Stifel, Nicolaus & Company, Inc., headquartered in St. Louis Missouri, was censured and fined $200,000; while one of the firm’s supervisors, Kurt LaLomia of Baltimore, Maryland, was fined $15,000 and suspended for thirty-one days from association with any Financial Industry Regulatory Authority (FINRA) member firm in any principal capacity, after consenting to findings that from January 2006 through February 2013, the firm and individual had failed to adequately supervise the written communications of an institutional salesperson registered with Stifel who made unfair, unwarranted, and misleading statements; and that the firm had failed to implement adequate supervisory systems designed to supervise, distribute, and approve research reports and institutional sales literature. Letter of Acceptance, Waiver and Consent, No. 2012032945601 (Dec. 30, 2015).
According to the AWC, the firm and LaLomia failed to supervise written communications of an institutional salesperson, A.L., who circulated to institutional investors select communications about companies which the firm’s research analysts had discussed during morning calls and about which they wrote in their research reports. A.L. was reportedly a managing director and institutional equity salesman at Stifel’s Cleveland, Ohio branch office from December 2005 – March 2013. A.L. was not a research analyst, according to FINRA.
The AWC indicated that from January 2006 – February 2013, A.L. had created and distributed a communication which was in excess of two-hundred pages called the Idea List, which was provided to institutional clients during meetings. The list, according to the AWC, had represented A.L.’s top stock picks, where each of the companies listed was also covered by the firm’s research department.
The AWC stated that A.L.’s various spreadsheets containing financial information such as stock price, earnings per share data and price per earnings, failed to provide the source of the financial information listed. A.L., during certain periods of times, listed A.L.’s personal price targets without indicating that the information was derived from his own figures. Additionally, A.L. reportedly failed to disclose that there was no certainty that the estimates, target prices, etc. would be achieved. FINRA found that such spreadsheets failed to provide a sound basis for evaluating the facts concerning the data provided for each stock.
The AWC stated that most of A.L.’s two-hundred pages of excerpts A.L. used from the official Stifel Research Reports had omitted material information about the stocks covered by the research reports, did not include information pertaining to the disclosures and certifications, and deleted extensive sections of analysis and supporting information. FINRA found that the excerpted pages containing A.L.’s handwritten commentary were misleading or unwarranted, and had improperly suggested that past performance could be predictive of future similar performance, and predicted future performance. FINRA found that as a result of the firm’s conduct, the firm had violated NASD Rule 2210(d)(1)(A) and (b) and NASD Rule 2110 and FINRA Rule 2010.
Further, the AWC pointed out that A.L. had sent Research Insight emails to dozens of institutional investors several times a week, where the emails contained discussion and analysis of several companies that the firm’s analyst had covered, with A.L.’s personal views, buy/hold/sell ratings, and listed stocks that were on the Idea List. FINRA found that such emails provided ratings for specific stocks but did not define the meaning of each rating, which violated NASD Rule 2711 – a rule which requires certain information to be disclosed in research reports in order for such information to be reasonably sufficient upon which to base an investment decision. FINRA found that the firm violated Rule 2711(h)(7) as a result of listing price targets without disclosing valuation methods to determine the price targets or associated risks.
The AWC additionally stated that from January 2006 through February 2013, three of the firm’s representatives had circulated to institutional investors a monthly communication called Best Ideas. This ten-fifteen page document had listed the author’s opinion of stocks in certain sectors based on certain financial information. FINRA found that the Best Ideas also contained violations of NASD Conduct Rule 2210(d)(1); specifically due to the failure to provide a sound basis for evaluating the facts with regard to the data provided for each stock, including sources of earnings-per-share and price-to-earnings estimates, and fair values. Consequently, the firm was found to have violated NASD Rules 2711 and 2210(d)(1)(A) and (b), in addition to NASD Rule 2110 and FINRA Rule 2010.
The AWC further indicated that LaLomia was A.L.’s supervisor in the firm’s equity sales and supervision group of Stifel’s Equity Capital Market division. LaLomia reportedly was aware of the Idea List and Research Insights emails since at least December 2006. At one point, the firm had restricted A.L. from providing personal price targets and EPS estimates, as well as personal opinions pertaining to the stocks. Notwithstanding, A.L. continued to provide such information until at least June of 2009. FINRA found that the firm and LaLomia had failed to adequately supervise the Idea List and Research Insights emails due to not adequately enforcing the restrictions imposed on A.L. by the firm; as well as detect Rule 2210(d)(1) violations in the communications. Consequently, FINRA found that the firm and LaLomia violated NASD Rule 3010, as well as NASD Rule 2110 and FINRA Rule 2010.
FINRA found that the firm had violated NASD Rule 3010 due to not having a supervisory system that would be reasonably designed to supervise the distribution, approval and maintenance of communications created by institutional salespeople including A.L. FINRA also found that the firm had failed to abide by its own procedures pertaining to Research Reports under Rule 2711, and additionally failed to abide by procedures which called for clients to receive all information in the Research Reports in their entirety, rather than excepts.
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. FINRA Conduct Rule 3010 specifically provides that each member shall establish and maintain a system to supervise the activities of each stockbroker and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules.
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