WASHINGTON – First Winston Securities, Alton Securities Group, and MidAmerica Financial Services were ordered to pay a total of $115,000 in fines and restitution by the Financial Industry Regulatory Authority for violation of municipal securities rules.
FINRA also brought a complaint against Jay Kumar Chitnis, chief executive officer and president of Atlanta-based YieldQuest Securities, alleging he fraudulently obtained funds from his firm’s clearing firm in order to keep YieldQuest afloat and support his own lifestyle.
The actions were disclosed in FINRA’s monthly disciplinary report for April. Officials with the firms could either not be reached or declined to comment.
The three firms neither admitted nor denied the charges.
FINRA fined First Winston Securities, based in Winston-Salem, N.C., $20,000 for violating Municipal Securities Rulemaking Board Rules G-32 on disclosures in connection with primary offerings and G-27 on supervision.
FINRA found the firm, in 94 sales of munis between January 2012 and October 2014, either failed to deliver official statements to customers or did not notify them about how to obtain copies of the documents. Joplin, Mo.–based MidAmerica was ordered to pay a $10,000 fine for misconduct under Rule G-27, part of a total fine of $150,000 for non-muni violations.
FINRA found the firm, between March 2011 and June 2013, processed about 50 muni transactions with approval from principals who were not registered as municipal-securities principals.
Alton Securities Group, based in Alton, Ill., did not receive a fine for its conduct but was ordered to pay $75,000 in restitution, plus interest, to customers for taking excessive markups and markdowns in muni and corporate debt and for not making suitable recommendations on exchange traded funds.
FINRA found in 104 muni trades occurring between February 2009 and June 2013, markups ranging from 3.01% to 4.53% that and violated MSRB Rule G-30 on prices and commissions. The firm did not receive a fine because the self-regulator wanted to maximize the restitution the customers received.
FINRA’s enforcement division asked that the Office of Hearing Officers appoint a three-person panel to consider ordering Chitnis to pay a fine, disgorge ill-gotten gains, and pay restitution, none of which were specified.
In a complaint filed with the office, FINRA found that from November of 2014 through September of 2015 Chitnis caused 480 fraudulent muni and corporate debt transactions in 18 customer accounts through YieldQuest’s clearing firm that resulted in him and the firm receiving $680,917 to which they were not entitled.
The complaint alleges Chitnis willfully violated federal securities laws against fraud as well as MSRB’s Rules G-14 on muni trade reports and G-17 on fair dealing, respectively. He also violated MSRB recordkeeping rules as well as Rule G-27.
The fraud involved a combination of corporate and muni bond transactions where Chitnis would purchase the 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.
However, 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.
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 did not effectively curb this practice, according to FINRA.
Chitnis’ scheme unraveled on Sept. 9, 2015 when the clearing firm asked YieldQuest to explain the numerous extended settlement trades and cancellations. It terminated the firm’s trading access.