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TAG | inverse floating rate CMOs

May/11

5

Thomas Anthony Chrestman Fined and Suspended by FINRA

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Thomas Anthony Chrestman (CRD #1135841, Registered Representative, Cordova, Tennessee) submitted a Letter of Acceptance, Waiver and Consent in which he was fined $20,000 and suspended from association with any FINRA member in any capacity for three months. Without admitting or denying the findings, Chrestman consented to the described sanctions and to the entry of findings that he engaged in pre-arranged trading of collateralized mortgage obligation (CMO) bonds in a trading account of his member firm.

The findings stated that Chrestman effected CMO bond transactions in the firm’s trading account for which a registered principal/trader or another trader, whose transactions the principal also coordinated, was the contra-party. The findings also stated that the transactions were pre-arranged and directed by the registered principal, who set the price of the bonds and, simultaneously, agreed to repurchase them from Chrestman at a specified time, at an agreed-upon price that provided Chrestman with a profit. The findings also included that Chrestman participated in the pre-arranged trading with the registered principal because the principal asked that he do so; Chrestman was not familiar with all of the risks and attributes of the “inverse floater” CMOs that he was trading with the principal, and did not ascertain whether the transaction prices were at or away from the current market.

FINRA found that the registered principal consistently repurchased, or caused the
repurchase of, the bonds within a short time after Chrestman acquired them, the
transactions were not without risk and an increasing number of the transactions occurred at prices away from the current independent market. FINRA also found that had the principal failed to repurchase those CMO bonds, the firm’s trading account would have owned them at a price exceeding the price the firm was likely to obtain in an open-market sell transaction.
The suspension is in effect from March 21, 2011, through June 20, 2011. (FINRA Case
#2008012444204).

This information was obtained on FINRA’s website.

If you feel you have been a victim of these alleged fraudulent schemes of  Thomas Anthony Chrestman, call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Sep/10

13

HSBC Securities (USA) Inc, Fined and Censured by FINRA

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HSBC Securities (USA) Inc. (CRD #19585, New York, New York)
Acceptance, Waiver and Consent in which the firm was censured and fined $375,000.  It was reported on FINRA’s website that the customers received full restitution from the firm, totaling approximately $320,000. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it offered collateralized mortgage obligation securities (CMOs), which its registered representatives sold to retail customers, and included among these CMO sales were the sales of inverse floating rate CMOs (Inverse Floaters), a riskier type of CMO that FINRA has advised is suitable only for sophisticated investors with a high risk profile. The findings stated that the firm failed to establish this and maintain a supervisory system and written procedures regarding the sale of CMOs  to customers that were reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules. The findings also stated that the firm failed to establish and maintain a system and written procedures reasonably designed to supervise whether CMO sales were suitable for its customers and that the attendant risks of the products were fully explained. The findings also included that the firm did not provide its registered representatives who sold CMOs with sufficient guidance or training relating to CMOs.FINRA found that the firm did not comply with the requirements that firms should offer certain educational materials before the sale of a CMO to any person other than an institutional investor; and the educational materials must include the characteristics and risks of CMOs, in general, and the specific characteristics and risks associated with the different tranches of a CMO. FINRA also found that the firm did not issue any procedures or compliance memos to advise its registered representatives that they also were required to offer written educational materials to their customers before selling them CMOs; and the only materials related to CMOs that the firm’s registered representatives could give to their customers did not comply with the content standards of NASD® Rule 2210(d)(1); failed to discuss inverse floaters; and failed to include a section on risks associated with purchasing CMOs. In addition, FINRA also determined that the registered representatives did not offer the brochure to every CMO investor, nor did they know that they were required to give the materials to all potential CMO investors before selling them a CMO. Moreover, FINRA found that the firm did not implement an adequate supervisory system and procedures relating to the sale of inverse floaters; as a result, its registered representatives made unsuitable sales of inverse floaters to retail customers, and the registered representatives’ supervisors pre-approved some of those transactions and some registered representatives did not fully disclose material facts regarding the risks and characteristics of inverse floaters.
(FINRA Case #2007010582702)
 
 If you feel you are a victim of the alleged fraudulent schemes of  HSBC Securities, Inc., call a Securities arbitration lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA and the NFA.
 

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Aug/10

20

HSBC Fined $375,000 by FINRA for Unsuitable Sales of Inverse Floating Rate CMOs to Retail Customers and Related Supervisory Failures

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WASHINGTON – On Thursday, Aug. 19, 2010, the Financial Industry Regulatory Authority (FINRA) announced that it has fined HSBC Securities (USA) Inc. $375,000 for recommending unsuitable sales of inverse floating rate Collateralized Mortgage Obligations (CMOs) to retail customers. HSBC failed to adequately supervise the suitability of the CMO sales and fully explain the risks of an inverse floating rate or other risky CMO investment to its customers.

It was announced that FINRA’s investigation found that HSBC recommended the sale of CMOs, including inverse floating rate CMOs, to its retail customers. As a result of HSBC not implementing an adequate supervisory system and procedures relating to the sale of inverse floating rate CMOs to retail customers, six of its brokers made 43 unsuitable sales of inverse floaters to retail customers who were unsophisticated investors and not suited for high-risk investments. In addition, HSBC’s procedures required a supervisor’s pre-approval of any sale in excess of $100,000; FINRA found that 25 of the 43 CMO sales were in amounts exceeding $100,000 and that in five of these instances, customers lost money in their inverse floating rate CMO investments. HSBC has paid these customers full restitution totaling $320,000.

 ”Firms must adequately train their brokers on all of the products that they are selling and must reasonably supervise them to ensure that every security recommended is suitable for the particular customer,” said James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “The losses incurred by HSBC’s customers likely would have been avoided had the firm sufficiently trained its brokers on the suitability and risks of inverse floating rate CMOs and reasonably supervised their brokers to ensure that they were making suitable recommendations.”

The term, CMO, is a fixed income security that pools mortgages and issues tranches with various characteristics and risks. CMOs make principal payments throughout the life of the security with the maturity date being the last date by which all of the principal must be returned. The timing of the return of principal payments can vary depending on interest rate changes.

It was noted that one of the more risky CMO tranches is the inverse floater, a type of tranche that pays an adjustable rate of interest that moves in the opposite direction from movements of an interest rate index, such as LIBOR. Since 1993, FINRA has advised firms that inverse floating rate CMOs “are only suitable for sophisticated investors with a high-risk profile.”

FINRA found that HSBC did not provide its brokers with sufficient guidance and training regarding the risks and suitability of CMOs. In particular, the firm did not inform its registered representatives that inverse floaters were only suitable for sophisticated investors with a high-risk profile. In addition, the firm did not provide its registered representatives with information regarding the risks associated with the specific inverse floaters that were available to be sold.

During the relevant time period, HSBC did not advise its registered persons that they were required to offer written educational material to their customers before they sold them CMOs. Although HSBC provided its brokers with a CMO brochure, the brokers did not offer the brochure to every CMO investor, nor did they know that they were required to give the materials to all potential CMO investors before selling them a CMO. Moreover, the brochures did not comply with FINRA’s content standards. In particular, the brochure failed to discuss inverse floaters and failed to include a section on risks associated with purchasing CMOs.

FINRA also found that HSBC failed to comply with a FINRA rule, adopted in November 2003, which requires firms to offer certain educational materials before the sale of a CMO to any person, other than an institutional investor. The educational materials must include, among other things, the characteristics and risks of CMOs, in general, and the specific characteristics and risks associated with the different tranches of a CMO.

In concluding this settlement, HSBC Securities neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

This information was obtained from FINRA’s website.

If you feel you have become an alleged victim of HSBC Securities or any other firm that recommended unsuitable sales of inverse floating rate Collateralized Mortgage Obligations (CMOs), call a FINRA Securities arbitration lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA and the NFA.

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