Account Executive and Stock Broker Fraud, Misrepresentation and Misrepresentation FINRA Arbitration and Litigation Lawyer, Russell L. Forkey, Esq.
Harry Friedman (CRD #2548017, Registered Principal, Woodmere, New York) submitted an Offer of Settlement in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the allegations, Friedman consented to the described sanction and to the entry of findings that he failed to adequately supervisecertain employees of his member firm who engaged in a fraudulent trading scheme through which improper markups were concealed and customers were denied best execution. The findings stated that the firm’s customers did not receive the most favorable market price because Friedman failed to reasonably supervise and detect occurrences in which the registered representative interjected the firm’s proprietary account between the customer and the market. The findings also stated that according to the firm’s WSPs, Friedman was responsible for ensuring that the head trader accurately disclosed on the order tickets the time that the customer orders were received and executed, the capacity in which the broker-dealer acted and the amount of compensation the broker-dealer received from the transaction. In furtherance of the fraudulent trading scheme, the registered representative entered false information on the order tickets for customer transactions regarding the share price and the time the customer order tickets were received, entered and executed, and did not accurately reflect the markup and/or commission charged or the order capacity. Friedman knew or was reckless in not knowing that the order tickets were mismarked. The findings also included that the firm designated Friedman as the person who was to ensure that the head trader properly marked order tickets. The order tickets were inaccurate in that they did not reflect that the firm had paid itself a markup or include the proper commission, and contained inaccurate information related to the share price, the time the customer order tickets were received, entered and executed, and order capacity.
FINRA found that according to the firm’s WSPs, Friedman was responsible for the review and supervision of trading activity at the firm, but he failed to enforce the WSPs to supervise the activities of each registered person that were reasonably designed to achieve compliance with the applicable rules and regulations with respect to trading activity of all registered representatives of the firm’s Offices of Supervisory Jurisdiction (OSJs). FINRA also found that Friedman failed to enforce the WSPs and, according to Friedman, his only form of supervisory review was to examine the previous day’s trade blotter. Friedman failed to perform the required reconciliation of daily positions and trades in the firm’s principal accounts. In addition, FINRA determined that per the firm’s WSPs, Friedman was responsible for establishing, maintaining and enforcing a supervisory control system for the firm. The firm, acting through Friedman, failed to establish, maintain and enforce a system of supervisory control policies and procedures that tested and verified that its supervisory procedures were reasonably designed with respect to the activities of the firm and its registered representatives and associated persons to achieve compliance with applicable securities laws and regulations, and created additional or amended supervisory procedures where the need was identified by such testing and verification. Among other things, Friedman and another designated principal failed to submit to the firm’s senior management any report for three years that detailed its system of supervisory controls, the summary of the test results and significant indentified exceptions, and any additional or amended supervisory procedures created in response to the test results. Moreover, FINRA found that the firm, acting through Friedman, failed to conduct a test of its supervisory procedures for a year. Although the firm conducted some limited testing in other years, that testing was deficient in that the firm failed to evaluate several aspects of its written compliance policies and WSPs, including review and supervision of the customer account activity conducted by the firm’s branch office managers, review and monitoring of customer changes of address and the validation of such changes, and review and monitoring of customer changes of investment objectives and the validation of such changes. Furthermore, FINRA found that Friedman failed to enforce the written supervisory control policies and procedures the firm had with respect to these areas. Friedman also failed to establish written supervisory control policies and procedures reasonably designed to provide heightened supervision over the activities of each producing manager who was responsible for generating 20 percent or more of the revenue of the business units supervised by that producing manager’s supervisor. As a result, the firm did not determine whether it had any such producing managers and, to the extent that it did, subject those managers to heightened supervision. The findings also stated that for three years, Friedman falsely certified that the firm had the requisite processes in place and that those processes were evidenced in a report reviewed by its CEO, CCO and other officers. (FINRA Case #2009016405904).