A long-standing Introducing Broker (IB) registered with the United States (US) National Futures Association (NFA) since 1999, California-based Hollencrest Securities, has been issued a fine by the NFA for $125,000 over what appears to be a fabricated email that one of its ex-employees had admitted to creating in connection with the registration status of one of the IB’s prior associated persons (APs) with the NFA.
Email from Who?
This is according to the regulator’s press release today. It referenced the case when on March 15th 2015 a Hollencrest staff member named Nita Charlton-Gomes sent an email to the NFA’s registration department claiming that the NFA had made an error by withdrawing the registration status for one of the firm’s APs.
The NFA became suspicious because the Hollencrest staff member said they had received an email from a purported Chris Collins of the NFA – attesting to the registration status of the AP, yet since the NFA never emails applicants to confirm their registration status and there’s no one with that name that had ever been employed by the organization, the regulator began an investigation.
Investigation After NFA Got Suspicious
Eventually, Charlton-Gomes confessed to fabricating the email – as explained to one of the firms principals in August 2015, who then reported the finding to the NFA in September, according to one of the filings. People familiar with the case said that this information was relayed within a few days, as the months overlapped.
The IB put the employee on unpaid administrative leave, and a ten-month probation, as it took corrective actions to implement proper internal controls and processes to properly monitor its staff, among other areas needed to prevent such occurrences. The NFA compliance rule 2-9(a) with regard to diligent supervision of staff was noted by the NFA as one of the alleged failures that seem to have driven the fine, as well as the amount of time and resources the NFA spent on a nearly seven-month investigation.
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In addition, rule 2-2(f) and rule 2-4 which relate to the need for firms to uphold standards of high commercial honor and just and equitable principles related to the registrant’s business had also been noted.
As is typical with NFA settlements, the IB neither admitted nor denied the allegations in the NFA’s complaint, yet agreed to pay the $125,000 within 30 days, and to other stipulations noted in the offer of settlement, including against one of the firm’s principals Peter Pellizzon. He was responsible for oversight during the time and is still one of the company’s principals according to information from the NFA’s background affiliation status information center (BASIC). The full case details the entire story on a more granular level.
Controls and Oversight
Considering how long the IB has been registered and that its record had been clean since 1999, we see that such administrative action can affect even the best of firms. Perhaps more than just a slap on the wrist at $125000, it shows that employee actions and supervision are an important part of avoiding such penalties, necessitating internal controls and monitoring. Yet, even with the best controls, some actions are unforeseeable.
Shortly after publication Finance Magnates reporters spoke with people at the company close to the news, who explained that no clients were affected by this event. Moreover, it appears that the motive driving the former employee was that they had initially failed to provide the NFA with the test results of one of the firms’s staff Ayako Hanyu who had just passed the series III. That AP’s status was thus not reflected properly on the NFA website since the NFA hadn’t received that information because of Nita Charlton-Gome’s failure to do so initially.
Motive: Forgotten Test Results
Luckily, Ayako Hanyu never used the AP capacity despite thinking that she was registered. This is likely because Hollencrest has very few futures clients as it mainly focuses on Investment Advisory, and as Ayako Hanyu was a registered securities representative and had taken the series III for educational purposes according to people familiar with the matter.
This seems to be the crux of the motive that caused Nita Charlton-Gomes to try to cover up the shortcoming- instead of simply admitting her mistake in the first place which would have avoided the fine and headache caused to both the firm and the regulator.