Initiated By
FINRA
Allegations
SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 10B-5 THEREUNDER, NASD RULES 2110, 2120, 2310, 2510(B), 3110, INTERPRETATIVE MATERIAL 2310-2(A), 2310-2(B)(3):
AS A REGISTERED REPRESENTATIVE WITH A MEMBER FIRM, BAILEY MADE FRAUDULENT AND UNSUITABLE MUTUAL FUND AND VARIABLE ANNUITY SWITCH RECOMMENDATIONS TO RETIRED AND UNSOPHISTICATED CUSTOMERS WITH LITTLE OR NO ECONOMIC BENEFIT TO THE CUSTOMERS. HE EXECUTED TRANSACTIONS ON A DISCRETIONARY BASIS IN HIS CLIENTS' ACCOUNTS WITHOUT RECEIVING PRIOR WRITTEN TRADING AUTHORITY. BAILEY WAS RESPONSIBLE FOR MUTUAL FUND SWITCH FORMS ON WHICH HE, OR HIS STAFF WITH HIS KNOWLEDGE, REGULARLY PREDATED THE CLIENT SIGNATURE LINE PRIOR TO MAILING THEM TO THE CLIENTS FOR SIGNATURE, AND ADDED INFORMATION AFTER THE FORMS WERE SIGNED IN ORDER TO MAKE IT APPEAR THAT HIS CLIENTS WERE AWARE OF CERTAIN FEES BEFORE THE TRADES WERE EXECUTED. BAILEY ENGAGED IN A PATTERN OF SHORT-TERM TRADING AND SWITCHING OF MUTUAL FUNDS IN ACCOUNTS BELONGING TO HIS CUSTOMERS. IN EACH OF THE ACCOUNTS, BAILEY, ON BEHALF OF HIS CUSTOMERS, REPEATEDLY SOLD MUTUAL FUNDS LESS THAN ONE YEAR AFTER PURCHASING THEM AND PURCHASED NEW MUTUAL FUNDS ("SHORT-TERM TRADING" OR "SHORT-TERM TRANSACTIONS") WITH THE PROCEEDS. TO ADVANCE HIS SHORT-TERM TRADING STRATEGY, BAILEY ENGAGED IN DISCRETIONARY TRADING WITHOUT PRIOR WRITTEN AUTHORIZATION OR PRIOR APPROVAL BY THE CUSTOMERS, MISLED CUSTOMERS ABOUT THE TRADES, AND FALSIFIED MUTUAL FUND SWITCH FORMS. WHEN BAILEY RECOMMENDED THE SHORT-TERM MUTUAL FUND TRADES, HE DID NOT DISCUSS WITH THE CUSTOMERS THE DIFFERENT TYPES OF SHARES AVAILABLE FOR PURCHASE, OR THE SALES CHARGES AND OPERATING EXPENSES ASSOCIATED WITH EACH SHARE CLASS AND THEIR EFFECT ON POTENTIAL RETURNS; NOR DID BAILEY DISCLOSE THE POTENTIAL CONTINGENT DEFERRED SALES CHARGES (CDSC) THAT COULD BE LEVIED UPON THE SALE OF THE SHARES. BAILEY ALSO DID NOT DISCLOSE COST-SAVING OPTIONS THAT WERE AVAILABLE. THE INFORMATION OMITTED IN MAKING THE MUTUAL FUND SWITCH TRANSACTIONS IN HIS CUSTOMERS' ACCOUNTS WAS MATERIAL BECAUSE THE CUSTOMERS COULD NOT FAIRLY EVALUATE THE RECOMMENDED SWITCH TRANSACTIONS WITHOUT UNDERSTANDING THE REASONS FOR THE TRANSACTIONS AND THEIR COSTS. AS A RESULT, BAILEY CAUSES HIS CUSTOMERS TO INCUR APPROXIMATELY $90,332 IN UNNECESSARY COSTS IN BUYING AND SELLING THEIR MUTUAL FUNDS; AT THE SAME TIME, HE DERIVED APPROXIMATELY $105,111 IN COMMISSIONS FROM THESE TRANSACTIONS IN THE ACCOUNTS OF HIS CUSTOMERS. THE BENEFIT TO CUSTOMERS OF THIS SHORT-TERM TRADING DID NOT JUSTIFY THE COSTS AND BAILEY DID NOT HAVE REASONABLE GROUNDS FOR BELIEVING THAT SUCH RECOMMENDATIONS WERE SUITABLE FOR THE CUSTOMERS IN LIGHT OF THE SIZE, FREQUENCY, THE NATURE OF THE TRANSACTIONS, AND EACH CUSTOMER'S INVESTMENT OBJECTIVES, FINANCIAL SITUATION, AND NEEDS. BAILEY EXCLUSIVELY SOLD CLASS A AND CLASS B MUTUAL FUND SHARES, RATHER THAN CLASS C MUTUAL FUND SHARES TO HIS CUSTOMERS, WHEN AVAILABLE, EVEN THOUGH HE WAS RECOMMENDING THAT HIS CUSTOMERS HOLD THEIR MUTUAL FUND POSITIONS FOR SHORT PERIODS OF TIME. THE FAILURE TO RECOMMEND CLASS C MUTUAL FUNDS WHILE RECOMMENDING SHORT HOLDING PERIODS WAS UNSUITABLE. BAILEY ALSO MADE VARIABLE ANNUITY RECOMMENDATIONS TO CUSTOMERS THAT WERE IMPROPER; HE MADE FREQUENT RECOMMENDATIONS TO HIS CUSTOMERS TO EXCHANGE, OR LIQUIDATE VARIABLE ANNUITIES THEY HELD IN ORDER TO FUND THE PURCHASES OF NEW VARIABLE ANNUITIES. BAILEY FRAUDULENTLY INDUCED THE CUSTOMERS TO MAKE VARIABLE ANNUITY EXCHANGES BY MISREPRESENTING THE NEED FOR THE EXCHANGES AND OMITTING MATERIAL INFORMATION ABOUT THE COSTS ASSOCIATED WITH THE TRANSACTIONS, INCLUDING CDSCS AND BONUS RIDER FEES. AS A RESULT OF BAILEY'S OMISSION AND MISREPRESENTATIONS HE CAUSED THE CUSTOMERS TO ENGAGE IN UNNECESSARY VARIABLE ANNUITY EXCHANGES AND NEEDLESSLY INCUR APPROXIMATELY $27,168 IN SURRENDER CHARGES. [CONTINUED IN COMMENT]
Resolution
Decision & Order of Offer of Settlement
Sanctions
Civil and Administrative Penalty(ies)/Fine(s)
Amount
$25,000.00
Sanctions
Requalification
Sanctions
Restitution
Amount
$166,914.00
Sanctions
Suspension
Registration Capacities Affected
ALL CAPACITIES
Duration
TWO YEARS
Start Date
8/1/2011
End Date
7/31/2013
Regulator Statement
[CONTINUED FROM ALLEGATIONS]: BAILEY PROVIDED FALSE, INACCURATE, AND MISLEADING INFORMATION ON FORMS ABOUT THE REASONS HIS CUSTOMERS MADE VARIABLE ANNUITY EXCHANGES AT HIS RECOMMENDATION AND ADDED INFORMATION TO THE FORMS AFTER THEY WERE SIGNED. BAILEY FAILED TO PROVIDE HIS FIRM WITH CORRECT AND COMPLETE INFORMATION RELATING TO THE MUTUAL FUND SWITCHES AND VARIABLE ANNUITY EXCHANGES AND DID NOT COMPLY WITH HIS FIRM'S MUTUAL FUND SWITCH AND VARIABLE ANNUITY EXCHANGE RECORDKEEPING REQUIREMENTS.
WITHOUT ADMITTING OR DENYING THE ALLEGATIONS, BAILEY CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE HE IS FINED $25,000, SUSPENDED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY FOR TWO YEARS, AND BEFORE BECOMING ASSOCIATED WITH ANY FINRA MEMBER IN A CAPACITY THAT REQUIRES A SERIES 7, BAILEY SHALL RE-QUALIFY BY EXAMINATION FOR THE SERIES 7. BAILEY IS ORDERED TO PAY RESTITUTION TO CUSTOMERS IN THE TOTAL AMOUNT OF $166,914, PLUS INTEREST AT THE RATE SET FORTH IN SECTION 6621(A)(2) OF THE INTERNAL REVENUE CODE, FROM JANUARY 1, 2006, UNTIL THE DATE OF PAYMENT. BAILEY MADE UNSUITABLE MUTUAL FUND AND VARIABLE ANNUITY SWITCH RECOMMENDATIONS TO SEVEN RETIRED AND UNSOPHISTICATED CUSTOMERS. HE ENGAGED IN A PATTERN OF SHORT-TERM TRADING AND SWITCHING OF MUTUAL FUNDS IN SEVEN ACCOUNTS BELONG TO SEVEN OF HIS CUSTOMERS AND CAUSED THREE CUSTOMERS TO ENGAGE IN UNNECESSARY VARIABLE ANNUITY EXCHANGES, WHICH WERE UNSUITABLE BASED ON THE CUSTOMERS' FINANCIAL SITUATION AND NEEDS, IN VIOLATION OF NASD RULES 2310, 2310(A) AND 2110 AND INTERPRETATIVE MATERIAL 2310-2(A) AND 2310-2(B)(3). BAILEY EXERCISED DISCRETION WITHOUT PROPER WRITTEN AUTHORIZATION IN EACH OF THE SHORT-TERM MUTUAL FUND SWITCH TRANSACTIONS HE EFFECTED WITHOUT OBTAINING PRIOR APPROVAL BY THE CUSTOMERS, IN VIOLATION OF NASD RULES 2510(B) AND 2110. BAILEY DID NOT COMPLY WITH THE MUTUAL FUND SWITCH AND VARIABLE ANNUITY EXCHANGE DISCLOSURE RECORDKEEPING REQUIREMENTS. BAILEY IMPROPERLY FILLED OUT, OR CAUSED TO BE FILLED OUT, MUTUAL FUND DISCLOSURE FORMS AND PROVIDED INACCURATE INFORMATION ON THE FORMS ABOUT THE REASONS HIS CUSTOMERS MADE VARIABLE ANNUITY EXCHANGES AT HIS RECOMMENDATION, WHICH CAUSED THE BOOKS AND RECORDS OF HIS FIRM TO BE INACCURATE, IN VIOLATION OF NASD RULES 3110 AND 2110. THE OFFER STATED THAT BAILEY'S CUSTOMERS INCURRED UNNECESSARY SALES CHARGES AND FEES AMOUNTING TO APPROXIMATELY $147,546 WHILE BAILEY RECEIVED GROSS COMMISSIONS OF APPROXIMATELY $120,177. TWO CAUSES OF ACTION, ONE ALLEGING FRAUDULENT MUTUAL FUND SWITCHING, IN VIOLATION OF SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 10B-5 THEREUNDER AND NASD RULE 2120, AND ONE ALLEGING FRAUDULENT MISREPRESENTATIONS, ALSO IN VIOLATION OF IN VIOLATION OF SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 10B-5 THEREUNDER AND NASD RULE 2120, WERE DROPPED IN THE SETTLEMENT.
THE FINE AND RESTITUTION SHALL BE DUE AND PAYABLE EITHER IMMEDIATELY UPON REASSOCIATION WITH A MEMBER FIRM FOLLOWING THE TWO YEAR SUSPENSION, OR PRIOR TO ANY APPLICATION OR REQUEST FOR RELIEF FROM ANY STATUTORY DISQUALIFICATION RESULTING FROM THIS OR ANY OTHER EVENT OR PROCEEDINGS, WHICHEVER IS EARLIER. THE IMPOSITION OF A RESTITUTION ORDER OR ANY OTHER MONETARY SANCTION HEREIN, AND THE TIMING OF SUCH ORDERED PAYMENTS, DOES NOT PRECLUDE CUSTOMERS FROM PURSUING THEIR OWN ACTIONS TO OBTAIN RESTITUTION OR OTHER REMEDIES. IF FOR ANY REASON BAILEY CANNOT LOCATE ANY CUSTOMER AFTER REASONABLE AND DOCUMENTED EFFORTS WITHIN SUCH PERIOD, OR SUCH ADDITIONAL PERIOD AGREED TO BY FINRA, BAILEY SHALL FORWARD ANY UNDISTRIBUTED RESTITUTION AND INTEREST TO THE APPROPRIATE ESCHEAT, UNCLAIMED PROPERTY, OR ABANDONED PROPERTY FUND FOR THE STATE IN WHICH THE CUSTOMER IS LAST KNOWN TO HAVE RESIDED. THE SUSPENSION IS IN EFFECT FROM AUGUST 1, 2011 THROUGH JULY 31, 2013.
