Initiated By
FINRA
Allegations
AIDED AND ABETTED IN VIOLATION OF AND WILLFULLY VIOLATED SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934, SEC RULE 10B-5, AND SECTION 17(A) OF THE SECURITIES EXCHANGE ACT OF 1933, FINRA RULES 2010, 2020, 3310(A), 8210, NASD RULES 2320(A)(2), 3010, 3012: LEYTON AND HIS MEMBER FIRM OFFERED AND SOLD TO PUBLIC CUSTOMERS COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A LIMITED LIABILITY COMPANY, ITS CHIEF EXECUTIVE OFFICER (CEO), AND AN INDIVIDUAL INVOLVED WITH THE CEO IN THE BUSINESS OF THE COMPANY, (COLLECTIVELY, THE CONSPIRATORS), ENGAGED IN A FRAUDULENT SCHEME THROUGH WHICH THEY OBTAINED POSSESSION AND CONTROL OF CMOS OWNED BY UNWITTING INVESTORS AND ATTEMPTED TO MISAPPROPRIATE INCOME STREAMS GENERATED BY THE CMOS. THE FIRM AND LEYTON KNEW OF THE CONSPIRATORS' SCHEME, OR SHOULD HAVE KNOWN OF IT, INCLUDING THAT THE PROMISES OF MONETIZATION AT THE LEVELS REPRESENTED WERE FALSE, AND THAT THE CONSPIRATORS WERE ENGAGED IN A FRAUDULENT SCHEME TO STEAL CMOS AND THEIR REVENUE STREAMS, AND THAT NO MONETIZATIONS OCCURRED. DESPITE THIS, THE FIRM AND LEYTON TOOK NO MEANINGFUL ACTION TO PREVENT THE CONSPIRATORS' ACTIVITIES FROM HARMING THE FIRM'S CUSTOMERS OR OTHERS, OR TO TERMINATE THE CONSPIRATORS' ACTIVITY OR RELATIONSHIP WITH THE FIRM. RATHER, IN RETURN FOR COMPENSATION ON THESE CMO SALES AND CASH PAYMENTS TO LEYTON'S CONTROLLED BANK ACCOUNT, LEYTON AND THE FIRM SUBSTANTIALLY ASSISTED THE CONSPIRATORS' SCHEME, PROVIDING THE CONSPIRATORS WITH BOTH A PLATFORM TO EFFECT THEIR FRAUDULENT SCHEME AND THE APPEARANCE OF LEGITIMACY. THE FIRM AND LEYTON EARNED OVER $1 MILLION SOLELY FROM ITS BUSINESS RELATIONSHIP WITH THE CONSPIRATORS. THE FIRM'S AND LEYTON'S SUBSTANTIAL ASSISTANCE TO THE CONSPIRATORS INCLUDED THE FOLLOWING ACTS: THEY ALLOWED THE COMPANY TO OPEN AND MAINTAIN ACCOUNTS AT THE FIRM, THEREBY ENABLING THE COMPANY TO RECEIVE CMOS FROM THIRD PARTIES, INCLUDING THE FIRM'S CUSTOMERS. THEY FACILITATED THE TRANSFER OF CMOS OR FUNDS FROM UNWITTING INVESTORS TO THE COMPANY. THEY PREPARED LETTERS ON BEHALF OF THE CONSPIRATORS WHICH WERE ISSUED TO THIRD PARTIES. THESE LETTERS WERE ON THE FIRM'S LETTERHEAD AND VERIFIED THAT IT WAS HOLDING SPECIFIC CMOS THAT HAD A FACE VALUE OF $600 MILLION TO $1 BILLION, AND THE CMOS WERE FREE OF ALL LIENS, CLAIMS AND INTERESTS. THESE LETTERS WERE MATERIALLY MISLEADING SINCE THE FACE VALUE WAS FAR IN EXCESS OF THE TRUE MARKET VALUE OF THE CMOS. THEY APPROVED A CMO SALE TRANSACTION WHERE A FIRM CUSTOMER WAS PERMITTED TO PURCHASE A CMO AT AN ARTIFICIAL PRICE MUCH LOWER THAN ITS TRUE MARKET VALUE, IN ORDER TO ACCOMMODATE THE CONSPIRATOR'S REQUEST. THE FIRM AND LEYTON KNOWINGLY OR RECKLESSLY IGNORED THE RED FLAGS OR SUSPICIOUS EVENTS ASSOCIATED WITH THE CONSPIRATORS' SCHEME THAT SHOULD HAVE ALERTED THEM TO THE IMPROPER CONDUCT. BASED UPON THE FOREGOING, THE FIRM AND LEYTON AIDED AND ABETTED THE CONSPIRATORS' FRAUDULENT SCHEME. A CUSTOMER OPENED AN ACCOUNT AT THE FIRM IN ORDER FOR HIM TO PURCHASE A CMO THAT AN INDIVIDUAL CLAIMED HE WOULD BE ABLE TO MONETIZE IN ORDER TO SECURE MULTI-MILLION DOLLAR FINANCING TO FUND THE CUSTOMER'S PROJECT. LEYTON WAS AWARE THAT THE CUSTOMER WAS UNSOPHISTICATED IN INVESTMENTS AND LACKED ANY REAL UNDERSTANDING OF CMOS. LEYTON RECOMMENDED THAT THE CUSTOMER PURCHASE A CMO. THE CUSTOMER FUNDED HIS ACCOUNT AT THE FIRM WITH $1.1 MILLION TO FUND THE PURCHASE AND LEYTON PURCHASED ON BEHALF OF THE CUSTOMER. THE FIRM AND LEYTON DID NOT CHARGE THE CUSTOMER A MARKUP OR A COMMISSION. LEYTON INACCURATELY MARKED THE ORDERS AS UNSOLICITED. DURING THE SALE OF THE CMO, THE FIRM AND LEYTON OMITTED TO INFORM THE CUSTOMER OF MATERIAL FACTS NECESSARY TO PREVENT THE STATEMENTS MADE, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, FROM BEING MISLEADING. IN CONSIDERATION FOR AN INDIVIDUAL REFERRING THE CUSTOMER TO THE FIRM AND LEYTON, (CONT. IN COMMENTS)
Resolution
Decision & Order of Offer of Settlement
Bar
Bar (Permanent)
Registration Capacities Affected
All Capacities
Start Date
10/11/2013
Regulator Statement
LEYTON AND THE INDIVIDUAL ENTERED INTO A PREARRANGED TRANSACTION WHEREBY LEYTON INTERPOSED SHARES FOR THE INDIVIDUAL (THROUGH HIS ENTITY) BETWEEN THE FIRM AND THE BEST AVAILABLE MARKET BEFORE EXECUTING THE CUSTOMER'S TRANSACTION. THE INTER-POSITIONING OCCURRED WHEN THE FIRM PURCHASED THE CMO SECURITIES FROM THE STREET, SOLD THE SECURITIES TO A FAVORED ACCOUNT (THE ACCOUNT OF INDIVIDUAL'S ENTITY), AND THEN SOLD THE CMO SECURITIES TO THE CUSTOMER AT A HIGHER PRICE. THE FIRM AND LEYTON DID NOT INFORM THE CUSTOMER AT THE TIME OF THE TRANSACTION THAT HIS TRANSACTION WAS INTERPOSED, THAT HE HAD BEEN CHARGED AN EXCESSIVE MARKUP ON THE TRANSACTION, OR OF PERTAINING RELEVANT FACTS. THE FIRM'S AND LEYTON'S CONDUCT WAS DECEPTIVE, ENGAGED IN WITH SCIENTER, AND ACCOMPLISHED THROUGH THE USE OF MEANS OR INSTRUMENTALITIES OF INTERSTATE COMMERCE, INCLUDING THE CUSTOMER'S WIRES FOR THE PURCHASE OF THE CMO ACTIONS BEING SENT THROUGH INTERSTATE COMMERCE, AND TELEPHONE AND INTERNET COMMUNICATIONS. LEYTON WILLFULLY OMITTED TO INFORM THE CUSTOMER OF MATERIAL FACTS IN REGARD TO THE CUSTOMER'S CMO TRANSACTION. LEYTON PROVIDED FALSE AND MISLEADING INFORMATION TO FINRA DURING HIS ORAL TESTIMONY AND IN HIS SIGNED WRITTEN RESPONSES. DURING A FINRA ON-THE-RECORD TESTIMONY, LEYTON, THROUGH HIS LEGAL COUNSEL, INFORMED FINRA THAT HE WOULD NOT RESPOND TO ANY FURTHER QUESTIONS BY FINRA. LEYTON'S REFUSAL TO RESPOND TO FINRA'S QUESTIONS IMPEDED ITS INVESTIGATION. THE FIRM'S WRITTEN AML POLICIES AND PROCEDURES REQUIRED LEYTON, THE FIRM'S AMLCO, TO MONITOR FOR POTENTIALLY SUSPICIOUS ACTIVITY AND RED FLAGS, INVESTIGATE POTENTIALLY SUSPICIOUS ACTIVITY AND REPORT SUSPICIOUS ACTIVITY BY FILING A SAR, AS APPROPRIATE. THE FIRM, ACTING THROUGH LEYTON, FAILED TO ENFORCE ITS WRITTEN AML PROGRAM TO ENSURE COMPLIANCE WITH THE BANK SECRECY ACT. THE FIRM AND LEYTON DID NOT IDENTIFY AND INVESTIGATE THE COMPANY'S CMO TRANSACTIONS, EVEN THOUGH MANY RED FLAGS IDENTIFIED IN THE FIRM'S WRITTEN AML PROCEDURES WERE PRESENT. DESPITE BEING PLACED ON REPEATED NOTICE OF POTENTIALLY FRAUDULENT CMO TRANSACTIONS, LEYTON AND THE FIRM NEVER CONSIDERED WHETHER TO FILE A SAR RELATED TO ANY SUSPICIOUS TRADING ACTIVITY, EVEN WHEN CUSTOMERS COMPLAINED THAT THE COMPANY IMPROPERLY RETAINED POSSESSION OVER A CUSTOMER'S CMOS AND MONEY, OR WHEN THE FIRM AND LEYTON KNEW THE COMPANY HAD MADE MISREPRESENTATIONS ABOUT ITS CMO TRANSACTIONS. THE FIRM, THROUGH LEYTON, FAILED TO INVESTIGATE AND TO DETERMINE WHETHER IT WAS APPROPRIATE TO REPORT THE ACTIVITY, THROUGH SAR-SF, THEREBY THEY DID NOT IMPLEMENT AND ENFORCE THE FIRM'S AML PROGRAM. THE FIRM, THROUGH LEYTON, ITS CEO AND CCO, FAILED TO ESTABLISH AND MAINTAIN A SUPERVISORY SYSTEM, INCLUDING WRITTEN SUPERVISORY PROCEDURES, REASONABLY DESIGNED TO ENSURE COMPLIANCE WITH FEDERAL LAWS AND FINRA AND NASD RULES IN THE OFFER OR SALE OF CMOS. AS THE FIRM'S CEO AND CCO, LEYTON HAD SOLE RESPONSIBILITY FOR THE ADEQUACY OF THE FIRM'S SUPERVISORY PROCEDURES. THE FIRM, ACTING THROUGH LEYTON, FAILED TO SUPERVISE HIS ACTIVITIES IN THE OFFER OR SALE OF CMOS, AND HIS OTHER ACTIVITIES. THE FIRM, ACTING THROUGH LEYTON, DID NOT ENFORCE PROCEDURES FOR THE SUPERVISORY REVIEW OF EMAIL COMMUNICATIONS, SPECIFICALLY, THE FIRM FAILED TO REVIEW LEYTON'S INCOMING AND OUTGOING EMAIL. LEYTON SOLELY OPERATED AND SUPERVISED THE FIRM'S CMO BUSINESS, FUNCTIONING AS BOTH THE GENERAL SECURITIES REPRESENTATIVE OFFERING AND SELLING THE CMOS, THE GENERAL SECURITIES PRINCIPAL OVERSEEING AND APPROVING THESE SAME CMO SALES. LEYTON WAS A PRODUCING MANAGER AND PRINCIPAL OF THE FIRM. THE FIRM AND LEYTON FAILED TO ASSIGN ANYONE TO SUPERVISE LEYTON'S CUSTOMER ACCOUNT ACTIVITY. THE FIRM, ACTING THROUGH LEYTON, FAILED TO ENFORCE A SYSTEM OF WSPS AND SUPERVISORY CONTROL POLICIES THAT WERE REASONABLY DESIGNED.
WITHOUT ADMITTING OR DENYING THE ALLEGATIONS, LEYTON CONSENTED TO THE DESCRIBED SANCTION AND TO THE ENTRY OF FINDINGS; THEREFORE HE IS BARRED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY.
