According to the Financial Industry Regulatory Authority (“FINRA”), purchases of securities “on margin” (using funds borrowed from the investor’s brokerage firm) average more than $320 billion per month. This tremendous volume of trading on margin caused FINRA recently to reissue an Investor Alert warning investors of the risks of trading securities on margin. Before trading on margin, or even opening a margin account, it is important to understand the risks of trading on margin and the dynamics how margin accounts operate. Margin accounts allow investors to borrow money from their brokerage firms and use that money to purchase securities. The borrowed funds allow investors to purchase more securities than they otherwise could using their own cash. However, the investor is paying interest on the borrowed funds, which adds costs to the securities transactions, and any losses are multiplied, potentially beyond the investor’s available cash because the investor is using borrowed money.
In a recent FINRA News Release, the Financial Industry Regulatory Agency announced that Pinnacle Partners Financial, Corp. has been expelled. Pinnacle Partners is a broker-dealer based in San Antonio, Texas. It’s President, Brian Alfara, has also been barred for fraudulent sales of oil and gas private placements and unregistered securities.
From the FINRA News Release:
In addition, Brian Alfaro was found to have used customer funds for personal and business expenses. As restitution, Pinnacle and Alfaro are ordered to offer rescission to investors who were sold fraudulent offerings and refund all sales commissions to those customers who do not request rescission.
On the day Alfaro and Pinnacle Partners were to appear before the hearing panel, Alfaro decided not to attend the hearing. As a result, the hearing officer issued a default decision.
The hearing officer found that from August 2008 to March 2011, Alfaro and Pinnacle operated a boiler room in which approximately 10 brokers placed thousands of cold calls on a weekly basis to solicit investments in oil and gas drilling joint ventures Alfaro owned or controlled. Alfaro and Pinnacle raised over $10 million from more than 100 investors, and that Alfaro diverted some of the customer funds for unrelated business and personal expenses.
The hearing officer also found that Pinnacle and Alfaro included numerous misrepresentations and omissions in the investment summaries for 11 private placement offerings, including grossly inflated natural gas prices, projected natural gas reserves, estimated gross returns and estimated monthly cash flows. Pinnacle and Alfaro deliberately attempted to mislead investors by deleting material, unfavorable information from well operator reports and providing investors with maps that omitted numerous dry, plugged and abandoned wells near their projected drilling sites. In addition, Pinnacle and Alfaro distributed an offering document claiming that a previous venture had distributed more than $14 million to its investors when the actual distribution was less than $1.5 million.
The hearing officer decision also notes that from January 2009 to March 2011, Alfaro misused customer funds entrusted to him with the belief that the funds would be used for drilling and production in the wells in which their ventures invested. The funds were used for Alfaro’s personal expenditures and for business purposes that were not related to the purposes of the customers’ investments. When projects failed or were failing, Alfaro concealed his misuse of customers’ funds by persuading them to transfer their investment to his other oil and gas ventures. In one instance, Alfaro collected more than $500,000 in subscription costs for a well that was never drilled, and used those funds for unrelated personal and business expenses.
In April 2011, FINRA had suspended indefinitely Pinnacle and Alfaro for failure to comply with a FINRA Temporary Cease and Desist Order prohibiting their fraudulent misrepresentations. The suspension resulted from FINRA’s Notice of Suspension, which alleged that Pinnacle and Alfaro had continued to make fraudulent oral and written misrepresentations and omissions in connection with their offer and sale of certain oil and gas joint interests, and had otherwise failed to comply with the terms of the Temporary Order FINRA issued on January 21, 2011.
FINRA was represented at the hearing by Mark Dauer, Enforcement Deputy Chief Litigation Counsel, and Robert Long, Enforcement Senior Regional Counsel.
With a default decision, unless the hearing officer’s decision is appealed to FINRA’s National Adjudicatory Council (NAC) or is called for review by the NAC, the hearing officer’s decision becomes final after 25 days.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2011, members of the public used this service to conduct 14.2 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999 . Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA’s Disciplinary Actions Online database.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms.
For more information, please visit http:// www.finra.org.
FINRA News Release
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Credit Suisse Securities (USA) LLC $1.75 million for violating Regulation SHO (Reg SHO) and failing to properly supervise short sales of securities and marking of sale orders. As a result of these violations, Credit Suisse entered millions of short sale orders without reasonable grounds to believe that the securities could be borrowed and delivered and mismarked thousands of sales orders.
In a short sale, the seller sells a security it does not own. When it is time to deliver the security, the short seller either purchases or borrows the security in order to make the delivery. Reg SHO requires a broker or dealer to have reasonable grounds to believe that the security could be borrowed and available for delivery before accepting or effecting a short sale order. Requiring firms to obtain and document this “locate” information before the short sale is entered reduces the number of potential failures to deliver in equity securities. In addition, Reg SHO requires a broker or dealer to mark sales of equity securities as long or short.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Credit Suisse’s Reg SHO supervisory and compliance monitoring system was seriously flawed. Millions of short sale orders were being entered in its systems without locates for over four years because the firm did not have adequate Reg SHO technology and procedures in place.”
FINRA found that from June 2006 through December 2010, Credit Suisse’s Reg SHO supervisory system regarding locates and the marking of sale orders was flawed and resulted in a systemic supervisory failure that contributed to significant Reg SHO failures across its equities trading business. During the time period, Credit Suisse released millions of short sale orders to the market without locates, including threshold and hard to borrow securities. The locate violations extended to numerous trading systems, aggregation units and strategies. In addition, Credit Suisse mismarked tens of thousands of sale orders in its trading systems. The mismarked orders included short sales that were mismarked as “long,” resulting in additional violations of Reg SHO’s locate requirement.
As a result of its supervisory failures, many of Credit Suisse’s violations were not detected or corrected by the firm until after FINRA’s investigation caused Credit Suisse to conduct a substantive review of its systems and monitoring procedures for Reg SHO compliance. FINRA found that Credit Suisse’s supervisory framework over its equities trading business was not reasonably designed to achieve compliance with the requirements of Reg SHO and other securities laws, rules and regulations throughout the period at least June 2006 through at least December 2010.
In concluding this settlement, Credit Suisse neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
FINRA’s investigation was conducted by Jeanne Elmadany and Chun Li under the supervision of Susan Light, Chief Counsel.
FINRA, the Financial Industry Regulatory Authority, announced today that it has ordered Chase Investment Services Corporation to reimburse customers close to $2 million for losses incurred due to unsuitable investment recommendations concerning floating rate loan funds and unit investment trusts (UIT.)
FINRA discovered that Chase brokers were responsible for recommending purchases of floating rate loan funds and UITs to customers with little to no experience in investing. FINRA also said the brokers did not likely believe the products were suitable for the customers. According to FINRA, Chase did not properly implement the supervisory procedures required to reasonably supervise the sales of floating rate loan funds and UITs.
According to FINRA, the Chase brokers were not provided with sufficient training regarding the risks associated with floating rate loan funds and UITs. The Chase brokers recommended these UITs almost 260 times. As a result of these investments, customers losses totaled close to $1.4 million.
For more information on floating rate loan funds, unit investment trusts, and the FINRA news release, visit: FINRA News Release