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FINRA Fines Jefferies $1.5M for ARS Sales


FINRA has fined Jefferies & Co. $1.5 million, ordered the investment bank to repay $425,000 in ill-gotten commissions and fees and suspended a pair of its brokers for failing to disclose additional compensation to institutional clients and other conflicts of interest related to shady sales of auction rate securities between August 2007 and March 2008.

FINRA found that Jefferies, through at least two brokers in its Corporate Cash Management investment advice group, didn't disclose "material facts" to a group of eight corporate customers for whom they were empowered to purchase and sell auction rate securities (ARS) and used this authority to buy new-issue ARS from other CCM group customers.

This deception allowed Jefferies' brokers Anthony Russo and Robert D'Addario to double-dip commissions by acting as both the buyer and seller on a total of 40 transactions over an eight-month span. More damning, according to FINRA, was the fact that Jefferies and its brokers didn't disclose the availability of comparable or similar ARS with higher yields while lining their pockets with both hands.

"In exercising discretion over customers' accounts, Jefferies was obligated to ensure that its customers were aware of material facts about the transactions," said Brad Bennett, FINRA EVP and chief of enforcement. "Instead, Jefferies and its brokers failed to disclose the additional compensation they earned in selling new issue ARS to their customers, their role in effecting trades between client accounts, and the existence of comparable or similar ARS with higher yields."

In a filing with the Securities and Exchange Commission, Jefferies acknowledged the looming settlement, saying that it had reached an agreement with the regulatory agency but did not admit or deny any wrongdoing in respect to its corporate cash management activities.

"We are pleased to have reached an agreement with FINRA and to have this matter behind us," Jefferies officials said in a statement.

Along with the $1.5 million fine and the $425,000 that Jefferies will repay to affected customers, Russo and D'Addario were fined $20,000 and $25,000, respectively. Russo also received a five business-day suspension while D'Addario must serve a 10-day suspension.

FINRA also filed a complaint against a third broker in the unit, Richard Morrison, for similar transgressions.

Along with the other findings, FINRA found that Jefferies was guilty of other violations related to 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.

In December 2008, Jefferies spent roughly $68 million in a partial voluntary buyback of ARS held in retail accounts and in July 2008 it 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.

Finally, the firm also agreed to participate in a FINRA-administered arbitration program to resolve eligible investor claims for other consequential damages.

Matt Ackermann writes for American Banker.