Initiated By
FINRA
Allegations
SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934 (EXCHANGE ACT) AND RULES 10B-5 AND 10B-10 THEREUNDER, SECTION 17(A) OF THE EXCHANGE ACT AND RULE 17A-3 THEREUNDER, FINRA RULES 2010, 2020, 3310(B), NASD RULES 2110, 2120, 2320, 3010, 3011(B), 3110, INTERPRETATIVE MATERIAL 2310-2, MSRB RULES G-27, G-41: FROM AT LEAST SEPTEMBER 2006 THROUGH JUNE 2009, THE FIRM, ACTING THROUGH KIRSHBAUM AND AT LEAST ONE OTHER PRINCIPAL OF THE FIRM, WERE INVOLVED IN A FRAUDULENT TRADING SCHEME THROUGH WHICH THE THEN CHIEF COMPLIANCE OFFICER (CCO) AND HEAD TRADER FOR THE FIRM, CONCEALED IMPROPER MARK-UPS AND DENIED CUSTOMERS BEST EXECUTION. AS PART OF THIS SCHEME THE CCO FALSIFIED ORDER TICKETS AND CREATED INACCURATE TRADE CONFIRMATIONS. THE HIDDEN PROFITS WERE CAPTURED IN A FIRM ACCOUNT THAT WAS CONTROLLED BY KIRSHBAUM AND ANOTHER FIRM PRINCIPAL. SOME OF THE PROFITS WERE THEN SHARED WITH THE CCO AND ANOTHER INDIVIDUAL. THE TRADING SCHEME TOOK ADVANTAGE OF CUSTOMERS PLACING LARGE ORDERS (GENERALLY 1,000 SHARES OR MORE) TO BUY OR SELL EQUITIES. RATHER THAN EFFECTING THE TRADES IN THE CUSTOMERS' ACCOUNTS, THE CCO PLACED THE ORDER IN A FIRM PROPRIETARY ACCOUNT. THIS FRAUDULENT TRADING SCHEME GENERATED APPROXIMATELY $1.3 MILLION IN PROFITS FOR THE FIRM'S PROPRIETARY ACCOUNTS. KIRSHBAUM WAS AWARE OF AND PERMITTED THE TRADING DESCRIBED HEREIN. A FIRM ACCOUNT, CONTROLLED BY KIRSHBAUM AND ANOTHER FIRM PRINCIPAL, RETAINED 47% OF THE PROFITS FROM THE SCHEME. IN FURTHERANCE OF THE FRAUDULENT TRADING SCHEME, THE CCO ENTERED FALSE INFORMATION ON THE CORRESPONDING ORDER TICKETS REGARDING THE SHARE PRICE AND THE TIME THE CUSTOMER ORDER TICKET WAS RECEIVED, ENTERED AND EXECUTED. MOREOVER, THE CORRESPONDING TRADE CONFIRMATIONS INACCURATELY REFLECTED THE PRICE, MARK-UP AND/OR COMMISSION CHARGED AND THE ORDER CAPACITY. THE FIRM, ACTING THROUGH KIRSHBAUM, ENTERED INTO AN AGREEMENT TO SELL THE PERSONAL, CONFIDENTIAL AND NON-PUBLIC INFORMATION OF THOUSANDS OF CUSTOMERS, RELATING TO OVER SIX THOUSAND BROKERAGE ACCOUNTS, TO AN UNAFFILIATED MEMBER FIRM IN EXCHANGE FOR TRANSACTION-BASED COMPENSATION FROM ANY FUTURE TRADING ACTIVITY IN THOSE ACCOUNTS. IN CONNECTION WITH THAT AGREEMENT, KIRSHBAUM PROVIDED THE UNAFFILIATED MEMBER FIRM WITH THE NAME, ACCOUNT NUMBER, VALUE AND HOLDINGS ON SPREADSHEETS VIA ELECTRONIC MAIL. MOREOVER, KIRSHBAUM GRANTED CERTAIN REPRESENTATIVES OF THAT FIRM LIVE ACCESS TO THE FIRM'S COMPUTER SYSTEMS, INCLUDING ACCESS TO SYSTEMS PROVIDE BY THE FIRM'S CLEARING FIRM, WHICH PROVIDED ACCESS TO OTHER NON-PUBLIC CONFIDENTIAL CUSTOMER INFORMATION SUCH AS SOCIAL SECURITY NUMBERS, DATES OF BIRTH AND HOME ADDRESSES. THE FIRM AND KIRSHBAUM DID NOT PROVIDE ANY OF THE CUSTOMERS WITH THE REQUIRED NOTICE OR OPPORTUNITY TO OPT OUT OF SUCH DISCLOSURE BEFORE THE FIRM DISCLOSED THE INFORMATION, AS REQUIRED BY REGULATION S-P. FROM AT LEAST SEPTEMBER 2006 THROUGH AT LEAST JULY 2009, THE FIRM, ACTING THROUGH KIRSHBAUM, FAILED TO ESTABLISH AND MAINTAIN A SUPERVISORY SYSTEM, AND ESTABLISH, MAINTAIN AND ENFORCE WRITTEN SUPERVISORY PROCEDURES TO SUPERVISE THE ACTIVITIES OF EACH REGISTERED PERSON THAT WERE REASONABLY DESIGNED TO ACHIEVE COMPLIANCE WITH THE APPLICABLE RULES AND REGULATIONS IN THE FOLLOWING AREAS: INTERPOSITIONING; FRONT-RUNNING; SUPERVISORY BRANCH OFFICE INSPECTIONS; SUPERVISORY CONTROLS; ANNUAL COMPLIANCE MEETING; MAINTENANCE AND PERIODIC REVIEW OF ELECTRONIC COMMUNICATIONS; RULE 3012 ANNUAL REPORT TO SENIOR MANAGEMENT; REVIEW AND RETENTION OF ELECTRONIC AND OTHER CORRESPONDENCE; REGULATION S-P; ANTI-MONEY LAUNDERING; FORM U4/U5 AMENDMENTS AND 3070 REPORTING. [CONTINUED IN COMMENT]
Resolution
Acceptance, Waiver & Consent(AWC)
Bar
Bar (Permanent)
Registration Capacities Affected
All Capacities
Duration
Indefinite
Start Date
5/23/2011
Regulator Statement
[CONTINUED FROM ALLEGATIONS]: THE FIRM, ACTING THROUGH KIRSHBAUM AND ANOTHER FIRM PRINCIPAL, FAILED TO IMPLEMENT POLICIES AND PROCEDURES REASONABLY DESIGNED TO ENSURE COMPLIANCE WITH THE BANK SECRECY ACT BY FAILING TO ENFORCE ITS PROCEDURES REQUIRING THE FIRM TO REVIEW ALL SECTION 314(A) REQUESTS THAT IT RECEIVED FROM THE U.S. DEPARTMENT OF THE TREASURY'S FINANCIAL CRIMES ENFORCEMENT NETWORK (FINCEN). AS A RESULT, THE FIRM FAILED TO REVIEW 74 SUCH REQUESTS. KIRSHBAUM AND ANOTHER PRINCIPAL WERE RESPONSIBLE FOR ACCESSING THE SYSTEM TO REVIEW THE FINCEN MESSAGES, BUT FAILED TO DO SO.
WITHOUT ADMITTING OR DENYING THE FINDINGS, KIRSHBAUM CONSENTED TO THE DESCRIBED SANCTION AND TO THE ENTRY OF FINDINGS; THEREFORE HE IS BARRED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY. KIRSHBAUM UNDERSTANDS THAT THIS SETTLEMENT INCLUDES A FINDING THAT HE WILLFULLY VIOLATED SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULES 10B-5 AND 10B-10 PROMULGATED THEREUNDER AND THAT UNDER ARTICLE III, SECTION 4 OF FINRA'S BY-LAWS, THIS MAKES HIM SUBJECT TO A STATUTORY DISQUALIFICATION WITH RESPECT TO ASSOCIATION WITH A MEMBER.
