Securities Fraud Blog | Find out if your broker is liable for your losses

TAG | risky CMO investments

Jun/11

12

FINRA Fines Northern Trust Securities $600,000 for Failure to Supervise Accounts

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FINRA, the Financial Industry Regulatory Industry, has found that during an 18 month period, Northern Trust Securities, failed in their supervision and monitoring of 43.5% of their total business.

FINRA also stated that “Northern Trust failed to monitor customer accounts for potentially unsuitable levels of concentration in CMOs, in large part because it used an exception reporting system that failed to capture or analyze substantial portions of the firm’s business”.  

These FINRA findings raise questions and doubts about broker-dealer reporting systems in general.  The failure of this supervision and exception reporting is not a question of software or technology.  Almost every failure of an automated exception reporting system relates to very human error in the design and implementation of the exception reporting rules and criteria.   These rules and criteria are established by the individual broker-dealer that implements an automated exception reporting system.  The software provider is providing the means and opportunity to generate the exception reporting.  The broker-dealer is defining the rules and establishing analysis standards.  FINRA reported that almost 50% of Northern Trust Securities business went without analysis, including all of the trading in CMO’s.   The potential risk to investors of over-concentration in CMO’s during the period in question, October 2006 to October 2009, would dwarf the amount of the FINRA fine.

It should not have gone unnoticed by Northern Trust that such a large percentage of their overall business was “escaping” surveillance.  Having such a large percentage of a broker-dealer’s business pass without analysis may be dramatic but, then again, what percentage is acceptable?  Implementation of an automated exception reporting system by a broker-dealer is only the beginning of a compliance and surveillance process.  An automated exception reporting system requires constant monitoring and audit.  In the absence of that, the broker-dealer exposes their business to severe potential failures of supervision and exception reporting. 

If you or a family member have invested with Northern Trust and feel your account was not properly supervised, call a Securities Arbitration Lawyer for a free consultation on how you could potentially 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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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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Jan/11

27

Lisa Renee Mello Fined and Suspended by FINRA

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Lisa Renee Mello (CRD # 1465948, Registered Principal, Lafayette, California) submitted a Letter of Acceptance, Waiver and Consent in which she was fined $8,000 and suspended from association with any FINRA member in a Financial and Operations Principal (FINOP) capacity for six months. Without admitting or denying the findings, Mello consented to the described sanctions and to the entry of findings that she served as her member firm’s FINOP and was responsible for monitoring the firm’s financial condition to determine whether its net capital was sufficient to conduct a securities business. The findings stated that one of the firm’s registered representatives effected trades in collateralized mortgage obligations (CMOs) through the firm’s proprietary trading account. The findings also stated that the transactions appeared to remove beneficial ownership of the CMOs from the firm, but they were sham transactions because the securities remained in the firm’s inventory. The findings included that the registered representative was able to accomplish and maintain his scheme because Mello and others at the firm reviewed his activity on a daily basis rather than in a manner that would evidence trading patterns over time and expose the firm’s losses and risk.
FINRA found that as a result of the registered representative’s activity and the firm’s method of monitoring it, the firm conducted a securities business on multiple days while failing to maintain its required minimum net capital and, because Mello failed to discern the true effect of the registered representative’s trading on the firm’s net capital, she allowed the firm to conduct a securities business on multiple occasions while in violation of SEC Exchange Act Rule 15c3-1.

This information was found on the FINRA website’s Disciplinary Actions.

If you have been a victim of the alleged fraudulent schemes of Lisa Renee Mello, or a similar situation, 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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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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