In the pump and dump scheme, criminals artificially inflate prices through coordinated trading and/or deceptive promotional activity. Once the prices are sufficiently “pumped,” the fraudsters sell off their positions at a profit, often leaving the account owners and unwitting investors facing substantial losses when the stock price collapses. The ease of access to customer securities accounts through apps (and lax security by investment firms) have only made these schemes easier to execute.

In response to these threats, the Financial Industry Regulatory Authority (FINRA) has issued comprehensive guidance to broker-dealers, most notably four years ago in Regulatory Notice 21-18, to help prevent and mitigate securities account takeover attempts. FINRA highlights the importance of robust authentication procedures, continuous monitoring for indicators of unauthorized account activity, and swift escalation and remediation protocols in the event of a suspected compromise. Broker-dealers are urged to evaluate and, where needed, enhance their existing controls in light of evolving attack techniques, particularly as more firms adopt fully online service models and rely on automated account opening processes.

Specific practices recommended by FINRA include multi-factor authentication for customer logins, use of out-of-band verification for sensitive transactions, real-time monitoring for unusual activity patterns, and regular education and training for both staff and customers about current fraud risks and social engineering tactics. Broker-dealers are also encouraged to have clear written escalation procedures for suspicious account events, collaborate closely between compliance, AML, and customer service functions, and leverage reporting from industry peers to stay ahead of emerging threats. Additionally, timely communication with customers regarding suspicious activity can help contain losses and reinforce a culture of vigilance.

U.S. SEC Regulation S-ID (17 CFR § 248.201) similarly requires investment firms to “develop and implement a written Identity Theft Prevention Program (Program) that is designed to detect, prevent, and mitigate identity theft…”

As securities account takeover incidents and related pump and dump schemes continue to grow in scale and sophistication, it is essential for broker-dealers to implement comprehensive, adaptive controls aligned with FINRA’s guidance, including those in Regulatory Notice 21-18. Proactive measures such as layered authentication, prompt fraud detection, and internal training are not only key to protecting client assets but also crucial for safeguarding the integrity and reputation of the securities industry as a whole.

If your securities firm allowed criminals to access your account without authorization causing losses or unauthorized withdrawals or wires, please contact the Securities Fraud Lawyers at Greco & Greco for a free consultation with one of our attorneys about your claims and possible recourse against your brokerage firm. We also recommend reading our blog post regarding our successful recovery in FINRA arbitration of losses, interest, and attorney’s fees for our client against Interactive Brokers in an unauthorized access and withdrawal case.

A. Alleged Violations of Whistleblower Protections

The core issue in this matter revolves around the Respondents’ alleged violations of whistleblower protections under Exchange Act Rule 21F-17(a). According to the SEC, during the period from May 2021 to February 2024 (the “Relevant Period”), the Respondents asked eleven clients to sign confidentiality agreements linked to compensatory payments for losses in their investment accounts. These agreements included provisions that obstructed the clients from reporting potential securities law violations to the SEC or other regulatory authorities. The confidentiality agreements contained clauses that not only restricted clients from disclosing information about the disputes or payments but also imposed conditions that clients would only be able to report violations if initiated by the regulators. This effectively impeded clients from voluntarily communicating with the SEC about potential violations.

B. Regulatory framework.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced Section 21F into the Exchange Act, which aimed to bolster whistleblower protections by offering financial incentives and confidentiality protections. Rule 21F-17, effective from August 12, 2011, specifically prohibits any actions that obstruct individuals from reporting potential securities law violations directly to the SEC, including enforcing confidentiality agreements that restrict such reporting.

C. Details of the Agreements and Alleged Violations

The Respondents utilized two main templates for their confidentiality agreements: the “Agreement” and the “Agreement and Release”. According to the SEC, both templates contained provisions that violated Rule 21F-17(a). Key problematic clauses included:

One paragraph restricted clients from discussing the terms of the agreement or the underlying dispute, even in response to inquiries from regulators, unless those inquiries were unsolicited and did not result from any action by the client.
Another paragraph required clients to affirm that they had not previously reported the dispute to any regulatory authority and pledged to refrain from doing so in the future. It also contained provisions providing only a limited carve-out for responding to unsolicited inquiries, thereby creating a reasonable impression that clients were discouraged from voluntarily reporting potential violations to regulators.
The confidentiality agreements created significant barriers for clients who might otherwise report securities law violations. The restrictive clauses not only limited the clients’ ability to report violations voluntarily but also imposed a misleading impression that reporting to the SEC was only permissible if initiated by the SEC itself.

D. Penalties Imposed

The SEC has imposed the following sanctions on the Respondents:

NPA Asset Management, LLC: A civil monetary penalty of $160,000.
Nationwide Planning Associates, Inc.: A civil monetary penalty of $70,000.
Blue Point Strategic Wealth Management, LLC: A civil monetary penalty of $10,000.
The SEC’s order further requires the Respondents to cease and desist from future violations of Rule 21F-17(a) and the Respondents to be censured.

E. Conclusion

The sanctions reflect the SEC’s emphasis on enforcing whistleblower protections ensuring that entities do not obstruct the reporting of securities law violations, and punishing securities firms for whistleblower violations. If you are aware of significant violations of securities laws or industry rules by a FINRA Broker-Dealer firm or a Registered Investment Advisor, please contact Scott Greco for a free securities fraud attorney consultation about the issues and any potential case or whistleblower action.

Of particular note is The Huntington Investment Company’s case, which stands out due to its self-reporting and cooperation with the SEC. As a result, Huntington was ordered to pay a lower civil penalty compared to other firms, totaling $1.25 million. This demonstrates the importance of voluntary disclosure and cooperation in regulatory investigations.

The investigations uncovered widespread use of unapproved communication methods, such as personal text messages, across all sixteen firms. Employees at various levels, including supervisors and senior managers, were involved in these violations. The failure to maintain and preserve required records potentially deprived the SEC of crucial information in various investigations.

Each of the firms involved was charged with violating recordkeeping provisions of relevant securities laws and failing to reasonably supervise to prevent and detect such violations. In addition to the financial penalties, the firms were ordered to cease future violations, receive censures, and engage independent compliance consultants to review and enhance their policies and procedures.

Most securities brokerage firms and investment advisory firms prohibit texting between financial advisors and brokers and their customers because of the difficulty of supervising those communications. The reality is, however, that many brokers and advisors don’t follow these rules and often will send texts that can be used against them and their firms in related securities fraud actions. For this reason, customers who have been damaged by the wrongdoing of their advisors should take care to preserve all communications with their advisors including texts. If you believe you may have a claim against your financial advisor, broker, or their firm, please contact securities fraud attorney Scott Greco for a free attorney consultation.

Background: LPL Financial LLC

LPL Financial LLC, a long-standing member of FINRA since 1973, operates as a significant player in the securities industry and is one of the larger “independent” FINRA firms. Headquartered in Fort Mill, South Carolina, LPL boasts a considerable network, with over 27,000 registered representatives across more than 18,000 branch offices. Most advisors who are registered with independent firms operate out of small one or two advisor offices. Although independent firms have the same supervisory duties and more traditional firms with big branch offices, proper supervision does not always occur.

Overview of Allegations

The allegations against LPL Financial LLC span a significant timeframe, from January 2012 to November 2022. Among the key alleged violations cited by FINRA include the firm’s failure to reasonably supervise transactions conducted directly with product sponsors on behalf of customers. This lack of oversight led to approximately 830,000 transactions not being reported, raising concerns about potential sales practice violations and unsuitable recommendations.

Moreover, LPL’s shortcomings extended to inaccurate information provided to customers regarding switch transactions, where approximately 11,300 letters were found to contain misleading fee information. This negligence in supervision and communication not only violated FINRA rules but also compromised the interests of customers.

Furthermore, the firm failed to establish a proper supervisory system for recommendations involving publicly traded securities of business development companies (BDCs which are considered “alternative” investments), leading to potential overconcentration in Listed BDC investments for certain customers. The AWC stated: “LPL also failed to have a reasonable supervisory system to ensure the collection of information for its direct business customers’ investment profiles—such as the customers’ ages, investment time horizons, and liquidity needs—that was relevant for making suitability determinations. LPL relied on its representatives to collect such information by completing new account forms for direct business transactions. However, the firm did not take steps to ensure that representatives completed the new account forms.”

Consequences and Sanctions

In response to these violations, LPL Financial LLC has consented to several sanctions imposed by FINRA, including a censure, a substantial fine of $5.5 million, and restitution totaling $651,374.51 plus interest. Additionally, the firm is required to undertake remedial actions within a specified timeframe to address the identified issues and ensure compliance with regulatory standards.

Contact a Securities Fraud Lawyer if you may have a claim.

If you think you may have a potential claim for unsuitable investments or failure to supervise against a financial advisory firm such as LPL, please contact Scott Greco for a free attorney consultation about your case.

The case underscores the importance of regulatory vigilance in the investment industry. Despite assurances of safety and profitability, Woods’s actions demonstrated a flagrant abuse of trust, ultimately causing financial ruin to hundreds of victims across 20 different states.

Investment Advisers are fiduciaries, and as such they owe their customers duties of care and loyalty, both of which were flagrantly breached in this situation. Mr. Woods was a longtime investment adviser representative at Oppenheimer & Co., Inc.

Although Investment Advisory firms and brokerage firms (Broker-Dealers) often claim they are not legally responsible for the unauthorized actions of their advisers, the law of most states holds otherwise. Firms can be legally responsible for the actions of their agents even if the agents acted solely for their own purposes and the firms received no compensation for the wrongful acts. Furthermore federal and state securities laws hold “control persons” liable for agents under their control, and firms further may be liable for breaches of their duties to supervise their agents.

If you believe you were the victim of a ponzi scheme or other fraudulent actions of your investment advisor, please contact securities fraud attorney Scott Greco for a free consultation about your potential case. Greco & Greco has decades of experience representing investors across the country for similar situations.

The Complaint alleges that Western and its brokers sold high risk and potentially illiquid L bonds issued by GWG Holdings, Inc., with many of the sales to customers on fixed incomes and with moderate risk tolerances. The SEC’s press release alleged that the Defendants “failed to comply with Reg BI’s “Care Obligation” both because they did not exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs associated with L Bonds, and also because they recommended L Bonds to at least seven particular customers without a reasonable basis to believe the bonds were in their customers’ best interests.”

The SEC also claimed that the activities and sales violated the compliance component of Reg BI which requires firms to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.

Western’s advisors allegedly sold $13.3 million of the L bonds in 2020 and 2021.

Greco & Greco’ securities fraud lawyers regularly represent harmed individuals who were sold unsuitable investments that were not in their best interest, and has brought multiple FINRA arbitrations against Western International in the past. If you lost money in GWG L bonds sold by Western brokers or brokers from another firm, and wish to discuss your claims, please contact Scott Greco for a free attorney consultation.

According the the FINRA Letter of Acceptance Waiver and Consent found here, Mr. Rowe refused to provide documents in response to a request of FINRA investigators. The AWC, signed by Mr. Rowe, imposed a bar on Mr. Rowe’s association with any FINRA member in all capacities.

Mr. Rowe’s FINRA Brokercheck report reveals that he voluntarily resigned from Oppenheimer in May 2020 after an allegation that he took a loan from a client without disclosing it to the firm. The report also references multiple customer complaints related to alleged loans, as well as complaints related to unauthorized trading, and inappropriate margin use. Interestingly, a customer complaint regarding a loan made after his separation from Oppenheimer is still listed as “denied” by the firm.

Mr. Rowe’s Brokercheck also reveals two prior settlements of customer complaints in 2005 and 2009 related to allegations of unsuitable trades.

Loans from customers to FINRA registered financial advisors are generally prohibited by FINRA Rules, with a couple minor exceptions. Loans between customers and advisors may often be used by advisors to hide conversion, theft of monies, or other wrongful conduct. FINRA Rule 3240 sets out the limited exceptions to the general prohibition, including loans between family members, and situations involving relationships between the parties outside the customer-broker relationship. Even under those limited circumstances, the loans have to be allowed by the firm, and have to be approved by the firm.

Virginia securities regulations, and those of many other states, also prohibit loans between securities brokers and customers. See 21 VAC 5-20-280 which consider the following to be a violation of duties to observe high standards of commercial honor and just and equitable principles of trade: “1. Engage in the practice of lending or borrowing money or securities from a customer, or acting as a custodian for money, securities or an executed stock power of a customer.”

The Virginia securities fraud attorneys at Greco & Greco have represented multiple customers in FINRA arbitrations over the years involved in recommended loans to securities salespersons in violation of FINRA Rules and state regulations. If you would like to discuss your situation with an attorney at no charge, please contact Scott Greco for a free attorney consultation.