Federal Court Grapples With Compliance Officer's Whistleblowing to FINRA

August 14, 2019

Day after day, FINRA rolls out bull-shit notices to members about initiatives, about seminars, about retrospective rule reviews. Absent from that spew of self-serving crapola is anything addressing the firing of compliance officers who report their concerns to FINRA. You'd sort of like to think that FINRA would want to draw a line in the sand when it comes to retaliation by its member firms against those who blow the whistle. You'd sort of like to think that FINRA appreciates the need to bolster Wall Street's first line of defense; namely, the industry's compliance staff. Instead, FINRA caters and panders to its powerful industry interests. What rank hypocrisy! What worse condemnation could there be of the inherent failure of Wall Street self-regulation then to see its largest self-regulatory-organization stand silent and impotent in the face of retaliation against compliance staff who are protecting the investing public and preserving whatever shreds of integrity remain on Wall Street. In a recent federal lawsuit, FINRA member firm Purshe Kaplan Sterling Investments, Inc. was sued by a former compliance officer, who alleged, in part, that she had been fired for whistleblowing to FINRA. It may be that the Plaintiff's concerns were wrong. It may be that she was dead-on. We'll leave that final determination to the courts. Regardless, as you read through the court's opinion, you realize that FINRA is largely absent from the unfolding events. Be that as it may, the federal court's initial concern is not with FINRA's action or inaction but with determining whether the compliance officer filed a Complaint that stated a claim and presented the basis for jurisdiction against her former employer and associated firms and individuals.

2014 Employment

In March 2014, Toni Caiazzo Neff was hired as a compliance officer by FINRA member firm Purshe Kaplan Sterling Investments, Inc. ("PKS"). In May 1, 2018, Caiazzo Neff filed a Complaint in the United States District Court for the Eastern District of Pennsylvania alleging, in part, that she was fired in retaliation for whistleblowing in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and, further, that under Pennsylvania law, she was wrongfully terminated. Additionally, Plaintiff Caiazzo Neff asserted state-based claims for breach of the implied covenant of good faith and fair dealing, and intentional infliction of emotional distress. Toni Caiazzo Neff, Plaintiff, v. PKS Holdings, LLC,
PKS Investments, Inc.; MHC Securities; Wentworth Management, LLC; J. Peter Purcell; David Purcell; Lisa 
LaFond; Peter Sheehan; Alex Markowits; Ryan Morfin; and Katherine Flouton
, Defendants 
(Opinion, United States District Court for the Eastern District of Pennsylvania, 18-CV-1826 / August 8, 2019)

2016 Concerns. 2017 Reassignment. 2018 FINRA Contact. 2018 Termination.

As set forth in the United States District Court for the Eastern District of Pennsylvania ("EDPA") Opinion [Ed: footnotes omitted and highlighting added]:

In January 2016, Caiazzo Neff raised concerns about a particular product offering and did not recommend that the product be added to the PKS platform based upon her finding that members of senior management at the sponsor of the product were using investor funds for personal business interests. Id. at ¶ 42. The product was subsequently re-reviewed, without Caiazzo Neff's input, and Caiazzo Neff was instructed by colleagues not to raise concerns about the product before it was offered to purchasers. Id. at ¶¶ 43-46. In July or August 2017, Defendant Katherine Flouton, the Chief Operating Officer at PKS, assigned review of a second product to a less experienced employee, even though Caiazzo Neff was the only employee to have experience with that particular product type. Id. at ¶¶ 51-52. Flouton expected Caiazzo Neff to have concerns about the product and reassigned the review to avoid her oversight. Id. at ¶ 52. Defendants offered a third product, again over Caiazzo Neff's concerns, because it was a condition precedent to PKS's acquisition by Defendants MHC Securities and Wentworth Management Services. Id. at ¶¶ 54-57. MHC and Wentworth subsequently acquired ownership stakes in PKS in November 2017. Id. at ¶ 66. Caiazzo Neff alleges upon information and belief that the transfer of ownership did not affect the day-to-day control of PKS. Am. Compl. ¶ 67. 

In August 2017, Flouton and Defendant Lisa LaFond, PKS's Chief Compliance Officer, removed Caiazzo Neff from the compliance group and reassigned her to the role of Internal Auditor/Internal Audit Department. Id. at ¶ 58. Flouton and LaFond informed Caiazzo Neff that the reassignment was due to FINRA requirements that prohibited the compliance department from performing internal auditing. Id. Caiazzo Neff was to hold sole responsibility for internal audits, a task previously completed by eight to ten employees. Id. at ¶ 59. Caiazzo Neff believes that Defendants were attempting to force her into resigning from her position. Id. Caiazzo Neff was also removed from her role as the Cybersecurity Liaison with IT in November 2017 after being removed from a conference call by Defendant J. Peter Purcell, the Chief Executive Officer of PKS. Id. at ¶¶ 63-64. 

Flouton emailed Caiazzo Neff in January 2018 requesting an update about the internal audit, which was due in February 2018. Id. at ¶ 68. Caiazzo Neff felt that the communication encroached on an auditor's proper independence, and she contacted a FINRA official to discuss her concerns. Id. at ¶ 69. Caiazzo Neff also contacted Defendant David Purcell, the General Counsel at PKS, to discuss similar concerns. Id. at 73-74. During Caiazzo Neff's conversation with David Purcell, he told her that "compliance offers [sic], under security laws really only had [sic] two choices if they find something problematic; report it or resign." Id. at ¶ 75. 

Two days after her conversation with David Purcell, Flouton contacted Caiazzo Neff to terminate her employment. Id. at ¶ 76. Flouton informed Caiazzo Neff that the "new owners," who Caiazzo Neff understands as MHC, Wentworth, and their respective managing officers, Defendants Alex Markowits and Ryan Morfin. Id. at ¶ 77-78. [sic: this appears to be a sentence fragment in the original] Caiazzo Neff also believes that Defendants became aware of her communication with a FINRA official. Id. at ¶ 79.

Pages 2 - 4 of the EDPA Opinion

Lack of Jurisdiction

Defendants moved to dismiss Caiazzo Neff's claims pursuant to Federal Rules of Civil Procedure 12(b)(2) and 12(b)(6), challenging the Court's personal jurisdiction over Defendants and arguing that the Amended Complaint fails to state a claim:

Defendants move to dismiss Caiazzo Neff's claims by challenging personal jurisdiction, asserting that none of the Defendants have sufficient contacts with Pennsylvania. Defs.' Mot. Dismiss 5, ECF No. 12. Caiazzo Neff asserts that PKS is subject to general jurisdiction in Pennsylvania because it is a registered corporation in Pennsylvania and that the other Defendants have sufficient minimum contacts with Pennsylvania to be subject to specific jurisdiction. . . .

Page 6 of the EDPA Opinion

Jurisdiction over PKS

EDPA found that it had specific jurisdiction over Defendant Purshe Kaplan Sterling Investments, Inc. ("PKS") pursuant to a three-point test:

[(1)] sufficient minimum contacts with the forum state; (2) a nexus connecting the claims to the defendant's contacts, and if the first two conditions are satisfied, (3) consistency with traditional notions of fair play and substantial justice. . . .

Page 8 of the EDPA Opinion

In arguing against sufficient minimum contacts, Defendant PKS made pointed references to Caiazzo Neff working from home and argued that personal jurisdiction is not appropriate because she unilaterally chose her work location; however, EDPA found that "even if Caiazzo Neff was not soliciting sales in Pennsylvania, she was hired to work in Pennsylvania as a part of Defendants' activities directed toward the forum state. " at Page 10 of the EDPA Opinion.

As to whether Caiazzo Neff's claims arose from the defendant's state-based contacts, EDPA cited to Plaintiff's Pennsylvania-based internal audits and that she claimed to have been wrongfully terminated as a result of reporting said audits to FINRA. In finding sufficient nexus, EDPA stated in pertinent part that:

Caiazzo Neff's claims are directly related to her alleged responsibility for internal auditing at PKS's Pennsylvania locations. The chain of events leading to Caiazzo Neff's allegedly wrongful termination began when PKS made contacts with Pennsylvania by opening locations there and hiring Caiazzo Neff in a compliance role. Caiazzo Neff's claims, related to her auditing those Pennsylvania locations, resulted from PKS's contacts with Pennsylvania. 

Page 10 of the EDPA Opinion

Fair Play

In considering the issue of fair-play, EDPA found in part that:

Although PKS's corporate headquarters and the majority of its officers are located in New York, the other factors lean towards allowing this dispute to be adjudicated in Pennsylvania. The burden on PKS would not be significant. PKS is alleged to operate twentyfive business locations in Pennsylvania; thus, PKS has some presence and resources in Pennsylvania. PKS's corporate headquarters, allegedly in Albany, are also not prohibitively distant from the forum state. Further, any burden on PKS is at least countervailed by Caiazzo Neff's interest in obtaining convenient relief: as an individual plaintiff, litigating away from her home state of Pennsylvania would likely impose a burden on her. 

Finally, Pennsylvania has a strong interest in ensuring that its residents are able to get relief for their lawful conduct. Caiazzo Neff alleges that she was wrongly fired from her job for reporting her employer's concerning conduct to a regulatory body. Pennsylvania would have an interest in ensuring protection for other similarly situated residents. In consideration of these factors, allowing litigation in Pennsylvania would be consistent with traditional notions of fair play . . .

Page 11 of the EDPA Opinion

Lack of Jurisdiction over PKS Holdings LLC; MHC Securities, LLC; and Wentworth Management LLC

In considering whether Caiazzo Neff alleged sufficient facts to find jurisdiction attached to PKS's sole owner Defendant PKS Holdings, LLC, EDPA wrestled with the issue and found that:

[C]aiazzo Neff does not argue alter ego, lack of independence, that PKS was established to conduct activities PKS Holdings would have had to perform, or any other basis for imputing PKS's contacts to PKS Holdings. Therefore, the Court lacks personal jurisdiction over PKS Holdings, LLC.
Similarly, EDPA found that:

[A]lthough Caiazzo Neff alleges that MHC and Wentworth purchased an ownership stake in PKS, she does not make clear which, in any, of PKS's contacts with Pennsylvania may be fairly attributed to MHC or Wentworth as owners of PKS. Therefore, Caiazzo Neff has failed to carry her burden of proving this Court's personal jurisdiction over MHC and Wentworth. 

Finally, as to the individual Defendants, with the exception of Katherine Flouton, EDPA found that it lacked personal jurisdiction and granted the motion to dismiss nine Defendants excluding only Flouton and PKS. 

Flouton Subject to Jurisdiction

In finding jurisdiction attached to Flouton, EDPA found that:

[C]aiazzo Neff alleges that Flouton terminated her over the phone after the Defendants became aware of Caiazzo Neff's reporting to FINRA. 

Caiazzo Neff suffered the full force of the harm in Pennsylvania because she worked in Pennsylvania and was physically present in Pennsylvania when she was fired. Finally, Flouton expressly aimed her alleged tortious conduct at Pennsylvania by communicating with Caiazzo Neff during her work in Pennsylvania and then by reaching out to this Commonwealth to terminate her over the phone. 

Dodd-Frank Retaliation Claim: the Post-Digital-Realty World

EDPA considers Defendants' argument that Caiazzo Neff was not entitled to anti-retaliation protection under Dodd-Frank:

Defendants move to dismiss Caiazzo Neff's whistleblower claim because she alleges that she reported the potential violations to FINRA, not to the Securities and Exchange Commission (SEC), and therefore does not qualify as a "whistleblower" under the Dodd-Frank Act. Mot. Dismiss 8-10. Defendants rely on the Supreme Court's holding in Digital Realty Trust, Inc. v. Somers, in which the Court held that "to sue under Dodd-Frank's anti-retaliation provision, a person must first ‘provid[e] . . . information relating to a violation of the securities laws to the Commission.'" 138 S. Ct. 767, 772-73 (2018) (quoting 15 U.S.C. § 78u-6(a)(6)). Therefore, an individual who has not reported a violation of the securities laws to the SEC falls outside the Act's definition of "whistleblower" and the anti-retaliation provision of the Dodd-Frank Act does not extend to such an individual. Id. 

In her response, Caiazzo Neff asserts that her whistleblower claim survives the Supreme Court's holding in Digital Realty Trust because she reported violations to FINRA, which is an agency of the SEC. Pl.'s Opp. 6-7. A district court in the District of New Jersey, however, recently held that an employee does not meet the definition of "whistleblower" under Dodd-Frank unless he reports his employer's misconduct directly to the SEC-even if he discloses the information to FINRA. See Price v. UBS Fin. Servs., No. 17-cv-01882, 2018 U.S. Dist. LEXIS 66200 (D.N.J. Apr. 19, 2018) (finding that the Supreme Court was "unequivocal" in holding that an individual who has not reported a violation to the SEC falls outside the Dodd-Frank Act's scope).

Page 21 -22 of the EDPA

In applying Caiazzo Neff's facts to Digital Realty Trust, EDPA dismisses with prejudice the anti-retaliation count because Plaintiff "did not tell the SEC; therefore, she is not a whistleblower under the Dodd-Frank Act, regardless of what specific conduct she claims is protected." at Page 22 of the EDPA Opinion. 

Wrongful Termination

Notwithstanding Plaintiff's assertion that she had a legal duty to report alleged violations of FINRA rules to FINRA, EDPA also dismissed this claim:

[C]aiazzo Neff fails to point to a statute that required her to report violations of securities laws to FINRA. See 737 A.2d at 1253-54. Nor does she offer any authority to suggest that FINRA regulations impose a statutory duty that brings whistleblowing within the public policy exception. Without such authority, this Court will not expand the limited scope of the public policy exception. Because Caiazzo Neff fails to allege that PKS offended public policy by terminating her, her wrongful termination claim is dismissed. 

At page 24 of the EDPA Opinion

Covenant of Good Faith and Fair Dealing

EDPA dismissed Plaintiff's claim of breach of the implied covenant of good faith and fair dealing for failure to state sufficient facts in support. Pointedly, the Court finds that:

Here, Caiazzo Neff alleges that PKS systematically obstructed her from performing her job duties as an internal auditor. Pl.'s Opp. 12. However, she fails to point to a contractual term that existed beyond the at-will employment relationship-her central complaint is that PKS fired her, not that it breached any independent contractual duty . . .

At page 26 of the EDPA Opinion

Intentional Infliction of Emotional Distress

In dismissing Plaintiff's claim of intentional infliction of emotional distress, EDPA offers this rationale:

Here, Caiazzo Neff alleges that she sustained pain and suffering and severe emotional distress as a result of defendants' outrageous conduct. Am. Compl. ¶ 112. However, she fails to allege that she suffered any type of resulting physical harm due to Defendants' conduct, and therefore she fails to allege an IIED claim . . .

Bill Singer's Comment

Supreme Court Narrows the Definition of "Whistleblower" / Digital Realty Trust

Real Estate Investment Trust Digital Realty Trust, Inc. employed Paul Somers as a Vice President from 2010 to 2014.  Somers alleged that shortly after he reported suspected securities-laws violations by the company to its senior management, he was terminated. Somers did not report his suspicions to the Securities and Exchange Commission and did not file an administrative complaint within 180 days after his termination. Somer filed a federal lawsuit in the United States District Court for the Northern District of California alleging, inter alia, a claim of whistleblower retaliation under Dodd-Frank. Digital Realty moved to dismiss that claim, arguing that Somers did not meet the statutory definition of a "whistleblower." The District Court denied the motion in part upon its finding that Somers was not required to have reported his concerns to the Securities and Exchange Commission in order to be deemed a Dodd-Frank "whistleblower." A divided United States Court of Appeals for the Ninth Circuit affirmed. On appeal to the United States Supreme Court, the "Question Presented" was

Whether the anti-retaliation provision for ''whistleblowers" in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 extends to individuals who have not reported alleged misconduct to the Securities and Exchange Commission and thus fall outside the Act's definition of a ''whistleblower."



Digital Realty Trust, Inc. v. Somers (Opinion, United States Supreme Court, No. 16-1276 / February 21, 2018) http://brokeandbroker.com/PDF/DigitalRealtySCt.pdf 

Ginsburg, J., delivered the Opinion of the Court; 
Roberts, C. J., And Kennedy, Breyer, Sotomayor, and Kagan, JJ., joined. 
Sotomayor, J., filed a Concurring Opinion, in which Breyer, J., joined; 
Thomas, J., filed an Opinion concurring in part and concurring in the Judgment in which Alito And Gorsuch, JJ., joined.    

As set forth in the "Syllabus" of the Opinion:  

Endeavoring to root out corporate fraud, Congress passed the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Both Acts shield whistleblowers from retaliation, but they differ in important respects. Sarbanes-Oxley applies to all "employees" who report misconduct to the Securities and Exchange Commission (SEC or Commission), any other federal agency, Congress, or an internal supervisor. 18 U. S. C. §1514A(a)(1). Dodd-Frank defines a "whistleblower" as "any individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission." 15 U. S. C. §78u- 6(a)(6). A whistleblower so defined is eligible for an award if original information provided to the SEC leads to a successful enforcement action. §78u-6(b)-(g). And he or she is protected from retaliation in three situations, see §78u-6(h)(1)(A)(i)-(iii), including for "making disclosures that are required or protected under" Sarbanes-Oxley or other specified laws, §78u-6(h)(1)(A)(iii). Sarbanes-Oxley's anti-retaliation provision contains an administrative-exhaustion requirement and a 180-day administrative complaint-filing deadline, see 18 U. S. C. §1514A(b)(1)(A), (2)(D), whereas Dodd-Frank permits a whistleblower to sue an employer directly in federal district court, with a default six-year limitation period, see §78u-6(h)(1)(B)(i), (iii)(I)(aa). 

SEC's regulations implementing the Dodd-Frank provision contain two discrete whistleblower definitions. For purposes of the award program, Rule 21F-2 requires a whistleblower to "provide the Commission with information" relating to possible securities-law violations. 17 CFR §240.21F-2(a)(1). For purposes of the antiretaliation protections, however, the Rule does not require SEC reporting. See §240.21F-2(b)(1)(i)-(ii). Respondent Paul Somers alleges that petitioner Digital Realty Trust, Inc. (Digital Realty) terminated his employment shortly after he reported to senior management suspected securities-law violations by the company. Somers filed suit, alleging, inter alia, a claim of whistleblower retaliation under Dodd-Frank. Digital Realty moved to dismiss that claim on the ground that Somers was not a whistleblower under §78u-6(h) because he did not alert the SEC prior to his termination. The District Court denied the motion, and the Ninth Circuit affirmed. The Court of Appeals concluded that §78u-6(h) does not necessitate recourse to the SEC prior to gaining "whistleblower" status, and it accorded deference to the SEC's regulation under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837. 

Held: Dodd-Frank's anti-retaliation provision does not extend to an individual, like Somers, who has not reported a violation of the securities laws to the SEC. Pp. 9-19. (a) A statute's explicit definition must be followed, even if it varies from a term's ordinary meaning. Burgess v. United States, 553 U. S. 124, 130. Section 78u-6(a) instructs that the statute's definition of "whistleblower" "shall apply" "[i]n this section," that is, throughout §78u-6. The Court must therefore interpret the term "whistleblower" in §78u-6(h), the anti-retaliation provision, in accordance with that definition. 

The whistleblower definition operates in conjunction with the three clauses of §78u-6(h)(1)(A) to spell out the provision's scope. The definition first describes who is eligible for protection-namely, a "whistleblower" who provides pertinent information "to the Commission." §78u-6(a)(6). The three clauses then describe what conduct, when engaged in by a "whistleblower," is shielded from employment discrimination. An individual who meets both measures may invoke Dodd-Frank's protections. But an individual who falls outside the protected category of "whistleblowers" is ineligible to seek redress under the statute, regardless of the conduct in which that individual engages. This reading is reinforced by another whistleblower protection provision in Dodd-Frank, see 12 U. S. C. §5567(b), which imposes no requirement that information be conveyed to a government agency. Pp. 9-11. 

(b) The Court's understanding is corroborated by Dodd-Frank's purpose and design. The core objective of Dodd-Frank's whistleblower program is to aid the Commission's enforcement efforts by "motivat[ing] people who know of securities law violations to tell the SEC." S. Rep. No. 111-176, p. 38 (emphasis added). To that end, Congress provided monetary awards to whistleblowers who furnish actionable information to the Commission. Congress also complemented the financial incentives for SEC reporting by heightening protection against retaliation. Pp. 11-12. 

(c) Somers and the Solicitor General contend that Dodd-Frank's "whistleblower" definition applies only to the statute's award program and not, as the definition plainly states, to its anti-retaliation provision. Their concerns do not support a departure from the statutory text. Pp. 12-18. 

(1) They claim that the Court's reading would vitiate the protections of clause (iii) for whistleblowers who make disclosures to persons and entities other than the SEC. See §78u-6(h)(1)(A)(iii). But the plain-text reading of the statute leaves the third clause with substantial meaning by protecting a whistleblower who reports misconduct both to the SEC and to another entity, but suffers retaliation because of the latter, non-SEC, disclosure. Pp. 13-15. 

(2) Nor would the Court's reading jettison protections for auditors, attorneys, and other employees who are required to report information within the company before making external disclosures. Such employees would be shielded as soon as they also provide relevant information to the Commission. And Congress may well have considered adequate the safeguards already afforded to such employees by Sarbanes-Oxley. Pp. 15-16. 

(3) Applying the "whistleblower" definition as written, Somers and the Solicitor General further protest, will allow "identical misconduct" to "go punished or not based on the happenstance of a separate report" to the SEC. Brief for Respondent 37-38. But it is understandable that the statute's retaliation protections, like its financial rewards, would be reserved for employees who have done what Dodd Frank seeks to achieve by reporting information about unlawful activity to the SEC. P. 16. 

(4) The Solicitor General observes that the statute contains no apparent requirement of a "temporal or topical connection between the violation reported to the Commission and the internal disclosure for which the employee suffers retaliation." Brief for United States as Amicus Curiae 25. The Court need not dwell on related hypotheticals, which veer far from the case at hand. Pp. 16-18. 

(5) Finally, the interpretation adopted here would not undermine clause (ii) of §78u-6(h)(1)(A), which prohibits retaliation against a whistleblower for "initiating, testifying in, or assisting in any investigation or . . . action of the Commission based upon" information conveyed to the SEC by a whistleblower in accordance with the statute. The statute delegates authority to the Commission to establish the "manner" in which a whistleblower may provide information to the SEC. §78u-6(a)(6). Nothing prevents the Commission from enumerating additional means of SEC reporting, including through testimony protected by clause (ii). P. 18. 

(d) Because "Congress has directly spoken to the precise question at issue," Chevron, 467 U. S., at 842, deference is not accorded to the contrary view advanced by the SEC in Rule 21F-2. Pp. 18-19. 
850 F. 3d 1045, reversed and remanded.  

Also SEE
: "SEC Takes on Federal Court In Dispute Over Whistleblowing Interpretation" (BrokeAndBroker.com Blog, August 14, 2015):

Under the circumstances, it is appropriate for me to clearly disclose my bias: I am an ardent advocate of whistleblowing, I have represented several whistleblowers and achieved an Award in excess of $1.5 million for one, and I oppose any retaliation against such informants. That being said, I am also highly critical of the SEC's Whistleblower process: "SEC Whistleblower Program Is A Black Hole Of Despair" (BrokeAndBroker.com BlogApril 9, 2015).

Strictly from the perspective of which organization makes the more compelling legal argument here -- the 5Cir or the SEC -- I must admit that the Court seems on firmer footing. Given the contentious history surrounding Dodd-Frank and the often testy battle over the SEC's drafting of the necessary rules to implement the Act, it is apparent that Rule 21F doesn't say what the SEC says it means.

Congress and the SEC engaged in some dubious wordsmithery when drafting the whistleblower laws and rules, and, as a result, the definition of a "whistleblower" (and, as a consequence, a whistleblower entitled to anti-retaliation protection) is narrowly proscribed to only those who properly file their original information with the SEC.

I've never been a big fan of this interpretation nonsense because it too often amounts to questionable attempts to rewrite laws and rules without actually going through the draft-to-approval route. Ultimately, I'm not sure that the SEC can simply wave a wand here, mumble a few words, and cast a spell that will satisfy any future federal courts to which this same issue is presented. In the absence of formally revising 21F, this issue may yet wind up enmeshed in further federal court appeals until, perhaps, it comes before the Supreme Court.

2017 FINRA Purshe Kaplan Sterling Investments AWC

In "FINRA Orders Purshe Kaplan Sterling Investments to Pay $3.4 Million in Restitution to Native American Tribe; Firm Also Fined $750,000 for Failures to Supervise" (FINRA Release)
The FINRA Release states in part:

The Financial Industry Regulatory Authority (FINRA) announced today that Albany, New York-based Purshe Kaplan Sterling Investments (PKS) will pay nearly $3.4 million in restitution to a Native American tribe, after the tribe paid excessive sales charges on purchases of non-traded Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs). In addition to ordering restitution, FINRA fined PKS $750,000 for its failures to supervise the sales of these securities. This settlement resolves charges brought in a February 2016 FINRA complaint against PKS. The charges alleged in the same complaint against the tribe's PKS registered representative, Gopi Vungarala, are ongoing.

FINRA found that from July 2011 through at least January 15, 2015, Vungarala was the tribe's PKS registered representative and also the tribe's Treasury Investment Manager responsible for managing the tribe's investment portfolio. PKS failed to adequately review the risks inherent in that relationship or establish procedures designed to mitigate the risks. FINRA found that as a result of these supervisory failures, Vungarala was able to misrepresent to the tribe that neither PKS nor he would receive commissions on its purchases, and he was therefore able to induce the tribe to invest more than $190 million in non-traded REITs and BDCs. In fact, Vungarala personally received at least $9 million in commissions from the tribe's investments.

FINRA also found that PKS failed to identify that more than 200 of the tribe's purchases were eligible for discounts based on the volume of the purchases. FINRA found that Vungarala's commissions would have been reduced to approximately $6 million if the tribe received the volume discounts for which it was eligible; however, Vungarala misrepresented to PKS that the tribe did not want to receive the volume discounts. PKS failed to take reasonable steps to verify this statement even after it received inquiries about the missed discounts from a REIT issuer and FINRA staff.

In addition, FINRA found that, between April 2009 and October 31, 2014, PKS failed to maintain and enforce an adequate supervisory system and written supervisory procedures to ensure compliance with the securities laws and FINRA rules when it sold non-traded REITs and BDCs. PKS did not have procedures that were reasonably designed to identify accounts that were eligible for volume discounts, and did not provide any guidance to its representatives or supervisors regarding how to ensure that the sales volume discounts were applied appropriately.

In concluding this settlement, PKS neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

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