FINRA also ordered Jefferies to repay $425,000 in fees and commissions earned from the sale of ARS to the affected customers.
The regulator also took action against the three brokers involved in the sale of these products, sanctioning two Jefferies brokers, Anthony Russo ($20,000 fine and five business-day suspension) and Robert D’Addario ($25,000 fine and 10 business-day suspension), and filing a complaint against a third, Richard Morrison, for their role in not disclosing the additional compensation and conflicts.
According FINRA, Russo, D’Addario and Morrison comprised the firm’s Corporate Cash Management (CCM) group that provided investment advice and services, including purchasing and selling ARS, to 40 Jefferies institutional clients.
FINRA found in its settlement, and alleged in the Morrison complaint, that from 1 August 2007, to March 31, 2008, Jefferies – through Russo, D’Addario and Morrison – failed to disclose material facts to a group of eight corporate customers for whom they exercised discretion to purchase and sell ARS.
The brokers used their discretion to purchase for these customers new-issue ARS that paid them and the firm additional compensation.
By exercising discretion, Jefferies and the brokers were obligated to disclose that they received this additional compensation, and that they could have purchased other comparable or similar ARS with higher yields.
In 32 other transactions, they used their discretion to purchase ARS for the customers from other CCM group customers, but failed to disclose the conflict created because they acted as agent for both the buying and selling customer. They also failed to disclose the existence of comparable or similar ARS with higher yields.
FINRA executive vice president and Chief of Enforcement Brad Bennett, said, "In exercising discretion over customers’ accounts, Jefferies was obligated to ensure that its customers were aware of material facts about the transactions.
"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,"Bennett said.
FINRA also found that Jefferies committed several other violations in connection with its ARS business, including exercising discretion without written authority; failing to deliver official statements in connection with purchases of municipal new issue ARS.
It also said that Jefferies mislead the 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, including written supervisory procedures, relating to the operation of the CCM group and its preparation and use of advertising and sales material for ARS.
In reaching the settlement, FINRA took into account that in December 2008, Jefferies spent approximately $68m in a partial voluntary buyback of ARS held in retail accounts.
As part of this settlement, which included findings relating to Jefferies’ ARS advertising and inadequate supervisory review of ARS advertising, Jefferies agreed to purchase ARS from additional retail accounts.
Also, in July 2008, Jefferies 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.
In concluding this settlement, Jefferies, Russo and D’Addario neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
