FINRA

Chitnis was named a respondent in a FINRA complaint alleging that he engaged in a scheme to fraudulently obtain funds from his member firm's clearing firm in order to keep the firm afloat and support his own lifestyle. The complaint alleges that Chitnis engaged in a pattern of fictitious trading, resulting in trades in customer accounts. In these transactions, Chitnis would purchase fixed income securities into his firm's inventory account from institutional customers, and then Chitnis would sell the same positions from the firm's inventory to other institutional customers. The institutional customers involved were all state-registered registered investment advisors (RIAs) with assets held in custody at third-party custodial firms. Chitnis knew at the time he made the trades that the trades would result in payments from the clearing firm to his firm prior to the offsetting customer trade settlement date. Chitnis' scheme was intentionally designed to allow such, and he was responsible for placing the orders, although actual order entry was performed by support staff at his direction. The trades were entered into the clearing firm's order entry system under Chitnis' broker identification code, and he was the broker of record for all the firm's customers. The firm received payments totaling $1,266,578.92 from its clearing firm. Of this amount, the firm's clearing firm paid approximately $680,000 in unearned advances as a result of Chitnis' trading scheme. Approximately 98 percent of all the funds paid by the clearing firm were disbursed either to Chitnis, an RIA he controlled, or the firm's payroll. As a result, Chitnis willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, violated FINRA 2020, and willfully violated Municipal Securities Rulemaking Board (MSRB) Rules G-14 and G-17. The complaint also alleges that Chitnis intentionally and wrongfully obtained and exercised ownership over $680,917.36 of the clearing firm's funds as a result of his fictitious trading scheme. To date, Chitnis has failed to return any of these funds to the clearing firm. The complaint further alleges that Chitnis made or caused to be made several trades in customers' accounts and did not communicate about these trades with any of the customers before making the trades. None of the customers authorized any of these trades. As a result, Chitnis willfully violated MSRB Rules G-14 and G-17. In addition, the complaint alleges that Chitnis exercised discretion in the customers' accounts without prior written authorization from the customers and approval from the firm, in willful violation of MSRB Rules G-8 and G-17. Moreover, the complaint alleges that Chitnis willfully violated MSRB Rules G-8, G-9 and G-14 and thereby caused the firm to maintain inaccurate books and records, when he recorded fictitious transactions, failed to maintain proper order tickets, inaccurately reported trades to the Trade Reporting and Compliance Engine (TRACE) and the MSRB, and caused the publication and circulation of communications and reports of non-bona fide purchases and sales to the clearing firm. Furthermore, the complaint alleges that Chitnis willfully violated MSRB Rule G-27 when the firm, under the direction of Chitnis, did not enforce its WSPs related to unauthorized trading and discretionary accounts, and with regard to maintaining order tickets that contained all of the data required under SEC and MSRB Rules. Also, the firm, under the direction of Chitnis, had no WSPs or supervisory system relating to principal review of trade cancellations, it failed to maintain a daily trade blotter signed or approved by a designated principal, in violation of its WSPs, it failed to have a municipal principal who was conducting any meaningful review of municipal transactions, and it did not have a reasonable supervisory system or WSPs to ensure compliance with MSRB rules.

Decision & Order of Offer of Settlement

Bar (Permanent)

All Capacities

Indefinite

9/14/2016

Without admitting or denying the allegations, Chitnis consented to the sanction and to the entry of findings that he engaged in a scheme to fraudulently obtain funds from his member firm's clearing firm in order to keep his firm afloat and support his own lifestyle. The findings stated that Chitnis, acting with scienter, caused fraudulent transactions to be entered through the firm's clearing firm that resulted in him and his firm wrongfully receiving $680,917.36 to which they were not entitled. In connection with certain of the transactions, Chitnis reported the purchase and sale of municipal securities which he knew had not been actually effected and which he knew were fictitious and in furtherance of a fraudulent, deceptive or manipulative purpose. As a result of this conduct, Chitnis willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, violated FINRA Rule 2020, and willfully violated MSRB Rules G-14 and G-17. The findings also stated that Chitnis intentionally and wrongfully obtained and exercised ownership over $680,917.36 of the clearing firm's funds as a result of his fictitious trading scheme. To date, Chitnis has failed to return any of these funds to the clearing firm. The findings also included that Chitnis effected unauthorized trades in customer accounts without communicating about these trades with any of the customers before making the trades. None of the customers authorized any of the trades. As a result of these unauthorized transactions, Chitnis and his firm received payments of at least $680,917.36 from the clearing firm. As a result of his conduct, Chitnis willfully violated MSRB Rules G-14 and G-17. FINRA found that Chitnis' actions caused incorrect trade reporting to TRACE and the MSRB and reporting of fictitious trades to the clearing firm in order to conceal the trading scheme. Moreover, Chitnis failed to maintain proper corporate bond and municipal bond order tickets. Chitnis caused his firm to maintain inaccurate books and records by recording transactions that he knew at the time they were made were fictitious and by failing to maintain proper order tickets. Chitnis also caused the publication and circulation of communications and reports of non-bona fide purchases and sales to the clearing firm. As a result, Chitnis willfully violated MSRB Rules G-8, G-9 and G-14. FINRA also found that Chitnis, as Chief Executive Officer and Chief Compliance Officer of his firm, failed to establish reasonable supervisory systems and procedures to prevent and detect unauthorized trading and discretionary trading, to provide for the proper review and approval of daily orders and related trade cancellations, and to address transaction reporting and order ticket requirements. The firm, under the direction of Chitnis, did not enforce its WSPs related to unauthorized trading, discretionary accounts, and maintaining order tickets that contained all of the data required under SEC and MSRB rules. The firm, under the direction of Chitnis, had no WSPs or supervisory system relating to principal review of trade cancellations. As a result, Chitnis was able to cancel the trades at issue here with no review or approval by another principal. In addition, the firm, under the direction of Chitnis, failed to maintain a daily trade blotter signed or approved by a designated principal, in violation of its WSPs, and failed to have a municipal principal who was conducting any meaningful review of municipal transactions. As a result, Chitnis willfully violated MSRB Rule G-27.

Complaint issued. Hiring pending.

BREACH OF FIDUCIARY DUTY, UNSUITABILITY, FAILURE TO DISCLOSE INFORMATION. IN 1993 TO 1995 SOLD CLIENT MUNICIPAL LEASES FROM BENNETT FUNDING WHICH TURNED OUT TO BE A PONZI SCHEME. CUSTOMER ALLEGED UNSUITABILITY & SALES PRACTICE VIOLATIONS.

$8,000,000.00

$9,999.00

THE CLAIMANTS WERE INNOCENTLY UNAWARE OF THE MISCONDUCT OF THE RESPONDENTS WHEN THEY PURCHASED BENNETT SECURITIES. HAD THEY KNOW OF THE MISCONDUCT OF THE RESPONDENTS, OR THE TRUTH ABOUT THE BENNETT INVESTMENTS, THEY WOULD NOT HAVE PURCHSED THE INVESTMENTS. CLAIMANTS WERE IN FACT IGNORANT THAT THEY HAD EVEN SUFFERED LOSSES OF PRINCIPAL UNTIL 1996 WHEN BENNETT FINANCIAL FILED BANKRUPTCY.