A Financial Industry Regulatory Authority hearing panel has hit Wedbush Securities with a $300,000 fine, and issued its president and founder, Edward Wedbush, a 31-day suspension along with a $25,000 fine.
The August 2nd decision is a culmination of a range of offenses, inquiries and disciplinary actions dating back over a decade to February of 2002. The complaint charges Wedbush with three violations relating to the firm's failure to file reports on employment registration of registered representatives, customer complaints, and statistical reports in a timely and accurate manner; and in some cases failure to file them at all. A fourth violation accused the firm of inadequate supervision, and a fifth named Edward Wedbush specifically, alleging that he failed to fulfill his duties as president and supervise registration filings from August 2006 until July 2010.
Wedbush was unavailable for comment despite calls to the firm and its attorney.
"The firm's failure to remedy the reporting problems despite repeated warnings from FINRA and the NYSE is also an aggravating factor applicable to all violations," the FINRA hearing officer said in the panel decision. "Over a period of at least eight years leading up to the filing of the complaint, NYSE and FINRA both warned the firm in examinations, an AWC, Wells Notices, and disciplinary actions, or failures in its regulatory reporting, yet problems persisted," the decision stated.
And in harsh words for the firm's president, the FINRA decision noted that "Mr. Wedbush knew of the firm's reporting issues." It went on to say that "as president of the firm, Mr. Wedbush should have taken more steps to ensure that the firm addressed its problems, but he did not."
FINRA alleged that the Los Angeles-based firm either filed late or failed to file RE-3 forms. Wedbush stipulated to failure to file, late filing and filing of inaccurate Forms RE-3. The RE-3 is required to be filed whenever a member or registered or non-registered employee is a defendant or respondent in any securities or commodities-related civil suit or arbitration which has resulted in a judgment, award or settlement for more than $15,000. The FINRA panel found that 33 Forms RE-3 were filed late; one was inaccurate; and three were never filed. Two were three weeks late, one was nearly three years late, and most were filed more than two months late.
FINRA also alleged that the firm failed to file or issued late filings or 84 U4 and U5 Forms, related to an employee's registration. Wedbush stipulated to 45 violations related to Forms U4 and U5. "Most of the stipulated violative filings were late, one was never filed and several were inaccurate," the FINRA panel wrote. "The late and never-filed reports related to a variety of events, including the receipt of reportable customer complaints, the settlement of customer complaints, the filings of arbitrations and civil litigation, the settlement of arbitration claims and civil litigation and an arbitration award. Some late reports were a few days late, while others were late by months, or even years."
The FINRA panel went on to say that there were a number of disputed violations, and found that the firm violated rules with respect to an additional 39 Form U4 and U5 filings. In one instance, a rep submitted a pre-hiring clearance form to Wedbush on Aug. 28, 2007, disclosing that her former employer, UBS, had alleged that she had a compliance problem. On Sept. 12, 2007, UBS filed a form U5 stating that she had been terminated for violating firm policy by completing client information on a new account form after the documents had been signed by the clients. On Sept. 20, 2001, Wedbush filed a relicense Form U4 for that rep but did not disclose the fact that she had been discharged because the rep said she wanted to challenge the filing by her former firm. On Sept. 20, 2007 and less than a month later on Oct. 4, FINRA staff sent disclosure letters by email to Wedbush about the failure to disclose the termination. Wedbush filed an amended U4 on Oct. 29, 2007, disclosing that she had been terminated by her prior firm. The FINRA panel, in its decision finding that Wedbush violated regulatory rules, stated: "The representative's intent to dispute the basis for filing of the Form U5 by her prior firm is not a defense, and does not stay the firm's filing deadline."
In another case, Wedbush filed a relicense Form U4 on Jan. 2, 2009 for a registered rep without disclosures. FINRA sent Wedbush disclosure letters on three occasions - Jan. 12, 2009; June 17, 2009 and Nov. 24, 2009, informing the firm that the rep had an arrest record that might require disclosure. Wedbush filed an amended U4, reporting that in 1995 he had been charged with misdemeanor burglary and pled "no contest." Wedbush didn't report the matter quickly because it was trying to determine if the matter was required to be reported and then once that determination had been made, to obtain the rep's signature on the form. FINRA's enforcement unit contends that the amended filing was 350 days late, based on the first disclosure letter. The FINRA decision found that "at a minimum, the firm should have obtained the information from [the rep], who must have known the nature of the conviction, or if not, had a duty to find out."
The panel decision found a similar pattern with another rep who turned out to have misdemeanor theft criminal arrest. In that instance, FINRA found that the update Form U4 was filed at least 66 days late by the firm.
FINRA also alleged that Edward Wedbush, who started the firm in 1955, was responsible for poor supervision of registration filings while he was head of the firm's business conduct department from August 2006 until October 2007, and as president thereafter.
FINRA also alleged that he failed to accurately file and amend his own Form U4, relating to the resolution of a lawsuit. On March 15, 1999, Corsair Capital Partners filed a lawsuit in federal court in California, alleging that Wedbush, its president and others at the firm had engaged in a market manipulation scheme. The suit sought monetary damages and an injunction (court order). Edward Wedbush amended his Form U4 on Dec. 17, 1999 to disclose the litigation. On May 26, 2000, a judgment was issued in favor of Corsair awarding damages only. On Dec. 19, 2001, the federal appeals court for the Ninth Circuit reversed the lower court's judgment. Both sides eventually settled the case on Feb. 28, 2002, requiring Wedbush to pay $234,684.00. Corsair and the other plaintiffs who brought the suit released all claims against Wedbush's officers, directors, employees and others but did not expressly identify those individuals-including Edward Wedbush - by name. Under the terms of the settlement, the lawsuit was dismissed on March 5, 2002. Wedbush filed an amended U4 for its president on Oct. 2, 2007, signed by him on Sept. 30, stating that the matter was resolved on approximately March, 15, 1999. The U4 said: "The matter was resolved is [sic] a court trial judge including the 9th Circuit appeal court and Mr. W was found not guilty." The resolution of the matter was reported as "other" rather than "dismissed."
The FINRA panel, in its decision, concluded that Wedbush filed Edward Wedbush's Form U4 amendment 2,007 days late and that it inaccurately stated that the resolution date was March 15, 1999 when it was actually March 5, 2002, the date of dismissal; that the Form U4 inaccurately stated that the resolution was "other" rather than "dismissed," and that the form inaccurately stated that Edward Wedbush was found "not guilty," when there was never a finding that he was not liable.
In addition, the decision alleges that the firm misfiled seven statistical reports in violation of various NYSE and FINRA regulations and overall failed to adequately oversee its registration filings.
According to FINRA decision, both Edward Wedbush and Eric Segall, who took over as manager of the business conduct department at Wedbush in 2007, attributed the failures to the stricture of the organization and the "failure of other units to provide the information or documentation to the Business Conduct Department punctually."
But the hearing panel wasn't convinced. While acknowledging that Edward Wedbush "did not literally ignore the warnings," the FINRA decision said that "his failure to take decisive action was tantamount to ignoring the regular warnings from regulators."
FINRA noted that the Wedbush firm had a history of compliance problems and "offered many of the same excuses and commitments several times over the years, yet there was no meaningful improvement in compliance." The decision pointed to "the persistence of the reporting problems over several years," noting that it "is sufficient to establish that supervision of the reporting process was inadequate."
The FINRA panel found that Wedbush's attempts to clean up its act as too little, too late, saying that of the steps it took to improve its reporting procedures, "most were taken after the firm became aware that might be subject to enforcement actions."
If the decision becomes FINRA's final disciplinary action, Edward Wedbush's suspension will be in effect from October 1 to 31, 2012.
