Unauthorized Outside Business Activity and Selling Away Broker/Dealer Fraud and Mismanagement FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
Cantone Research Inc. (CRD® #26314, Tinton Falls, New Jersey) and Christine L. Cantone (CRD #2687618, Registered Principal, Thompson, Pennsylvania) submitted an Offer of Settlement in which the firm was censured, fined $25,000, $10,000 of which was jointly and severally with Christine Cantone, and ordered to pay a total amount of $200,000 in partial restitution to customers, jointly and severally with Christine Cantone. Christine Cantone was suspended from association with any FINRA member in any principal capacity for three months. Without admitting or denying the allegations, the firm and Christine Cantone consented to the described sanctions and to the entry of findings that Christine Cantone, as the firm’s vice president and chief compliance officer (CCO), failed to reasonably supervise a registered representative who was able to continue engaging in a scheme through which he sold fictitious investments to firm customers and misappropriated more than $1.6 million of their funds. Throughout the time of the registered representative’s association with the firm, Christine Cantone was aware of certain “red flags” that should have alerted her to the misconduct but failed to reasonably follow up on those indications of possible misconduct. The findings stated that Christine Cantone was responsible for enforcing the firm’s procedures regarding the monitoring and review of employee transactions in outside accounts, and for reviewing incoming and outgoing paper and electronic correspondence for the firm’s registered representatives. The findings also stated that upon the registered representative’s association with the firm, he disclosed an account at another member firm. Christine Cantone asked him to transfer the account to the firm and he objected, citing several reasons, including that he needed to pay certain bills from the account. Christine Cantone acquiesced and permitted the registered representative to retain his account at the other member firm. The findings also included that Christine Cantone regularly reviewed statements from the account, which alerted her to unusually large deposits in the account. Concerned that the registered representative might be engaging in outside business activities or private securities transactions, Christine Cantone questioned him about the origin of the funds but accepted the registered representative’s explanation that the deposits were related to real estate sales or to his relative’s supposed antique business, and did not request supporting documentation or make any other efforts to verify those representations.
FINRA found that even when presented with direct evidence of the registered representative’s deposit of customer funds into the account, Christine Cantone continued to rely on his unverified representations. As a result of Christine Cantone’s failure to supervise the representative, he was able to continue his misappropriation scheme unabated while registered at the firm. FINRA also found that although the firm had general procedures requiring the disclosure of outside brokerage accounts, the provision of duplicate statements for those accounts and the questioning of registered representatives about suspect transactions in those accounts, the written supervisory procedures (WSPs) lacked specific requirements, and the firm otherwise failed to provide for reasonable follow-up or review of such suspect transactions, such as requesting documentation on questionable transactions, comparing deposit activity in the outside accounts to withdrawal activity in customer accounts, or speaking with customers. As a result, the firm failed to establish and maintain a supervisory system and establish, maintain and enforce WSPs reasonably designed to achieve compliance with applicable securities laws and regulations with regard to monitoring the activity of its registered representatives in outside brokerage accounts.
Christine Cantone’s suspension is in effect from March 19, 2012, through June 18, 2012. (FINRA Case #2009020383002).