South Florida Arbitration & Litigation Lawyer Blog
FINRA Negligent Supervision and Churning Arbitration Attorney, Russell L. Forkey, Esq.
August, 2011:
Bluechip Securities, Inc. (CRD® #45726, Houston, Texas) and Muhammad Akram Khan, (CRD #1400089, Registered Principal, Houston, Texas) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $15,000. Khan was fined $385,000 and suspended from association with any FINRA® member in any capacity for 18 months. In assessing the fine, financial benefits Khan obtained were considered. The fine must be paid either immediately upon Khan’s reassociation with a FINRA member firm following his suspension, or prior to the filing of any application or request for relief from any statutory disqualification, whichever is earlier. Without admitting or denying the findings, the firm and Khan consented to the described sanctions and to the entry of findings that Khan engaged in excessive trading in the accounts of his member firm’s customers; Khan effected transactions and generated approximately $380,296 in commission charges. The findings stated that the customers’ accounts incurred losses of approximately $399,000; the annualized commission-equity ratio for one customer’s account was approximately 22,131 percent and the commission-equity ratio for the other customer’s account was approximately 450 percent. The findings also stated that Khan executed, or caused the execution of, options transactions at prices that were unfair, in that the commissions charged on such transactions were excessive in light of all factors relevant to the transactions; the trades involved opening and closing transactions in listed index options traded on an options exchange, for which immediate execution was obtained through the firm’s clearing firm. The findings also included that Khan recommended opening options transactions to his firm’s customers without having reasonable grounds to believe that the recommended transactions were suitable for the customers; further, Khan did not have a reasonable basis for believing that the customers had such knowledge and experience in financial matters that they could reasonably be expected to be capable of evaluating the risks of the transactions, and that they were financially able to bear the risks of the recommended positions in the options contracts.
FINRA found that Khan exercised discretion in executing options transactions in customers’ accounts; none of the customers provided Khan or the firm with written authorization to exercise discretion in their accounts and none of the accounts were accepted by the firm or a registered options principal in writing as discretionary accounts. FINRA also found that the firm was required to conduct an independent test of its Anti-Money Laundering (AML) Compliance Program (AMLCP); pursuant to Interpretative Material (IM) 3011-1, an individual with a working knowledge of applicable requirements of the Bank Secrecy Act and implementing its regulations was required to conduct the test. In addition, FINRA determined that during one year, Khan, who is the firm’s AML Compliance Officer and therefore not independent, conducted the test; and during another year, the test was conducted by an individual who did not have a working knowledge of applicable requirements of the Bank Secrecy Act and implementing its regulations-therefore, Khan failed to cause the firm to conduct an independent test of its AML Compliance Program. Moreover, FINRA found that the firm, acting through Khan, failed to maintain accurate books and records, in that the firm failed to prepare and maintain accurate net capital computations.
Furthermore, FINRA found that the firm, acting through Khan, conducted a securities business while failing to maintain the required minimum net capital; some violations were caused by the mischaracterization of certain items as allowable assets when such items were properly classified as non-allowable assets, and one violation involved the firm’s failure to take into account certain liabilities in calculating its net capital. The findings also stated that Khan sent and received electronic communications to and from a customer, in the form of text messages, related to the firm’s business; as such the firm did not preserve these communications in the manner Securities and Exchange Act Rule 17a-3 required. The findings also included that the firm, acting through Khan, filed inaccurate quarterly Financial and Operational Combined Uniform Single (FOCUSTM) Reports because they included inaccurate net capital computations. FINRA found that the firm did not maintain the minimum net capital required by SEC Rule 15c3-l; the firm, acting through Khan, failed to provide notice of its net capital deficiency to FINRA and the SEC pursuant to SEC Rule 17a-11.
The suspension is in effect from July 5, 2011, through January 4, 2013. (FINRA Case #2009016264301).