On December 15, 2011, the Securities and Exchange Commission filed a civil injunctive action against Stephen M. Folan, a former registered representative in the Chicago office of FTN Financial Securities Corp. (“FTN”), for assisting Sentinel Management Group, Inc. (“Sentinel”), a bankrupt former investment adviser, in its fraud against its advisory clients.
The SEC’s complaint alleges that over year-end 2006 and the first few days of 2007, Sentinel and FTN engaged in a five-day reverse repurchase transaction (“Repo Transaction”) involving approximately $35 million of collateralized debt obligations (“CDOs). Folan acted as the primary advocate for the Repo Transaction within FTN and served as the conduit between Sentinel, his best customer, and FTN’s management. The complaint further alleges that recorded telephone calls show that although Folan had information indicating that Sentinel would use the Repo Transaction for an improper purpose, he did not share this information with his superiors at FTN.
According to the SEC complaint, Sentinel used the Repo Transaction to mislead its clients by temporarily reducing the outstanding bank loan balance in its year-end 2006 financial statements by approximately 10% without disclosing that the source of the reduction was an atypical, non-recurring event and by understating its liabilities by failing to record any liability associated with its obligation to repurchase the CDOs when the Repo Transaction was unwound.
FINRA arbitration is a dispute resolution process offered by the Financial Industry Regulatory Authority (FINRA) to resolve conflicts between investors, brokerage firms, and individual brokers. Unlike traditional court litigation, arbitration is typically faster and less formal. In this process, an impartial arbitrator or a panel of arbitrators listens to both parties’ arguments and evidence before making a binding decision. This method is often chosen for its efficiency and lower costs, making it an attractive option for investors seeking resolution without the complexities of a court trial. The arbitration process is governed by specific rules and procedures, ensuring a fair and equitable hearing. While the decision is final and generally cannot be appealed, parties can still settle the dispute before the arbitration concludes. FINRA arbitration serves as a crucial mechanism in maintaining market integrity and protecting investors’ rights.