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The Securities and Exchange Commission (SEC) recently announced significant penalties against sixteen firms for widespread recordkeeping failures, amounting to over $81 million in combined fines. Among the firms involved were Northwestern Mutual Investment Services LLC, Guggenheim Securities LLC, Oppenheimer & Co. Inc., Cambridge Investment Research Inc., Key Investment Services LLC, Lincoln Financial Advisors Corporation, U.S. Bancorp Investments Inc., and The Huntington Investment Company. The penalties stem from the firms’ failure to maintain and preserve electronic communications, a violation of federal securities laws. These actions highlight the SEC’s commitment to enforcing compliance with recordkeeping requirements essential for monitoring and enforcing securities laws.

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.

The Financial Industry Regulatory Authority (FINRA) has issued a Letter of Acceptance, Waiver, and Consent (AWC) against LPL Financial LLC, a notable member firm in the securities industry. The AWC alleges a series of alleged rule violations that occurred over several years, painting a picture of insufficient supervision and inaccurate information dissemination to customers. Let’s delve into the details of this regulatory action and what it means for investors and the securities industry at large.

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.

The Securities and Exchange Commission of the U.S. (the SEC) recently fined J.P. Morgan Securities $18,000,000 for taking various steps to prevent securities whistleblowers from contacting the SEC or other securities regulators.  J.P. Morgan agreed to the Order which can be found here.

The alleged wrongdoing centered on the language included by J.P. Morgan in its settlement agreements with its advisory and brokerage firm customers to which it paid over $1,000.00.  Virtually all FINRA securities firms and Registered Investment Advisors require a confidentiality clause to be included in any settlement agreement with a customer.  These settlement agreements are often the result of various misconduct by the firms or their advisors, such as securities fraud, breach of fiduciary duty, unauthorized trading, broker theft, recommended unsuitable investments, and churning.  The reason why securities firms always require their settlements to be confidential is clear – they wish to hide their misconduct and the misconduct of their advisors from the public.  FINRA’s Brokercheck report does require firms to disclose settlements with advisors/firms, but the details are often extremely general, and one has to look up the broker directly to find the disclosures.

According to the SEC Order, from 2020 to 2023 J.P. Morgan included language in 362 release agreements that prohibited customers not only from disclosing the amount of the settlement to the SEC, but also prohibited disclosing the facts related to the account (i.e. the misconduct).  Although the releases did allow disclosure to the SEC in response to an inquiry, it did not allow the customers to initiate contact with the SEC.

A former stockbroker / investment advisor from Bergen County, New Jersey, has been indicted for allegedly stealing over $3 million from five unsuspecting clients. Kenneth A. Welsh, 42, of River Edge, has been charged with four counts of wire fraud and one count of investment advisor fraud, as announced by U.S. Attorney Philip R. Sellinger on November 16, 2023.

According to the indictment, from July 2017 through March 2021, Welsh, operating as a financial advisor registered with Wells Fargo Clearing Services, purportedly abused his position to misappropriate funds entrusted to him by clients. Instead of responsibly managing their investments, Welsh is accused of diverting substantial sums into accounts under his control, leaving his clients in financial distress. The charges carry severe penalties, with each wire fraud count potentially leading to 20 years in prison and a $250,000 fine, while the investment advisor fraud count could result in five years behind bars and a $10,000 fine, or twice the gross gain or loss from the offense.

The indictment details that Mr. Welsh allegedly used multiple fraudulent means to siphon off customer funds, including having customers sign forms in blank, fraudulently forging signatures, and carrying out unauthorized wires from customer accounts.

Lickhai Quach, a Silver Spring, Maryland broker/agent of Transamerica Financial Advisors, Inc., was recently barred by FINRA from association with any FINRA firm.  The FINRA Letter of Acceptance, Waiver, and Consent states that Mr. Quach refused to produce documents or information to investigators as required by FINRA Rule 8210.

Mr. Quach was allegedly under investigation by FINRA as a result of being permitted to resign “while under review by the firm for violating firm’s policy related to borrowing funds from a client.”  Mr. Quach’s FINRA Brokercheck report states that he was registered with Transamerica since 2012.  The report further states that he had one recent customer complaint relating to borrowed funds that settled, and that he was permitted to resign in March, 2023.

Registered financial advisors are generally prohibited from borrowing money from customers under FINRA Rule 3240 except in limited circumstances such as from a family member or other personal relationship.  The loan must also be disclosed and approved by the advisor’s firm.

Miche Jean was a registered securities salesperson with Morgan Stanley in Rockville, Maryland since 2015. However, on November 12, 2020, Morgan Stanley submitted a Termination Notice (Form U5), indicating that they terminated Jean’s employment due to concerns related to his trading strategy for certain clients, potential unauthorized discretion in specific accounts, and incomplete and delayed communication with clients regarding transactions. Furthermore, on March 30, 2021, an amended Form U5 disclosed a customer complaint alleging unauthorized trading with exchange-traded funds (ETFs) during Jean’s tenure at Morgan Stanley.

Then, on November 15, 2022, the Maryland Securities Commissioner issued a Consent Order in which Jean admitted to fraudulent actions during his time with Morgan Stanley in Maryland. Specifically, he was found to have initiated four ACH transfers, totaling $10,182, from a Morgan Stanley customer’s brokerage account to cover his personal credit card expenses.

FINRA, a national self-regulatory securities regulator, recently barred Mr. Miche from the industry pursuant to a decision by its Office of Hearing Officers.

The local Virginia Securities Fraud Lawyers of Greco & Greco are currently representing multiple Virginia customers of Richmond, Virginia based broker John Starke. These claims for investment losses have been filed in FINRA arbitration against Mr. Starke’s brokerage firm, Centaurus Financial.

As shown by Mr. Starke’s FINRA Brokercheck report, found here, in the last two years customers have filed seven complaints against Mr. Starke, most involving allegations of the sale of illiquid, unsuitable, and high-risk investments.

Alternative Investments, which include REITs (Real Estate Investment Trusts), are often sold as an alternative to more traditional stocks, bonds, and stock and bond funds. These higher-risk investments are often touted for their high returns, especially in a low interest rate environment, however those high returns are accompanied with corresponding high risk.

On July 25, 2023, the Financial Industry Regulatory Authority (FINRA) issued a Letter of Acceptance, Waiver, and Consent (AWC) against LPL Financial LLC, a prominent independent securities broker headquartered in Fort Mill, South Carolina. This disciplinary action followed a series of egregious violations that involved the conversion/theft of approximately $2.4 million of customer funds by two of the firm’s brokers.

Background

The AWC against LPL Financial LLC was the result of a failure to reasonably supervise the transmittal of customer funds, which enabled two firm registered representatives to convert substantial sums of money for their personal use. The findings by FINRA in the AWC are outlined below:

FINRA announced last month that it has barred Charlotte, North Carolina based financial advisor Christopher J. Carpenter.  The FINRA Letter of Acceptance, Waiver, and Consent states that Mr. Carpenter failed to produce documents or information requested in response to a FINRA investigation.

The investigation allegedly was initiated in response to a Uniform Termination Notice for Securities Industry Registration (Form U5), reporting Carpenter’s discharge from his firm, LPL Financial. The Form U5 stated that LPL was reviewing Carpenter’s “alleged participation in unapproved real estate investments with customers.”

Mr. Carpenter’s FINRA Brokercheck report states that he was registered with LPL in Charlotte from 2020 to 2023, and prior to that he was registered with Spire Securities.

The online FINRA Brokercheck report for former Western International broker Chris Kennedy shows eleven different customer complaints.  These complaints include allegations of unauthorized trading, unsuitability, breach of fiduciary duty, and other wrongful conduct.  Many of the complaints have been settled, with one settled for over 2.7 million dollars.

The Brokercheck report also states that Western International discharged Mr. Kennedy in 2021 after allegations were made about unauthorized options trading.

Mr. Kennedy was registered with Western at a branch office in Woodland Hills, California and Tarzana, California.

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