The Financial Industry Regulatory Authority (FINRA) recently announced that it has fined Jefferies & Company, Inc. $1.5 million for failing to disclose additional compensation received and conflicts in connection with the sale of auction rate securities (ARS). FINRA also ordered Jefferies to repay $425,000 in fees and commissions earned from the sale of ARS to the affected customers. FINRA also took action against the three brokers involved in the sale of these products, sanctioning two Jefferies brokers, Anthony Russo ($20,000 fine and five business-day suspension) and Robert D’Addario ($25,000 fine and 10 business-day suspension), and filing a complaint against a third, Richard Morrison, for their role in not disclosing the additional compensation and conflicts.
Russo, D’Addario and Morrison comprised the firm’s Corporate Cash Management (CCM) group that provided investment advice and services, including purchasing and selling ARS, to 40 Jefferies institutional clients.
FINRA found in its settlement, and alleged in the Morrison complaint, that from Aug. 1, 2007, to March 31, 2008, Jefferies — through Russo, D’Addario and Morrison — failed to disclose material facts to a group of eight corporate customers for whom they exercised discretion to purchase and sell ARS. The brokers used their discretion to purchase for these customers new-issue ARS that paid them and the firm additional compensation. By exercising discretion, Jefferies and the brokers were obligated to disclose that they received this additional compensation, and that they could have purchased other comparable or similar ARS with higher yields. In 32 other transactions, they used their discretion to purchase ARS for the customers from other CCM group customers, but failed to disclose the conflict created because they acted as agent for both the buying and selling customer. They also failed to disclose the existence of comparable or similar ARS with higher yields.
FINRA also found that Jefferies committed several other violations in connection with its ARS business, including exercising discretion without written authority; failing to deliver official statements in connection with purchases of municipal new issue ARS; using misleading ARS advertising and marketing materials; selling restricted (Rule 144A) ARS to a customer that was not qualified to buy them; failing to implement an information barrier with a customer; deficiently completing order tickets for ARS trades; and, failing to establish and maintain an adequate supervisory system, including written supervisory procedures, relating to the operation of the CCM group and its preparation and use of advertising and sales material for ARS.
In reaching the settlement, FINRA took into account that in December 2008, Jefferies spent approximately $68 million in a partial voluntary buyback of ARS held in retail accounts. As part of the settlement announced today, which included findings relating to Jefferies’ ARS advertising and inadequate supervisory review of ARS advertising, Jefferies agreed to purchase ARS from additional retail accounts. Also, in July 2008, Jefferies began remitting all trailing commissions received for frozen ARS held in customer accounts directly to its customers on a go-forward basis, and as of October 2010, had remitted in excess of $868,000.
As part of the settlement, Jefferies also agreed to participate in a special FINRA-administered arbitration program to resolve eligible investor claims for consequential damages.
In concluding this settlement, Jefferies, Russo and D’Addario neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. The Morrison complaint is not yet adjudicated. Under FINRA rules, a firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry; giving up gains associated with the violations; and payment of restitution. The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made, and does not represent a decision as to any of the allegations contained in the complaint. Because the complaint referenced above is unadjudicated, uninterested persons may wish to contact the respondents before drawing any conclusions regarding the allegations in the complaint.
If you have questions about this FINRA investigation, the securities attorneys of The White Law Group may be able to help. To speak with an attorney, please call the firm’s Chicago office at 312-238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm. For more information on the firm, visit the firm’s website at https://www.whitesecuritieslaw.com.