WASHINGTON – Stark Municipal Brokers and Performance Trust Capital Partners have agreed to pay a total $25,000 to settle alleged reporting violations uncovered by the Financial Industry Regulatory Authority.
In addition, a former chief executive officer of an Atlanta-based securities company has agreed to be barred from the market by FINRA over alleged securities fraud.
Jay Chitnis, the former CEO of YieldQuest Securities, and the two firms accepted their FINRA settlement terms without admitting or denying the findings. Stark agreed to pay $10,000 and Performance Trust agreed to pay $15,000 to settle the charges.
The two firms and Chitnis either could not be reached for comment or declined to comment. FINRA's findings involving Agoura, Calif.-based Stark Municipal Brokers were gathered in two separate review periods, one between Oct. 1, 2014 and Dec. 31, 2014, and the other between April 1, 2015 and June 30, 2015.
Under Municipal Securities Rulemaking Board Rule G-14 on reporting, dealers are required to report their transactions to the MSRB's Real-time Transaction Reporting System within 15 minutes of the time of trade.
FINRA found that there were 45 Stark reports of inter-dealer transactions in municipal securities in the first review period that did not correctly report the time of trade. The trades constituted 2.16% of those the firm reported to the RTRS during the review period, FINRA said, and each of the incorrect reports qualified as a violation of Rule G-14.
Additionally, Stark also failed to record the correct time of execution on its trade memorandum for 44 muni transactions during the same period. That conduct violated MSRB Rule G-8 on books and records.
FINRA determined that over the two relevant periods, the firm did not file timely reports of information in connection with 107 muni trades in violation of G-14. Forty-six of those were interdealer transactions and 61 were purchase and sale transactions. The 107 transactions accounted for 2.6% of all those Stark reported to RTRS during the review period.
In a similar but unrelated action, Chicago-based Performance Trust failed to report 83 muni trades to the RTRS within 15 minutes of the time of trade between Oct. 1, 2014 and Dec. 31, 2014, according to FINRA.
FINRA first brought an action against Chitnis in February when it filed a complaint alleging that from November of 2014 through September of 2015, Chitnis caused 480 fraudulent fixed income transactions in 18 customer accounts through YieldQuest's clearing firm. The fraud resulted in him and the firm receiving $680,917 to which they were not entitled, FINRA said. The transactions involved corporate, municipal, and government bonds.
The complaint alleged that Chitnis, who also served as YieldQuest's chief compliance officer and financial and operations principal, willfully violated federal anti-fraud laws as well as MSRB Rules G-14, G-17 on fair dealing, and G-27 on supervision.
Chitnis' alleged scheme to defraud, according to the settlement document approved earlier this month, occurred when he would purchase a security from an institutional customer into his firm's inventory and then sell the security out of the inventory to another institutional customer account. He would then arrange to settle the offsetting trades shortly after the end of the month by using an extended settlement date, FINRA said.
The clearing firm would pay him out of the profit from the inventory trading at the end of the month, a type of advance on the scheduled customer trade settlement. But Chitnis would then cancel the scheduled customer trades and re-book both trades with another extended settlement date to hide the unwarranted advance payment. None of the customers with accounts used in the fraudulent trades ever authorized Chitnis to make the transactions. YieldQuest's written supervisory procedures also did not effectively curb this practice, according to FINRA.
Chitnis' scheme unraveled on Sept. 9, 2015 when the clearing firm began looking into YieldQuest's numerous extended settlement trades and cancellations.
