Initiated By
FINRA
Allegations
WILLFULLY VIOLATED SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934, AND RULE 10B-5, AND VIOLATED FINRA BY-LAWS ARTICLE V, SECTION 2(C), NASD BY-LAWS ARTICLE V, SECTION 2(C), FINRA RULES 1122, 2010, 8210, NASD RULES 2110, 2120, 2310, 2330(A), 2370, 2510, 3030, INTERPRETATIVE MATERIAL-1000-1, INTERPRETATIVE MATERIAL-2310-2: HOTTON IMPROPERLY USED AND CONVERTED MILLIONS OF DOLLARS (AT LEAST $5,932,000) OF CUSTOMER FUNDS, WITHOUT THE CUSTOMERS' KNOWLEDGE OR CONSENT, FOR HIS OWN USE AND BENEFIT. WHILE ASSOCIATED WITH HIS MEMBER FIRM, HOTTON WAS EITHER EMPLOYED BY OR ACCEPTED COMPENSATION FROM OUTSIDE BUSINESS ENTITIES AND HIS INVOLVEMENT WAS OUTSIDE THE SCOPE OF HIS EMPLOYMENT RELATIONSHIP WITH THE FIRM. HOTTON DID NOT PROVIDE PROMPT WRITTEN NOTICE TO THE FIRM OF THESE OUTSIDE BUSINESSES. WHILE REGISTERED WITH HIS FIRM, HOTTON SUBMITTED, OR CAUSED TO BE SUBMITTED, NUMEROUS AMENDED FORMS U4 AND HOTTON WILLFULLY FAILED TO DISCLOSE THE MATERIAL FACT OF HIS ENGAGEMENT IN THE NUMEROUS OTHER BUSINESSES HE WAS ENGAGED WITH WHILE EMPLOYED BY THE FIRM. HOTTON FORGED AND FALSIFIED NUMEROUS DOCUMENTS AND MADE NUMEROUS MISREPRESENTATIONS, INCLUDING VERBAL AND WRITTEN MISREPRESENTATIONS, TO HIS CUSTOMERS, HIS FIRM AND OTHERS IN ORDER TO FURTHER HIS FRAUDULENT SCHEMES AND CONVERSION OF CUSTOMER FUNDS. HOTTON PROVIDED CUSTOMERS WITH FABRICATED STATEMENTS FOR A NONEXISTENT ACCOUNT AT AN ENTITY AND FALSE WRITTEN STATEMENTS ABOUT THE VALUE OF THEIR INVESTMENTS WITH HIM. HOTTON PROVIDED CUSTOMERS WITH LETTERS THAT FALSELY AND MISLEADINGLY DESCRIBED THE PRINCIPAL BALANCE, TIMING AND AMOUNT OF INTEREST PAYMENTS, AND ACCRUED INTEREST FOR THEIR PURPORTED INVESTMENTS IN THE NON¬-EXISTENT NOTES. HOTTON FABRICATED AND PROVIDED TO A CUSTOMER A SERIES OF MISLEADING SUMMARIES THAT OVERSTATED THE VALUE OF THE CUSTOMER'S ACCOUNT BY SEVERAL MILLION DOLLARS, MISSTATED PROFIT OR LOSS ON PARTICULAR TRADES, AND INCLUDED SEVERAL FICTITIOUS PUT OPTION TRADES. HOTTON EXERCISED CONTROL OVER CUSTOMERS' BROKERAGE ACCOUNTS, RECOMMENDED AND/OR EXECUTED TRANSACTIONS THAT WERE EXCESSIVE AND UNSUITABLE IN LIGHT OF THE CUSTOMERS' INVESTMENT OBJECTIVES, RISK TOLERANCE, AND FINANCIAL SITUATION, AND ACTED WITH THE INTENT TO DEFRAUD OR WITH RECKLESS DISREGARD FOR THE CUSTOMERS' INTERESTS AND FOR THE PURPOSE OF GENERATING COMMISSIONS. THESE CONDUCTS WERE CHURNING, EXCESSIVE TRADING, AND SECURITIES FRAUD VIOLATIONS BY HOTTON. DURING HIS ON-THE-RECORD TESTIMONY AND IN RESPONSE TO QUESTIONS POSED BY FINRA, HOTTON FALSELY TESTIFIED ON NUMEROUS TOPICS. IN RESPONSE TO FINRA REQUESTS FOR DOCUMENTS AND INFORMATION, HOTTON PROVIDED FALSE STATEMENT AND MADE FALSE CLAIM. HOTTON WILLFULLY FAILED TO MAKE ANY DISCLOSURE ON HIS FORM U4 OF SEVERAL LEGAL ACTIONS AGAINST HIM, OR THE SETTLEMENT OF THOSE ACTIONS AND HE CONTINUED TO FAIL TO DISCLOSE THAT INFORMATION EVEN AFTER HE WAS INSTRUCTED TO DO SO BY THE NASD. HOTTON WILLFULLY FAILED TO DISCLOSE THE FILING OF ARBITRATION COMMENCED AGAINST HIM BY CUSTOMERS. HOTTON WILLFULLY FAILED TO TIMELY AMEND HIS FORM U4 TO DISCLOSE THE COMMENCEMENT OF FEDERAL ACTION AGAINST HIM, OR THE TEMPORARY RESTRAINING ORDER GRANTED IN THAT ACTION. WHEN HOTTON FINALLY AMENDED HIS FORM U4 TO DISCLOSE THE EXISTENCE OF THE FEDERAL ACTION, HE FALSELY DESCRIBED THE ACTION AS A BUSINESS DISPUTE BETWEEN BUSINESS PARTNERS. HOTTON LOANED $250,000 TO CUSTOMERS WHEN HIS FIRM'S WRITTEN SUPERVISORY PROCEDURES PROHIBITED LOANING MONEY TO CUSTOMERS EXCEPT TO IMMEDIATE FAMILY MEMBERS. HOTTON NEVER SOUGHT THE FIRM'S PERMISSION TO LOAN MONEY TO THE CUSTOMERS, AND THE FIRM DID NOT PRE-APPROVE IN WRITING THE LOAN TO THE CUSTOMERS. HOTTON EXECUTED NUMEROUS UNAUTHORIZED TRADES IN SOME CUSTOMERS' ACCOUNTS AND HUNDREDS OF UNAUTHORIZED TRADES IN ANOTHER CUSTOMER'S ACCOUNT. THESE TRANSACTIONS PLACED BY HOTTON WERE EXECUTED WITHOUT THE KNOWLEDGE, CONSENT, OR AUTHORIZATION OF CUSTOMERS. (CONT. IN COMMENT)
Resolution
Decision & Order of Offer of Settlement
Bar
Bar (Permanent)
Registration Capacities Affected
All Capacities
Duration
Indefinite
Start Date
8/20/2013
Regulator Statement
(CONTINUED FROM COMMENT) THE CUSTOMERS NEVER GAVE PRIOR WRITTEN AUTHORIZATION TO HOTTON TO EXERCISE DISCRETIONARY POWER IN THEIR ACCOUNTS. NOR DID THEY EVER GIVE HOTTON VERBAL TIME AND PRICE DISCRETIONARY POWER. HOTTON NEVERTHELESS EXECUTED TRANSACTIONS IN THEIR ACCOUNTS WITHOUT THEIR PRIOR KNOWLEDGE, CONSENT, OR AUTHORIZATION. A CUSTOMER TOLD HOTTON THAT HE WAS NOT INTERESTED IN RISKY OR SPECULATIVE TRADING BUT RATHER WANTED A MORE CONSERVATIVE STRATEGY. CONTRARY TO THE CUSTOMER'S STATED INVESTMENT OBJECTIVES AND INCONSISTENT WITH THE CUSTOMER AND HIS WIFE'S FINANCIAL CONDITION, HOTTON RECOMMENDED RISKY AND SPECULATIVE INVESTMENTS IN VIOLATION OF HIS CUSTOMER-SPECIFIC SUITABILITY OBLIGATION. WHEN HOTTON FIRST RECOMMENDED SOME SECURITIES TO A CUSTOMER, HOTTON DID NOT UNDERSTAND THE FEATURES OF LEVERAGED AND INVERSE EXCHANGE TRADED FUNDS (ETFS). IN PARTICULAR, HOTTON DID NOT UNDERSTAND THAT THE LONGER-TERM RETURN OF A LEVERAGED OR INVERSE ETF COULD DEVIATE FROM THE UNDERLYING INDEX. THUS, HOTTON FAILED TO SATISFY THE REASONABLE BASIS SUITABILITY REQUIREMENT IN CONNECTION WITH HIS RECOMMENDATIONS OF THESE SECURITIES. WITHOUT ADMITTING OR DENYING THE ALLEGATIONS, HOTTON CONSENTED TO THE DESCRIBED SANCTION AND TO THE ENTRY OF FINDINGS; THEREFORE HE IS BARRED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY. HOTTON WILLFULLY VIOLATED SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934, RULE 10B-5 THEREUNDER, ARTICLE V, SECTION 2(C) OF THE NASD AND FINRA BY-LAWS, FINRA RULES 1122, 2010, NASD RULE 2110 AND INTERPRETATIVE MATERIAL 1000-1. HOTTON VIOLATED FINRA RULES 2010, 2020, 8210, NASD RULES 2110, 2120, 2310, 2330, 2370, 2510, 3030, 8210, AND INTERPRETATIVE MATERIAL 2310-2.
