems by FINRA staff, yet years went by before either firm implemented sufficient corrective measures.”  A complete copy of the FINRA press release is available here.

Through a Letter of Acceptance Waiver and Consent (“AWC”), Morgan Stanley submitted to censure and agreed to pay a $650,000 to settle charges that from at least June 2009 through November 2014, Morgan Stanley failed to establish, maintain and enforce reasonable supervisory systems and written procedures regarding outgoing wire transfers and branch check disbursements from customer accounts.  Additionally, from approximately June 2009 through September 2011, Morgan Stanley failed to establish and maintain reasonable supervisory systems regarding its third-party service provider’s coding and acceptance of money orders, which were deposited into customer accounts.  The Morgan Stanley AWC may be found here.

Specifically, FINRA alleged that between October 2008 and June 2013, three (3) Morgan Stanley registered representatives, in two (2) branch office locations, collectively converted approximately $494,400 from thirteen (13) Morgan Stanley customer accounts by causing fraudulent wire transfers and branch checks to be sent to third-party accounts.  During this time, Morgan Stanley had no supervisory procedures in place to detect and monitor disbursements from separate accounts to the same third-party account.  Additionally, Morgan Stanley’s system did not address comparing customers’ signatures on outgoing wire transfer request forms with those on file.  Furthermore, Morgan Stanley’s third-party service provider miscoded certain types of customer deposits that would have raised red flags earlier.  Together, FINRA alleged that Morgan Stanley’s supervisory failures constituted violations of NASD Rule 3012, NASD Rule 3010, and FINRA Rule 2010.

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On May 28, 2015, the Financial Industry Regulatory Authority (“FINRA”) released its second proposed rule designed to help investors understand what financial incentives their broker may have to transition between member firms and how those transitions could affect the customer’s investments.  The complete FINRA release regarding the new rule may be found here.  FINRA encouraged all interested parties to comment on the proposal no later than July 13, 2015.

Rule 2272 — “Educational Communication Related to Recruitment Practices and Account Transfers” (the “Proposed New Rule”) would require delivery of a FINRA created educational communication focusing on key considerations for customers contemplating transferring their assets, with their broker, to the recruiting firm.  According to FINRA, a recruiting firm is any member firm that hires or associates with a registered representative who was previously associated with another member firm.  FINRA created the Proposed New Rule because it was concerned that retail customers were not aware of important factors they should consider when making the decision to transfer assets to the transitioning registered representative’s new firm.

FINRA’s educational communication is intended to motivate customers towards making inquiries of the transitioning registered representative and the customer’s current firm, to the extent that the customer considers the content of the educational communication important to his or her decision.  Specifically, FINRA’s educational communication highlights the potential implications of transferring assets to the recruiting firm and suggests questions the customer should ask questions regarding: 1) whether financial incentives received by the representative may create a conflict of interest; 2) assets that may not be directly transferrable to the recruiting firm, and, as a result, the customer may incur costs to liquidate and move those assets or incur inactivity fees by leaving them with the current firm; 3) the potential costs related to transferring assets to the recruiting firm, including the difference in the pricing structure and fees imposed between the customer’s current firm and the recruiting firm; and 4) the differences in products and services between the customer’s current firm and the recruiting firm.