SEC ISSUES INVESTOR ALERT REGARDING FINANCIAL PROFESSIONALS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to help investors identify and be aware of financial professionals that may have a history of misconduct.

Potential Red Flags for Financial Professionals

The SEC oversees key participants in the securities industry, including broker-dealers and investment advisers.  The SEC and other regulators may bring enforcement actions against financial professionals for misconduct in connection with their securities related activities.  Some financial professionals may also have a history of customer complaints or other indications of possible bad behavior.

Investors should be cautious of financial professionals with a history of misconduct.  Red flags may include:

Disciplinary actions by a government regulator, such as the SEC or a state securities regulator, or by a self-regulatory organization, such as FINRA;
A history of customer complaints;
Lawsuits or arbitration claims brought by customers;
Employment with one or more firms that have been expelled from the securities industry.

Check the Financial Professional’s Background

Even if a close friend or family member recommends a financial professional, you should still check out that person for signs of potential problems.  Before becoming a customer, take the time to look at the registration status and background of any firm or financial professional you are considering.

Anyone registered to sell securities or provide investment advice generally must disclose certain customer complaints, lawsuits and arbitrations, regulatory actions, employment terminations, bankruptcy filings, and certain other criminal or civil legal proceedings.  You should also be able to find out whether the individual is currently registered or licensed, or has been suspended, as well as the individual’s qualifications and employment history.  These records are available through the SEC, FINRA, and/or state securities regulators.

           FINRA’s BrokerCheck Program

For an individual broker or a brokerage firm, background information is available through FINRA’s BrokerCheck report.  BrokerCheck reports are free and investment professionals or firms are not made aware of any search conducted.

A FINRA BrokerCheck report for an individual includes a listing of the broker’s registrations or licenses, industry exams that the broker has passed, and information on a broker’s previous employment, customer disputes, and regulatory or disciplinary events.  A FINRA BrokerCheck report for a firm includes, among other things, the firm’s history (including any mergers, acquisitions or name changes), a listing of the firm’s active licenses and registrations, arbitration awards against the firm, and regulatory or disciplinary events.

As noted above, a potential red flag for financial professional misconduct is previous employment at one or more firms that have been expelled from the securities industry.  To determine whether this red flag applies to an individual broker, review the BrokerCheck report for the individual broker and review the firms listed under the “Registration History” section.  Then, run a separate BrokerCheck report for each of those firms listed.

A BrokerCheck report may be obtained from FINRA in any of the following ways:
Submitting a request to FINRA via U.S. mail or fax.  The BrokerCheck mailing address and fax number are:
      FINRA BrokerCheck
      P.O. Box 9495
      Gaithersburg, MD 20898-9495
      Fax: (240) 386-4750

            Investment Adviser Public Disclosure (IAPD) Website

Certain firms or financial professionals, such as money managers, investment consultants, and financial planners may be required to register with the SEC or your state’s securities regulator as investment advisers.

For state-registered investment advisers or their representatives, background information such as a description of the adviser’s business practices, fees, conflicts of interest, and disciplinary history, is generally available from your state securities regulator. You may find information on how to contact your state securities regulator in the “State Securities Regulators” section of this investor alert.

            State Securities Regulators

State securities regulators also have background information on brokers and state-registered investment advisers. Notably, state securities regulators may, in certain instances, provide information in addition to what may be found in a FINRA BrokerCheck report or on the SEC’s IAPD website.

            Professional Titles

Some financial professionals also may have professional titles, such as Certified Financial Planner (CFP®) or Chartered Financial Analyst (CFA®).  The requirements for obtaining and using professional titles vary widely.  To use certain titles, a financial professional may need to pass exams, meet ethical standards, have relevant work experience, and undertake continuing education.  Other titles, however, may be obtained with little time, effort, and experience.  Keep in mind that a professional title is not the same as a license or registration granted by federal or state regulatory authorities.


The SEC does not endorse any financial professional titles, and you are strongly encouraged to look beyond a financial professional’s title when determining whether he or she can provide the type of financial services or products you need.

SEC CHARGES 10 BROKERS IN $125 MILLION INVESTMENT SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced charges against 10 former brokers at an Albany, N.Y.-based firm at the center of a $125 million investment scheme for which the co-owners have received jail sentences.

The SEC filed an emergency action in 2010 to halt the scheme at McGinn Smith & Co. and freeze the assets of the firm and its owners Timothy M. McGinn and David L. Smith, who were later charged criminally by the U.S. Attorney’s Office for the Northern District of New York and found guilty.

The SEC’s Enforcement Division alleges that 10 brokers who recommended the unregistered investment products involved in the scheme made material misrepresentations and omissions to their customers.  The registered representatives ignored red flags that should have led them to conduct more due diligence into the securities they were recommending to their customers.

“As securities professionals, these brokers had an important duty to determine whether the securities they recommended to customers were suitable, especially when red flags were apparent.  These registered representatives performed inadequate due diligence and failed to fulfill their duties,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s order names 10 former McGinn Smith brokers in the administrative proceeding:

Donald J. Anthony, Jr. of Loudonville, N.Y.
Frank H. Chiappone of Clifton Park, NY.
Richard D. Feldmann of Delmar, N.Y.
William P. Gamello of Rexford, N.Y.
Andrew G. Guzzetti of Saratoga Springs, N.Y.
William F. Lex of Phoenixville, Pa.
Thomas E. Livingston of Slingerlands, N.Y.
Brian T. Mayer of Princeton, N.J.
Philip S. Rabinovich of Roslyn, N.Y.
Ryan C. Rogers of East Northport, N.Y.
According to the SEC’s order, the scheme victimized approximately 750 investors and led to $80 million in investor losses.  Guzzetti was the managing director of McGinn Smith’s private client group from 2004 to 2009, and he supervised brokers who recommended the firm’s offerings.  The SEC’s Enforcement Division alleges that despite his knowledge of serious red flags, Guzzetti failed to take any action to investigate the offerings and instead encouraged the brokers to sell the notes to McGinn Smith customers.

The SEC’s Enforcement Division alleges that the other nine brokers charged in the administrative proceeding should have conducted a searching inquiry prior to recommending the products to their customers.  The brokers continued to sell McGinn Smith notes even after being told that customers placed in some of the firm’s offerings could only be redeemed if a replacement customer was found.  This was contrary to the offering documents.  In January 2008, the brokers learned that four earlier offerings that raised almost $90 million had defaulted, yet they failed to conduct any inquiry into subsequent offerings and continued to recommend McGinn Smith notes.

The SEC’s order alleges that the misconduct of Anthony, Chiappone, Feldmann, Gamello, Lex, Livingston, Mayer, Rabinovich, and Rogers resulted in violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The order alleges that Guzzetti failed to reasonably supervise the nine brokers, giving rise to liability under Section 15(b)(6) of the Exchange Act, incorporating by reference Section 15(b)(4).

The SEC’s civil case continues against the firm as well as McGinn and Smith, who were sentenced to 15 and 10 years imprisonment respectively in the criminal case.
The SEC’s investigation was conducted by David Stoelting, Kevin P. McGrath, Lara Shalov Mehraban, Haimavathi V. Marlier, Joshua Newville, Kerri Palen, Michael Paley, and Roseann Daniello of the New York office.  Mr. Stoelting, Ms. Marlier and Michael Birnbaum will lead the Enforcement Division’s litigation.