Wall Street’s Overseer Prevents Open Examination of Companies With Problematic Agents
Richard Haus, a North Dakota farmer, claimed that Mike McMahon, a Long Island stockbroker, and his associates incurred fees and interest of $267,567 over three years of managing his investments, yet ultimately lost him $261,441 on the trades.
National Securities Corporation, of which McMahon was a part of, conducted around nine transactions of 200-900 shares of Apple stock for Haus over a period of approximately one year. This resulted in a total of $27,000 in fees, as outlined in a complaint submitted to the Financial Industry Regulatory Authority (FINRA) in 2015 by Haus.
Haus made the regulator aware of what he labelled as the “churning” of his account to generate excessive commissions. This would not have been unforeseen by FINRA, the industry’s self-governing body, as it is mandated by Congress to shield investors from unethical brokers.
Since the year 2000, the Financial Industry Regulatory Authority has imposed at least 25 fines on National. By the beginning of this year, Reuters determined that when analyzing FINRA data, 35 percent of National’s 714 brokers had either experienced regulatory issues, legal disputes, or personal financial concerns that FINRA requires them to disclose to customers.
No response was received from McMahon when requests for comment were made. National chose not to give any comment.
Reuters conducted an analysis of 48 firms in which at least 30 percent of brokers have been flagged by FINRA. This represents a higher rate (9 percent) of those who have experienced one of the 12 most serious occurrences out of the 23 that brokers must disclose to FINRA in comparison to the industry as a whole.
Altogether, 48 companies have authority over 4,600 agents and a large number of investor assets. (Here is the full list with the data for each firm.)
Interviews between Reuters and FINRA representatives revealed that the recruiting techniques utilized by certain businesses are a major concern for investors. They acknowledged, however, that there is not much that can be done to halt the hiring of a large number of brokers who may be unreliable, since it isn’t against the law.
Haus and other investors are exposed to a select few brokerages that tend to employ advisors with tarnished records that would be ineligible for work at most firms, according to ex-regulators and industry professionals.
Reuters conducted an examination of twelve FINRA flags, which included disciplinary action for improper behavior, dismissals of employees following allegations of misconduct, and payments to settle customer grievances. Additionally, the analysis revealed certain brokers have experienced personal financial issues, such as bankruptcy filings or unpaid debt. For further details on the methodology used for this analysis, please refer to the article accompanying this report.
In the past, a person from the Financial Industry Regulatory Authority (FINRA) informed Reuters that they had identified 90 companies as presenting the largest danger to customers and flagged them internally for further examination. However, FINRA chose not to make the companies known to the public or to give out information displaying the amount of brokers with a record of FINRA flags for each company.
When approached by Reuters, Susan Axelrod, FINRA’s executive vice president of regulatory operations, refused to make any comments in regards to the firms that were identified by Reuters. She would not give a reason why the regulator would not make public the names of the firms they classified as high-risk.
She commented on the firms identified by Reuters, noting that they were not unfamiliar to them.
Robert Cook, CEO of FINRA, addressed why the organization does not name individual violators in a speech at Georgetown University in Washington on Monday. His words were released in a statement from FINRA.
Cook remarked that it is essential to take fairness and due process into account. He also pointed out that FINRA does not possess supernatural insight; someone identified as a high-risk broker for oversight purposes does not necessarily signify that they are a wrongdoer.
Axelrod informed Reuters that the regulator has formed a specialized division to handle those companies that are considered high-risk, yet she did not give details regarding the budget, personnel, or the exact responsibilities of the unit. On Monday, Cook mentioned that the unit includes a certain amount of “examiners and managers” who are experienced in dealing with high-risk brokers.
Axelrod pointed out the “unparalleled transparency” that FINRA’s Brokercheck website provides by giving the public access to records of complaints and sanctions against individual brokers – however, it only permits individuals to search one broker at a time.
The regulator has declined to make available the information in its entirety, such as in a database, which would allow researchers to pinpoint companies with a large amount of brokers who have had FINRA flags in the past.
According to Susan Axelrod, FINRA’s executive vice president of regulatory operations, the 48 brokerage firms identified by Reuters were not unfamiliar to her.
To gain an understanding of the FINRA data, Reuters asked researchers from Columbia University Law School DataLab to compose a computer program to extract the information from the regulator’s website.
Reuters attempted to acquire a statement from the representatives of all 48 companies. Several replied that numerous of the FINRA-required declarations do not always indicate misbehavior by brokers, such as when a business compensates a customer to settle a grievance without conceding guilt.
During his speech on Monday, Cook, the head of FINRA, reaffirmed the same sentiment.
He explained that a broker who has an unpaid lien due to a medical expense related to a family member ought to disclose that lien, and it should not be categorized the same as a fraudulent act or misappropriation of funds from customers.
Among the companies revealed in the Reuters research is one that has a representative on FINRA’s Board of Governors – Kovack Securities Inc., whose president, Brian Kovack, is the executive in question.
The Reuters analysis reveals that 34 percent of the firm’s 388 brokers have had flags raised by FINRA in the past.
Brian Kovack explained that the large influx of brokers from another broker in 2014 led to the firm’s inability to use its normal vetting process for new hires, thus resulting in the figures presented.
Kovack explained that it had taken quite some time to make sure the examination of new brokers’ credentials was impartial and open. Following the assessment, certain advisors were asked to leave the firm, however, the specific number of people and the rationale for their dismissal were not stated.
The capacity to control one’s own behavior is known as self-regulation.
FINRA is a private “self-regulatory organization” that is financed by the industry and exempt from public records laws. It does not receive any type of taxpayer funding.
The Financial Industry Regulatory Authority (FINRA) has a yearly budget of roughly $1 billion which is used to employ 3,500 personnel across 16 offices. The majority of their funding comes from dues paid by firms and brokers. Additionally, they have the authority to impose penalties, suspensions, and prohibitions on firms and individuals and are able to send any cases of potential criminality to the Securities and Exchange Commission (SEC).
In 2019, a strange partnership between Senators Elizabeth Warren (MA-D) and Tom Cotton (AR-R) composed a letter to FINRA, imploring the organization to take greater steps to stop broker misconduct and to impede brokers with a history of trouble from working in the same companies.
The letter declared that FINRA was falling short of its obligation to safeguard investors.
On June 15 of the previous year, FINRA issued a letter stating that it monitors firms with a close eye to identify any heightened risk to investors.
Between the years of 2013 and mid-2016, the regulatory body reported to the senators that they noticed 279 brokers who posed a “high risk”. After discovering them, 238 of these brokers were ultimately barred from the profession due to their subsequent violations.
Approximately 630,000 brokers are regulated and monitored by FINRA, which oversees the activities of around 3,800 brokerages.
Axelrod, in his interviews with Reuters, mentioned the various firms that FINRA had expelled during the six-year period ending in January 2017; the number of firms being around 130, with the majority of them being shut down due to alleged securities fraud, misuse of funds or record falsification.
In the majority of cases, FINRA did not expel the top executive of the firm being disciplined, allowing them to move on and work for other brokerages. Furthermore, the brokers at the sanctioned firms were also often still able to continue working in the industry.
Axelrod commented that FINRA pays additional attention to individuals who have previously held executive positions at expelled firms and then subsequently acquire new jobs at different firms.
A MYRIAD OF PROOF
At least one state’s regulatory body believes that further measures should be taken in order to enforce stricter penalties on brokers and brokerages that have a history of violations.
In the wake of an evaluation of brokerages that have an abundance of agents with problematic histories, regulators in Massachusetts who are responsible for securities are considering altering their regulations relating to licensing.
William Galvin, the Secretary of the Commonwealth of Massachusetts, reported to Reuters that the abundance of evidence suggests that a pattern exists of people shifting from one company to another and repeating the same mistakes. He also noted that without some sort of incentive, the companies would not make any efforts to improve the situation.
Reuters spoke to ex-regulators who concurred with the decision by FINRA to not make its internal risk ratings for firms available to the public.
Merrill, who held the position of head of enforcement at FINRA and is now part of Sidley Austin LLP, expressed her opinion that publicly disclosing ratings of firms would be unjust if those companies have not violated any laws or regulations.
Merrill stated that if the regulator makes a discovery, then it is appropriate for them to take action.
Last June, Richard Ketchum, who was the CEO of FINRA at the time, informed Reuters that the regulator was thinking of making public more details about firms that have a significant number of controversial brokers.
Ketchum stated in an interview that they are carefully examining if it is feasible and just to provide a more expansive disclosure when companies have a large number of people having the same issues.
On Monday, Cook stated that FINRA was looking into adopting extra strategies to control brokers with dangerous practices, though he did not provide any details.
In an interview with Reuters before his retirement in 2019, Richard Ketchum, FINRA’s former chairman and CEO, revealed that the agency was looking into the possibility of making public certain information on brokerages with large numbers of brokers with questionable records.
The Wolves of Wall Street have become a well-known group of stock market investors. They are renowned for their vast knowledge and ability to make lucrative investments in the industry. Their expertise has enabled them to build wealth and gain influence in the financial world.
Regulatory complaints and sanctions against 48 businesses and their brokers demonstrate that the companies often employ high-pressure sales tactics when cold-calling customers.
The film “The Wolf of Wall Street” was based on the story of Jordan Belfort and his brokerage firm, Stratton Oakmont. This firm had been situated in Long Island, New York, and has had a long history of hosting boiler-room brokerages. Belfort was convicted of money laundering and securities fraud in 1999.
In a statement issued last year, FINRA cautioned that a resurgence of boiler-room tactics was occurring, especially those targeting more vulnerable investors such as the elderly.
Jeske, a lawyer at Foley & Lardner and former deputy regional chief counsel for FINRA enforcement in the Midwest, stated that brokers often have an understanding of which companies would be willing to employ them, even if prior sanctions were in place.
Jeske noted that it is challenging to obtain a job at Morgan Stanley or Merrill Lynch with a mark on one’s record.
Regardless of the multiple claims and settlements made against him, Mike McMahon has not faced difficulty in obtaining positions at securities firms.
In 2014, McMahon abandoned National and ended up at Worden Capital Management, a Long Island-based smaller company. As of the start of this year, out of 79 brokers, 43 percent of them had a record of FINRA flags.
Reuters’ analysis found that 41% of the company’s brokers had prior experience at businesses that were at some point in time stripped of their FINRA membership.
Jamie Worden, the chief of Worden Capital, commented that his company’s compliance department evaluates all possible brokers and that FINRA-mandated disclosures do not necessarily imply wrongdoing.
Worden noted that the available data disclosed to the public only represents a small fraction of the total background information regarding any given situation.
Since 2007, $1.35 million has been distributed between McMahon, National, and one other firm he was employed with to settle 10 grievances made by clients against McMahon, as reflected on FINRA’s BrokerCheck website.
Four additional complaints against McMahon have been filed with FINRA – which have not yet reached a settlement resolution or an arbitration ruling – due to his advice given to clients while he was employed with National, per the regulator’s records.
In multiple of the concluded issues, McMahon exculpated himself of any culpability.
Haus, who had been swindled out of more than half a million dollars by McMahon and others at National, revealed to Reuters that the experience had him considering taking his own life.
The soybean farmer and ex-military serviceperson expressed their shame, declaring that they didn’t want anyone to know that they were in the process of losing their life savings.
In November, Haus was compensated in an undisclosed amount by National, resulting in a settlement. As part of the agreement, he signed a nondisclosure agreement and has remained silent in response to requests for comment by Reuters.
Despite having had numerous issues with FINRA and other regulatory bodies, many of the businesses highlighted by Reuters remain in operation for extended periods of time.
Approximately 95 brokers are employed by WestPark Capital Inc, based in Los Angeles, and nearly half of them have FINRA flags on their records. Additionally, more than 47% of their brokers previously worked at firms that were ultimately expelled by FINRA.
Six times in the past decade, FINRA and the New Jersey Bureau of Securities have imposed sanctions against WestPark for a multitude of purported infringements.
In 2004, the Financial Industry Regulatory Authority (FINRA) penalized WestPark and its chief executive, Richard Rappaport, for failing to provide essential information in investment research reports and having inadequate supervisory systems. As a consequence, the firm and Rappaport were both fined $50,000 and the former was suspended from his managerial role for thirty days.
Although Rappaport accepted the penalty in a settlement with FINRA without admitting any fault, he disregarded the suspension and kept on managing WestPark, as shown in FINRA disciplinary documents seen by Reuters.
The consequences for disregarding the 30-day suspension were another 30-day suspension from FINRA and a monetary fine of $10,000.
In 2016, West Park identified a chance for recruitment. The company initiated bringing in numerous brokers from Newport Coast Securities – an agency prohibited by FINRA from the sector that year for excessive trading in customer accounts to generate commissions and for suggesting inappropriate investments. Newport initiated an appeal against the ouster.
In the early months of 2017, WestPark had recruited around 40 brokers from Newport Coast, among them being the ex-CEO, Richard Onesto.
No response was received from WestPark, Rappaport, or Onesto when requests for comment were made.
An illegal market manipulation tactic in which an investor or group of investors artificially inflates the price of an owned stock through false and misleading positive statements, before selling the stock at a high price, thus creating a “pump” in the price and a “dump” in the value.
Reuter’s analysis has revealed that Windsor Street Capital has been disciplined 12 times by FINRA since the year 2000, but the SEC may take a much harsher stance this time around.
Of the 48 brokers employed by the firm, 58 percent had previously been flagged by FINRA. Over time, the company has paid out fines of $300,000 and is challenging two other fines of more than $1 million.
During the first month of the year, the SEC initiated administrative proceedings against Windsor Street Capital and its one-time anti-money laundering administrator, John Telfer, for supposedly abetting a $25 million pump-and-dump operation. This strategy consists of investors trying to increase the value of a dubious stock they own before selling it off, also known as “dumping” it.
Reuters received no comment from Windsor, yet they denied any wrongdoings in an SEC filing.
The U.S. Securities and Exchange Commission(SEC) claims that Windsor permitted customers to dispose of an extensive number of unregistered penny stocks through their respective Windsor accounts, but neglected to tell the U.S. Treasury Department of the questionable transactions.
The SEC has charged the Windsor clients with buying stocks in dormant corporations, spreading deceitful communication to boost the products of these companies, and then selling the shares when other investors purchased them at increased costs. This case is still under investigation.
The SEC reported that Windsor was able to generate $500,000 from commissions and fees originating from the fraudulent scheme.
In response to a query about FINRA personnel’s involvement in the SEC’s investigation, an SEC representative declined to comment but referred to the SEC’s press release, which solely credited SEC investigators.
No comment was given by FINRA on their involvement in the Windsor inquiry when asked.
According to Reuters, a majority of the 59 brokers (71%) employed by Joseph Stone Capital, based in Long Island, have flags on their FINRA records.
The state of Montana investigated Joseph Stone due to an incident involving a salesperson, Lawrence Sullivan, who had called the Commissioner of Securities and Insurance’s office on January 15th, 2016 to present an investment opportunity. The regulator then issued a report on the occurrence.
In response to the call, the securities commission began an inquiry into the business. In the call, Sullivan quickly retracted his statement that he was offering securities, as the report claims.
Efforts to contact Sullivan for a statement were unsuccessful. Patrick Navarro, an assistant analyst at the state regulator, who was contacted by Sullivan, could not be reached for comment.
The regulator’s report ultimately disclosed that “dishonest and immoral” activities were uncovered, such as too much trading of client accounts – with commissions adding up to 28% of the $877,493 invested by Montana customers.
On April 18th, the company reached an agreement with the state wherein they would pay $30,000 in restitution to their clients, without conceding any guilt.
At the conversation which caused the firm complications, Sullivan proposed to Navarro to invest in Paypal stock, the report stated. When Navarro informed Sullivan that he was employed by the state’s security regulator, Sullivan abruptly exclaimed “Happy New Year!” and ended the call.
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