Broker/Dealer and Investment Advisor Fraud, Misrepresentation and Mismanagement FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
Bulltick Securities, LLC (CRD #132092, Miami, Florida) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $125,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it made transaction-based payments to a non-registered foreign asset manager (foreign finder) whose activities required registration. The findings stated that the firm’s sole business entailed executing securities transactions on behalf of Latin American customers foreign finders referred to the firm. The foreign finders were not registered with FINRA. In making referral payments, the firm relied on NASD Rule 1060, which allows member firms to pay transaction-based compensation to non-registered foreign finders (without requiring those entities/individuals to register) based upon the business of customers they direct to the firm provided that certain specified conditions are satisfied. The findings also stated that a non-registered foreign finder referred customer accounts to the firm that generated gross commissions of approximately $600,000 through the unsolicited, short-term trading of collateralized mortgage obligations (CMOs). The firm paid the non-registered foreign finder approximately $400,000 in net commissions from this amount. The findings also included that the firm’s relationship with the non-registered foreign finder failed to satisfy the requirement of NASD Rule 1060. After the non-registered foreign finder referred the foreign customers to the firm, the securities trades in those accounts were managed by a non-registered affiliate of the foreign finder who was not a foreign asset manager.
FINRA found that the affiliate’s office manager or president would provide the firm with the daily trading instructions for the non-registered foreign finder’s referred account but never obtained evidence confirming that the affiliate was authorized to effect securities transactions in the referred accounts. Additionally, the firm paid the non-registered foreign finder approximately $82,000 for transactions in a United States citizen’s account. FINRA also found that the firm did not evaluate whether the affiliate’s role in the transactions required the affiliate or the non-registered foreign finder to register in the United States as a broker-dealer. The firm’s confirmations for transactions in the referred accounts failed to state that it was paying a referral or finder’s fee. The CMO trading decision and strategy in the referred accounts were directed in part by the customer, who was purportedly a consultant with the affiliate. In addition, FINRA determined that the customer opened an account in his name with the firm and shortly after he had voluntarily resigned from a FINRA member firm. The firm maintained the customer’s account along with the nonregistered foreign finder’s referred accounts of foreign customers (sharing the same account number prefix). The customer had a disciplinary history at the time he opened his firm account. Moreover, FINRA found that the firm was aware of this and, in opening the customer’s account, the firm tasked a registered principal with providing heightened supervision over the customer’s account. Although the firm implemented monthly principal reviews by the principal of the activity in the customer’s account, this procedure was insufficient. The firm learned about the SEC action against the customer shortly after it was filed. Nevertheless, the customer’s account remained open and continued to trade. Furthermore, FINRA found that the customer routinely engaged in cross-trades of CMOs with other non-registered foreign finder’s referred accounts. In many instances, the customer would purchase the CMOs for his account from another broker-dealer and re-sell the positions at substantially higher prices to other of the non-registered foreign finder customers. As a result of the differences in the prices of the cross-trades, the customer profited on the majority of the CMO transactions in the referred accounts. The customer’s account made a profit of approximately $1.83 million. The findings also stated that the firm did not reject any trades in the customer’s account until it cancelled an order to sell a CMO position from the customer’s accounts to other non-registered foreign finder’s referred accounts because the execution prices for the purchases were different. The firm later terminated its relationship with the non-registered foreign finder but never conducted a review of the CMO transactions in the referred accounts to determine if there were other transactions with discrepancies.
The findings also included that the firm had a written anti-money laundering (AML) compliance program (AMLCP) that covered, among other things, monitoring for, detecting and reporting of suspicious activities. The firm’s procedures specified that its designated principal (its AML compliance officer (AMLCO)) and others would determine whether a particular account or transaction must be reported based upon a lengthy list of red flags of possible misconduct. FINRA found that the firm failed to monitor for, detect and appropriately investigate suspicious transactions the customer conducted and, if appropriate, file a suspicious activity report (SAR), despite multiple red flags related to these transactions. The red flags, each of which corresponded to a red flag identified in the firm’s procedures, included, among other things the short-term trading activity of CMO securities conducted through the customer’s account, which was generally inconsistent with the long-term investment horizon associated with such investments; the customer’s disciplinary history with the SEC; the volume of cross-trades involving the customer and the non-registered foreign finder’s referred accounts, which appeared to have no business purpose other than to enrich the customer; the fact that the pricing of the customer’s cross-trades differed from the prices the firm received from its clearing firm for the same securities; the differences in prices on the cross-trades involving the customer’s account and the profits the customer obtained; and transactions involving disparate pricing in the customer’s cross-trade involving other of the non-registered foreign finder-referred accounts, which occurred over the course of one month. FINRA also found that the firm failed to develop and implement a reasonably designed AMLCP because its procedures did not address the AML risks presented by certain aspects of its foreign finder business and CMO trading. In addition, FINRA determined that the firm failed to establish and maintain a supervisory system, and establish, maintain and enforce WSPs, reasonably designed to achieve compliance with applicable rules and regulations relating to its foreign finder business and the CMO transactions and trading activity in the referred accounts. The firm principal responsible for supervising the securities activity in the non-registered foreign finder’s referred accounts did not have any experience prior to joining the firm regarding CMOs, which rendered his monthly review of the customer’s account and implementation of heightened supervision inadequate. Moreover, FINRA found that the firm failed to establish WSPs pertaining to CMOs. The firm’s WSPs did not address how it would obtain, monitor and conduct due diligence on pricing for these securities. Furthermore, FINRA found that the firm failed to establish a system or WSPs that addressed the payment of transaction-based compensation to foreign finders made pursuant to NASD Rule 1060 and related registration issues, and failed to ensure that its relationships with the foreign finders satisfied the criteria of NASD Rule 1060 for payment of transaction-based compensation to
those entities. The findings also stated that the firm failed to enforce its WSPs requiring it to obtain trading authorization for third-party transactions. (FINRA Case #2009015969501).