Tuesday, November 6, 2018

FINANCIAL ADVISER TERMINATIONS



It’s what we do here at Cosgrove Law Group, LLC.


              Believe it or not, there are instances in which a broker-dealer seeks out pre-textual reasons for a termination.  Some reasons are more frivolous than others.  For many advisers, an involuntary termination is nothing more than the first chapter of a multi-chapter nightmare.

            The broker-dealer has 30 days from the date of termination to file the U-5, a disclosure to FINRA that modifies the adviser’s U-4 with information regarding the termination.  The U-5 disclosure includes both narratives and the checking of “yes” or “no” boxes.  Notably, which boxes are checked or not will impact what, if any, information is added to the publicly accessible BrokerCheck Report.

            Once the U-5 is filed, and sometimes before that, FINRA and state regulators will make inquiry as to the disclosure.  Before that, however, potential employers will want to know what is, or will be, on the U-5.  During this early post-termination window, while the adviser is trying to get hired and registered, it is common for the former broker-dealer’s agents to solicit the departing adviser’s clients.  Sadly, these solicitations frequently cross the line between fair competition and tortious interference/defamation.

            It should be obvious from this brief summary that it is critical to retain counsel as soon as you begin to even sense that things are going south with your current broker-dealer.  Sometimes the legal department of the broker-dealer will step in and correct its clients’ improper behavior.  Moreover, there are times when the U-5 language initially intended can be modified to be, while still accurate, less prejudicial or inflammatory in nature.  If all else fails, filing an arbitration claim for compensatory and punitive damages and an expungement is a final avenue of recourse.  Please do not try to navigate these treacherous waters by yourself.

Monday, September 24, 2018

Overview of FINRA’s Form U5 Reporting Requirements

FINRA Form U5, called the “Uniform Termination Notice for Securities Industry Regulation” is submitted to FINRA when a registered representative is terminated from a firm. A brief overview of Form U5 is contained below:

Currently, there are three different types of Form U5 filings: 1) a full Form U5; 2) a partial Form U5; and 3) amended Form U5. The full Form U5 is utilized when the individual terminates with the firm, while a partial Form U5 is utilized when the individual is terminated from certain jurisdictions or self-regulatory organizations. An amendment to Form U5 is used, for example, when the basis of the individual’s termination has been changed.

Information disclosed on Form U5 can have far reaching effects on financial advisors and stockbrokers because it may be made public through FINRA BrokerCheck. Here’s a closer look at the information FINRA is looking for in the submission of the Form 5:

In Question 7A, FINRA requires that the firm identify if the individual is subject of an investigation by a government body or self-regulatory organization having jurisdiction over investment-related business. Question 7B requires the firm to indicate whether the terminated individual has been subject of an internal review for wrongful taking of property, fraud or violating investment-related statutes, regulations, rules or industry standards of conduct. Firms must answer Question 7C in situations where the individual was charged or convicted of a felony while the individual was associated with the firm.

Question 7D of Form U5 concerns the disclosure of regulatory actions. Particularly, the firm is obligated to confirm whether the individual, when associated with the firm, had been subject of a self-regulatory organization or foreign government disciplinary action having jurisdiction over investment-related business. Disclosure is not mandated; however, when the incident was deemed a minor rule violation pursuant to a plan which the United States Securities and Exchange Commission (“SEC”) has authorized.

FINRA’s interpretative guidance further reveals that firms are not required to monitor the associated person to make sure that Questions 7C and 7D are answered correctly. FINRA calls for disclosure to be made by the firm when the firm has been expressly notified about the incident. In other words, disclosure is warranted if an agency contacts the firm’s staff concerning the incident, and the staff member knows, or should know, of the requirement to report the incident on Form U5.

FINRA is also concerned about whether the terminated individual has been the subject of formal disputes. Specifically, the firm is required to indicate whether, during the time that the individual was associated with the firm, the individual had been named in, or the subject of, certain investment-related, consumer-initiated arbitration or civil actions. Reportable actions include those that are pending, resulted in an award or judgment against the individual, or settled for $15,000.00 or more after May 18, 2009. Firms are even obligated to report certain instances when a customer files a complaint concerning the individual’s activities but did not pursue a more formal action.

In addition, FINRA requires the firm to disclose instances where the individual has been terminated after allegations of misconduct arose. Specifically, FINRA requires that the firms disclose when the individual has been discharged, permitted to resign, or even voluntarily resigned from the firm after allegations surfaced accusing the individual of (1) violating investment-related statutes, regulations, rules or industry standards of conduct; or (2) fraud or wrongful taking of property; or (3) failure to supervise in connection with investment-related statutes, regulations, rules or industry standards of conduct.

Form U5 is required to be submitted within 30 days of the registered representative’s termination. Firms also have an obligation to keep the Form U5 current; there is no expiration date on the firm’s duty to amend the Form U5 to address incompletions or inaccuracies.

Cosgrove Law Group, LLC has represented many advisers around the nation in situations where a broker-dealer reported false and defamatory information on a Form U5, helping them obtain settlements and awards ranging from $100,000.00 to $3,500,000.00. If you feel that you have been a victim to Form U5 defamation, call Cosgrove Law Group and speak to our experienced counsel today.

Friday, September 21, 2018

A Closer Look At Regulatory Action Disclosures On Form U4

Financial advisors who become registered with a Financial Industry Regulatory Authority (“FINRA”) member firm should be knowledgeable about Form U4, as it addresses a broad spectrum of historical events that are required to be reported to FINRA. FINRA has offered some interpretative guidance, some of which is explained below, as it relates to Form U4 actions.

Question 14 of FINRA Form U4 concerns criminal disclosures, regulatory action disclosures, civil judicial disclosures, customer complaints, arbitrations, and civil litigation. To begin with, and perhaps to no surprise, an individual who has been charged or convicted of a felony is required to disclosure that information on Question 14A. Even, an individual who has even been pardoned for a crime must report the conviction, according to FINRA’s interpretive guidance.

Financial advisors should take note that misdemeanors are also required to be reported on Form U4 in certain cases. For example, an individual who has been charged or convicted of a misdemeanor involving investments, fraudulent conduct, or wrongful taking of property would be required to disclose those incident(s).

Question 14C prompts individuals to state whether they have been found to have committed certain types of misconduct by the Commodity Futures Trading Commission (“CFTC”) and Securities and Exchange Commission (“SEC”) including: making false statements or omissions; committing a violation of investment-related statues or regulations; and causing a business to have its authorization to do business revoked or suspended.

individuals are additionally required to report on Question 14C whether they have been found by the SEC or the CFTC to have willfully violated Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, Investment Advisers Act of 1940, Commodity Exchange Act, or Municipal Securities Rulemaking Board (MSRB) rules. Disclosure is also mandated when the individual has been found to have aided and abetted a person’s violative activities, or failed to supervise another person responsible for committing violations in the securities industry.

Similarly, Question 14(E) requires that individuals report if they have been found by a self-regulatory organization to have made false statements or omissions, violated SEC rules; or caused an investment-related business to lose authorizations to conduct securities business. Any suspensions or expulsions from those self-regulatory organizations are required to be reported. Plus, disclosure is necessitated when there have been any findings of federal securities law violations committed by the individual, or someone who the individual supervised or aided.

FINRA confirms in Question 14G that individuals are required to disclose to FINRA when they are notified that they have become subject of a regulatory complaint or proceeding brought on by the SEC, CFTC, other federal agencies, state securities commissioners and self-regulatory organizations. Investigations, according to FINRA, are signaled by the issuance of a Wells Notice to the individual or the individual being notified from FINRA staff that formal disciplinary action has been recommended by FINRA. However, not all things mean an investigation to FINRA. For example, requests for information, regulatory inquiries and subpoenas, per se, apparently do not constitute investigations.

FINRA’s guidelines further reveal that when an individual has been subject to an order from a foreign regulatory agency that is later vacated, the individual generally has to report the order because of the advisor’s obligation to report the original findings. Exceptions exist, according to FINRA’s guidelines, where the regulatory agency not only vacates the order, but confirms an intent to make that order have retroactive effect.

Individuals who are the subject of a FINRA Acceptance, Waiver and Consent are also required to disclose this information so long as the AWC concerns findings as to the individual’s misconduct identified in Question 14(E). There are some situations; however, where violations of the rules do not have to be reported, including some “minor rule violations” where the fine is no more than $2,500.00 and the individual does not contest the fine.

Financial advisors and stockbrokers often wonder how to go about making disclosures concerning negative events. If you are in a situation that mandates disclosure, such as a pending regulatory investigation, it is best to consult with an attorney. If you need assistance, you may wish to consult with the experienced counsel at Cosgrove Law Group.

Thursday, September 20, 2018

SEC Affirms FINRA’s Findings of EKN Stockbroker’s Form U4 Violations


The Securities and Exchange Commission (“SEC”) affirmed a Financial Industry Regulatory Authority (“FINRA”) Decision in which EKN Financial Services Inc. stockbroker, Louis Ottimo, was assessed a $25,000.00 fine and two-year suspension in all capacities pursuant to findings that he willfully failed to accurately and timely update his Uniform Application for Securities Industry Registration or Transfer (“Form U4”) to reflect judgments, unsatisfied tax liens, and a bankruptcy filing. (In the Matter of the Application of Louis Ottimo, Admin. Proc. File No. 3-17930 (June 28, 2018).

Back on August 22, 2013, FINRA’s Department of Enforcement filed a Complaint against Ottimo alleging that he, inter alia, violated FINRA Rules 2010, 1122, NASD IM-1000-1, and Article V, Section 2(c) of FINRA’s By-Laws by deliberately failing to disclose facts on his Form U4. An Extended Hearing Panel found Ottimo to have committed the violations, and assessed a $25,000.00 fine and two-year suspension; however, sanctions were not imposed in light of Ottimo being barred by the Extended Hearing Panel for a more serious act: committing securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

On appeal, the National Adjudicatory Council affirmed the Extended Hearing Panel’s findings of Ottimo’s Form U4 violations. Ottimo subsequently appealed to the SEC, who sustained FINRA’s findings with respect to Ottimo’s Form U4 violations.

Ottimo became registered with EKN Financial Services Inc. on March 9, 2009. Because he was registering with a FINRA member firm, Ottimo was obligated to submit a Form U4. Ottimo, like any associated person, was obligated by FINRA rules to keep his Form U4 current at all times. Under FINRA By-Laws Article V, Section 2(c), this meant that Ottimo was required to update his Form U4 within thirty days of learning facts or circumstances giving rise to the need to amend the form.

Question 14.M on the Form U4 prompted Ottimo to disclose whether he had any liens or judgments that were unsatisfied, and question 14.K prompted Ottimo to disclose whether he, or any organization that he controlled, filed a bankruptcy petition within the prior ten year period. The findings stated that after Ottimo commenced employment with EKN Financial Services Inc., he continually neglected to accurately and timely report information on his Form U4 concerning a bankruptcy filing, six unsatisfied civil judgments and seven unsatisfied liens.

Specifically, the findings stated that Ottimo failed to report five of the tax liens issued from January 2010 to April 2010 on his Form U4 until September 2010. In addition, a November 2010 tax lien was not reported by Ottimo on his Form U4 until June 2011, and a June 2011 tax lien was not reported until April of 2012. Evidently, Ottimo’s reporting of the liens occurred well after FINRA’s thirty day time limit for reporting. Critically, Ottimo revealed in a FINRA hearing that he was cognizant about FINRA’s requirements – but he obviously disregarded them.

Further, from March 2008 to April 2010, a total of six civil judgments had been entered against Ottimo, where Ottimo failed to accurately and timely report those judgements. One of the judgments against Ottimo on June 4, 2009 had been vacated on September 9, 2009. Despite Ottimo having amended his Form U4 on four occasions between June 2009 and August 2009, he failed to report that unsatisfied judgment. Notwithstanding the judgement being vacated, Ottimo was still subject to the reporting requirement.

In addition, Ottimo failed to report a bankruptcy petition for a company he founded and which he served as president, Wheatley Capital Corporation. The findings stated that Wheatley filed for bankruptcy on April 27, 2010, and the bankruptcy petition had been signed and submitted by Ottimo. Ottimo evidently neglected to make the bankruptcy known on his Form U4 until April 19, 2002.

In the Opinion, the SEC confirmed FINRA’s findings that Ottimo’s failure to make timely disclosures of liens, civil judgments and a bankruptcy was violative of FINRA By-Laws Article V, Section 2(c). SEC also found that by way of Ottimo’s Form U4 being misleading and inaccurate, he violated FINRA Rules 1122 and NASD IM-1000-1. And as a consequence of violating FINRA Rules 1122 and NASD IM-1000-1, the SEC confirmed that Ottimo violated FINRA Rule 2010.

Moreover, the SEC concluded that Ottimo was subject to a statutory disqualification because of his (1) willful conduct in neglecting to update his Form U4, and (2) material omissions relating to his Form U4. The SEC turned to Securities Exchange Act Section 3(a)(39)(F), which provides a basis for statutory disqualification when a FINRA member intentionally omits a material fact in applying for association with a member.  Finally, the SEC found Ottimo’s conduct willful given Ottimo’s knowledge of his disclosure obligations and the significance of that information (six unsatisfied civil judgements that totaled more than $440,000.00 and unsatisfied tax liens that totaled more than $260,000.00) to investors, employers and regulators.

Interestingly enough, the SEC reversed a part of FINRA’s fraud findings, and in so doing, set aside the barring of Ottimo and remanded the matter to FINRA to determine what sanctions it deems appropriate. The SEC invited FINRA to reconsider its decision not to impose sanctions against Ottimo for his willful Form U4 violations.

Financial advisors and stockbrokers often question whether to make disclosures concerning negative events. If you are in one of those situations, it is best to be careful versus taking a risk that could possibly end your career in the securities industry. If you need assistance with your Form U4 matter, call (314) 563-2490 today to consult with the experienced counsel at Cosgrove Law Group.

Sunday, September 16, 2018

FINRA Sanctions Against Oppenheimer & Co.


The Financial Industry Regulatory Authority (FINRA) sanctioned Oppenheimer & Co. Inc. more than $3.4 million in November of 2016 due to Oppenheimer’s failing to report required information to FINRA, failing to produce documents in discovery to customers who filed arbitrations, and for not applying applicable sales charge waivers to customers. The $3.4 million in sanctions included $1.575 million in fines and $1.85 million paid to customers. In regards to the customers who filed arbitrations, FINRA ordered Oppenheimer to provide the claimants with the documents that they failed to produce and pay said claimants more than $700,000. The remainder of the $1.85 million was paid to eligible customers who qualified for, but did not receive, applicable mutual fund sales charge waivers.
            These violations by Oppenheimer spanned several years and included failures to report “more than 350 required filings including securities-related regulatory findings, disciplinary actions taken by Oppenheimer against its employees, and settlements of securities-related arbitration and litigation claims.” Additionally, FINRA stated that Oppenheimer, on average, made these filings “more than four years late.” This incident was not Oppenheimer’s first run in with FINRA. Despite prior FINRA investigations resulting in Oppenheimer’s revision of its supervisory procedures, FINRA alleged that Oppenheimer had in fact failed to adopt adequate procedures for reporting regulatory events involving its employees. In March of 2015, FINRA fined Oppenheimer $2.5 million and ordered the firm to pay $1.25 million in restitution for failure to supervise former Oppenheimer broker Mark Hotton. In that instance, FINRA found that Oppenheimer “failed to make more than 300 required filings to FINRA about some of its brokers in a timely manner” with the filings being, on average, “238 days late.”

The FINRA news releases can be viewed at the following links:



An example of a Motion for Sanctions in a FINRA arbitration can be found below:











Monday, August 13, 2018

Goldman Director Sues Firm For Whistleblower Retaliation


Christopher Rollins, a former managing director of American multinational investment bank and financial services company, Goldman Sachs (New York, New York), has filed a Complaint against the firm alleging to have been retaliated against for blowing the whistle on Goldman’s anti-money laundering compliance failures relating to an infamous wealthy financier based in Europe. (Christopher Rollins v. Goldman Sachs& Co. LLC, et al., Case No. 18-CV-7162 (S.D.N.Y. Aug. 9, 2018)

According to the Complaint, the financier met with two Goldman bankers, John Storey and Michael Daffey, on the financier’s yacht in August of 2015, to determine how Goldman could assist the financier in business dealings despite the financier’s checkered past. Apparently, from September of 2015 to August of 2016, Storey, Daffey and the firm’s former vice-chairman, Michael Sherwood, leveraged their status with the company and command of Goldman’s risk management systems to help effect transactions connected to the financier, circumventing Goldman’s anti-money laundering controls in the process.

The Compliant specified that transactions connected to the financier included: 1) the issuance of $1,200,000,000.00 in bonds structured by a broker whom the financier had been affiliated with; 2) the establishment of a customer account for an offshore fund which the financier controlled; 3) the creation of a London-based account for the offshore fund to effect a $400,000,000.00 trade; and 4) trading of securities of a foreign company introduced to the firm’s customers by the financier.

The Complaint alleged that Rollins and the financier met merely on a social level; no business relationship was consummated. The financier did, according the Complaint, call Rollins to discuss possible transactions, resulting in Rollins reporting his interactions with the financier to appropriate parties within Goldman.

The Complaint detailed that in August of 2016, a client of Goldman failed to pay for trades involving the securities of the foreign company introduced to the firm by the financier, causing Goldman to experience a brief $85,000,000.00 exposure. Goldman’s financial crimes compliance division, who was responsible for overseeing anti-money laundering controls, purportedly grew suspicious that the trading settlement mishap related to an unlawful pre-arranged trading scheme. The Complaint stated that officers of the financial crimes compliance division figured Rollins was a party to an unlawful scheme.

Apparently, in September of 2016, Rollins was interviewed by Goldman Sachs International’s securities compliance leader, Anil Karpal, as well as other financial crimes compliance division investigators. Rollins was seemingly advised at that time to refrain from engaging in any contact with the financier. The Complaint then stated that Rollins expressed to investigators that he was under the impression that the financier’s business dealings had been vetted through compliance. Rollins contended that he subsequently learned that investigators were not apprised of the financier’s involvement with Sherwood, Daffey and Storey; that information was deliberately concealed from Goldman’s records. In turn, Rollins was supposedly viewed by Goldman as the source of the financier’s business dealings with the firm.

In speaking with investigators, Rollins reportedly contended that his contact with the financier was reasonable and had been supported by instructions from Goldman’s compliance officer, Steven Hadermayer, who provided the greenlight to the financier’s introduction of the trading of the foreign company’s securities. Goldman’s compliance division had apparently not deemed it suspicious for the financier to be involved in those trades, and did nothing to stop those trades from being effected.

Rollins contended in the Complaint that he should have been cleared of any suspicion of wrongdoing following his interview with Goldman’s investigators, or at least not subject of an investigation by those who were tainted with conflicts. Instead, Rollins was reportedly suspended by Goldman. Over the ensuing weeks, Rollins’ suspension remained in place, and the basis of his suspension had apparently never been made clear. The Complaint revealed that Rollins soon became the primary target for the blame of the anti-money laundering compliance failures pertaining to the financier.

According to the Complaint, in an effort to determine why he was falsely accused for Goldman’s business dealings with the financier, Rollins further analyzed the transactions, finding that the questionable activities involving the financier should have altered the firm to conduct further due diligence or even file a suspicious activity report. The Complaint stated that Rollins was cognizant that Commodities and FuturesTrading Commission (“CFTC”) and Securities and Exchange Commission (“SEC”) laws and regulations mandated reasonable anti-money laundering procedures to be created and implemented by Goldman in reference to the establishment and surveillance of accounts – particularly those involving speculative or foreign companies.

The Compliant then specified that Rollins reported his suspicion about the anti-money laundering compliance failures being covered up by way of the investigation. Rollins claimed to have recalled being told by Daffey that the $400,000,000.00 trade was a mistake and that Goldman could not afford to be subject of a scandal. Apparently, Daffey caught wind of Rollins’ outspoken concerns about the investigation conducted by Goldman, and attempted to convince Rollins to take the fall for the financier’s business dealings with the firm – Rollins’ job depended on it. The Compliant stated that Rollins refused to accept the blame, resulting in Goldman’s commencement of a disciplinary proceeding in which Rollins was pressured to admit to violating compliance restrictions. The firm; however, reportedly failed to detail the restrictions it claimed Rollins violated.

According to the Complaint, Rollins confronted the firm’s treatment of him through a disciplinary hearing directed by James Esposito, but it was ultimately determined by Esposito that Rollins’ sixteen year employment with Goldman would be terminated effective February 5, 2017. Esposito’s decision was apparently founded on a pretext – he claimed that Rollins breached compliance restrictions relating to the financier’s business dealings despite failing to detail exactly what those restrictions were.

Prior to Rollins’ termination, he apparently submitted a report to Goldman of what he believed to be violations of United States law in reference to Goldman’s compliance mishaps, and complained of a bogus investigation and disciplinary proceeding having been commenced into his activities to cover up Goldman’s conduct. Moreover, Form TCRs had been submitted by Rollins to SEC and CFTC as part of his formal reporting of Goldman’s activities to those regulators.

The Complaint further alleged that Goldman, in addition to terminating Rollins for reporting the firm’s misconduct: falsified information to regulators about Rollins’ activities; defamed him to other employers; and cancelled equity awards totaling millions of dollars. Despite the statements that Goldman made to regulators, the firm reportedly established with Rollins that he never committed any unethical or illegal activities, and that he was not terminated for cause. Moreover, the firm purportedly admitted that the compliance restrictions referenced by Esposito never existed.

According to the Complaint, substantial damages have been requested by Rollins from Goldman due to the firm’s unlawful retaliation of him in violation of the Dodd-Frank Reform Act, 7 U.S.C. §26(h)(1)(A) and 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii), and for the firm’s acts of defamation and fraud.

Cosgrove Law Group, LLC represents former employees in the finance industry against their employers for U5 defamation and whistleblower retaliation. If you feel that you have been retaliated against for blowing the whistle on your employer’s actual or prospective violations of securities laws, call Cosgrove Law Group and speak to our experienced counsel today.

Tuesday, August 7, 2018

FINRA Rule Helps Prevent Abuse

            FINRA Rule 2165 focuses on preventing the financial exploitation of certain “specified adults”.   The rule, put into effect on February 5, 2018, provides for a temporary hold on disbursement of funds or securities from the account of a specified adult.  Two rule changes put into effect include reasonable efforts required to get in touch with a “trusted contact person” and the ability to put a hold on the funds.

            A specified adult is defined as “a natural person age 65 and older; or a natural person age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.”

            A temporary hold may be placed on disbursement of funds or securities of a specified adult’s account under certain circumstances:

            1.         “The member reasonably believes that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted;” and
            2.         “The member… provides notification orally or in writing… of the temporary hold and the reason for the temporary hold…;” and
            3.         “The member immediately initiates an internal review of the facts and circumstances that has caused the member to reasonably believe that the financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted.”

            The rule allows the member to get in touch with a “trusted contact person” about the hold on the account.  A trusted contact person is the person who may be contacted about the Specified Adult’s account in accordance with Rule 4512.  “The temporary hold authorized by this Rule will expire not later than 15 business days after the date” the hold was placed.

            These provisions “will allow firms to investigate the matter and reach out to the customer, the trusted contact and, as appropriate, law enforcement or adult protective services, before disbursing funds when there is a reasonable belief of financial exploitation.  It is a critical measure because of the difficulty investors face in trying to recover funds that they have inadvertently sent to fraudsters and scam artists.”

            This newly adopted FINRA Rule addresses a long-standing concern in the industry and provides an extra layer of client protection that brokers can utilize.  If you have concerns about your securities account or actions taken by your broker or financial adviser, please contact our firm to see if we may be able to help.