There are still brokers out there acting like the "Wolf of Wall Street," and FINRA is making it a high priority to shut them down, said the agency's head of enforcement at a law seminar in New York Friday, pointing out that in the first quarter of this year, there has been an uptick in the number of enforcement actions to regulatory agency has brought to bear on so called "bad actors."
“People see Wolf of Wall Street and think that must be long in the past, an artifact of a bygone era. But in fact, there are not an insignificant number of firms that operate along that model,” Brad Bennett, head of enforcement at FINRA, said in comments during a Practising Law Institute seminar.
Bennett mentioned on recent case where a broker was pushing an investment that literally turned trash into gold. “If you could do that, why you need my money as a retail investor I don’t know, because you should probably be able to make it on your own,” Bennett joked.
The self-regulatory organization has an initiative in place to ensure “bad actors” are dealt with quickly, as opposed to being the subjects of lengthy investigations, Bennett says. The agency has designated 180 brokers in the past 18 months as “high-risk” and 140 of them were removed from the industry within a matter of months. In one case, a flagged individual sat down in a meeting with enforcement officials and agreed within 8 minutes to settle his case and be barred him from the industry.
But with others, it's more complicated, Bennett says. “A lot of those firms, you start investigating, they don’t care. They’ll do it as long as they can. If they can’t do it in the venue of the firm we’re investigating, the brokers move on en masse to a new firm where they continue the same practices."
Micro-cap securities and money laundering tend to go “hand in glove,” and are some of the activities FINRA finds in these high-risk firms, Bennett added. Penny stock liquidations also are very prevalent. “You don’t need a boiler room to do a lot of that because they create the investor demand by touting emails and spam sites,” Bennett says, adding the one thing they still need is a brokerage and clearing firm to process those transactions.
And these kinds of pump-and-dump schemes are migrating up the food chain, he adds.
“It’s not just the bad actors we see, it’s firms you would frankly expect better of,” Bennett says, citing SEC and FINRA cases against Oppenheimer & Co. as an example; the firm was fined $20 million for executing the sale of unregistered penny stocks and failing procedures to detect money laundering, and earlier this year was fined a few more million for failing to supervise a broker who was allegedly churning clients' accounts. “If you can fly under the flag of established and reputable firm, that’s even more troubling.”
In 2014, FINRA had 1100 cases, barred about 500 people from the industry and expelled 16 firms. Bennett says in 2015, there’s been an uptick in cases. In the first few months, FINRA has brought about 300 cases, barred 100 brokers and expelled six firms. “It’s puzzling because you’d think in a market that’s somewhat attractive to investors, somewhat of a bull market, there’d be less sales practice type of retail misconduct, but that doesn’t appear to be the case.”
