Investment Banking Malpractices

Investment banking is a dream job of many people. Even investment bankers are highly paid, they are too greedy to earn even more by cheating their clients.

FINRA recently fined GunnAllen Financial, Inc. US$750,000 for its role in a trade allocation scheme conducted by the firm's former head trader, as well as for various Anti-Money Laundering (AML), reporting, record-keeping and supervisory deficiencies.

In 2002 and 2003, the firm, acting through Rivera, the former head trader, engaged in a "cherry picking" scheme in which Rivera allocated profitable stock trades to his wife's personal account instead of to the accounts of firm customers. Rivera garnered improper profits of more than US$270,000 through this misconduct. Rivera was barred in December 2006. Kelley McMahon, Rivera's supervisor, was suspended for six months from association with any FINRA-registered firm in any principal capacity and fined $25,000, jointly and severally with the firm.

In connection with the firm's investment banking business, prior to March 2005, GunnAllen never put any stock of a company on a restricted or watch list even though the firm was conducting investment banking business with these companies. During the same period, GunnAllen failed to inform its own compliance department of the investment banking activities in which the firm was involved.

GunnAllen also failed to report to FINRA that its parent firm had entered into a consulting contract with an individual who had been previously barred by FINRA. In addition, the firm was sanctioned for:

• failing to preserve e-mails and instant messages;
• failing to implement an adequate AML compliance program; and
• supervisory and complaint reporting deficiencies.

Supervisory deficiencies included a failure to ensure that markups and commissions charged on equity transactions were reasonable. In reviewing markups on equity transactions, the firm did little more than ensure that commission charges did not exceed 5%.