Finra's battle with Jesup is heating up

Broker-dealer goes toe-to-toe with regulator and Penson, its clearing firm

Mar 7, 2010 @ 12:01 am

By Dan Jamieson

A series of nasty fights involving Jesup & Lamont Inc., its clearing firm, Penson Financial Services Inc., and Finra could be coming to a head in the next few months.

The feisty New York-based broker-dealer has accused Dallas-based Penson of conspiring with the Financial Industry Regulatory Authority Inc. to shut down a former Jesup unit, Longwood, Fla.-based Empire Financial Group Inc., and of helping another Penson correspondent firm raid Empire's profitable trading desk.

Arbitration hearings are under way in that case and are set to resume next month, according to Todd Zuckerbrod, Jesup's general counsel.

In an unusual twist in the case, the hearing panel ordered Finra to produce internal documents related to Empire, which the regulator refused to do, citing legal privilege.

Last week, a federal court in Texas denied Jesup's motion to compel production of the documents. Finra told the court that Jesup had tried, and failed, in two other legal proceedings, to force the release of Finra records.

The firm also cried foul over a recent attempt by Finra to shut it down.

Finra sent a “notice of suspension” to the firm in November after Jesup refused to produce some records to Finra examiners who were looking into allegations that one of the firm's brokers in Fort Lauderdale, Fla., was linked to a Ponzi scam.


Jesup contends that staff members in Finra's Boca Raton, Fla., office have an animus toward the firm, built up after a series of run-ins over the past few years.

“We offered to produce [the Ponzi-related records] as long as the [Finra] individuals [in Boca Raton] who were harassing us were cordoned off,” said Mr. Zuckerbrod, who has complained about the alleged continuing mistreatment to Finra's ombudsman, the Securities and Ex-change Commission and members of Congress.

Jesup quickly settled the suspension case last month by handing over the material to Finra enforcement officials, he said.

But Mr. Zuckerbrod complained that Finra then hit the former chief executive of Empire, Don Wojnowski, with a second Wells Notice over alleged past problems at Empire.

Mr. Wojnowski last May was notified of Finra's intention to file other charges. The regulator said that he operated Empire with insufficient net capital in 2007 and 2008, and allowed its former chief operating officer, Kevin Carreno, to perform functions at the firm without the required principal's license.

Mr. Wojnowski is now head of national sales at Jesup.

Finra formally charged Mr. Carreno last May.

Mr. Carreno, now president of Experts Counsel Inc. in Tampa, Fla., is fighting the charges. Hearings are scheduled for next month.

Mr. Carreno and Jesup officials said that the feud between the firm and Finra staff in Florida heated up when Empire sued a number of the regulator's officials in an attempt to gain access to internal Finra communications related to Empire.

In January 2009, a federal court in Florida denied Empire's attempt to depose Finra officials.

In an indication of just how bad the feud has become, in November, when Finra staff in Florida showed up at another Jesup office in Fort Lauderdale unannounced, Mr. Zuckerbrod called the local police department to complain about trespassers. The Finra examiners were gone by the time the police arrived, he said.

Finra District 10 in New York has authority to examine the firm, not the Boca Raton office, Mr. Zuckerbrod argued

“Finra will aggressively pursue a firm or associated person it suspects is involved in misconduct,” spokesman Herb Perone said in a statement.

But some said that Jesup's battles with Finra and its aggressive stance in fighting back could backfire.

“Jesup is probably being singled out, but in this case, Finra may have cause” to target them based on past regulatory issues that the firm has faced, said Bill Singer, a securities lawyer with Stark & Stark. “There's a price you pay when your reputation is less than stellar.”

Jesup, which has a history of underwriting and trading lower-priced stocks, has shifted to more retail and fixed-income business, according to its SEC filings. The firm, which posted $36.9 million in revenue last year, has 215 employees, including 63 retail brokers.

Empire had its own problems, including an SEC investigation into mutual fund market timing and a practice of hiring brokers from lower-tier firms.

The dispute involving Penson and Finra staff in Florida began in 2007 after a disgruntled former employee led Finra officials to believe that Empire was being controlled by a former boiler room operator, Mr. Zuckerbrod said.

He said that wasn't the case but acknowledged that the firm was using a banned broker as a recruiter.

Things came to a head on April 9, 2008, when Peter Cleven, an associate director in Finra's Boca Raton office, sent what appeared to be a shutdown notice to Empire.

He wrote that after a review, Jesup hadn't persuaded the regulator that it had adequate net capital. Empire, Mr. Cleven said, had miscategorized a large unsecured debit as secured.

Jesup claims that Penson conspired with Finra to re-categorize the debit as unsecured.

Penson would benefit from a closure, according to Jesup, because it was working to move Empire's crown jewel, an equity trading desk with revenue of $10 million to $20 million per year, to another correspondent.

In a federal court filing in Texas, Finra lawyers said that the April 9 shutdown letter “was advisory in nature and did not demand that Empire cease operations.”

Nevertheless, on that date, Finra told Penson to stop clearing trades for Empire, according to a document produced for the arbitration.

After some further negotiations, Empire was allowed to continue operating. The market meltdown and a large disciplinary award that went against the firm finally put Empire under in November 2008.

“The Supreme Court of the state of New York previously heard the "evidence' relating to Jesup & Lamont's conspiracy argument and flatly rejected it,” Tim Davis, Penson associate general counsel, said in a statement.

In November, the state court awarded Penson a summary judgment for $688,000 against Jesup. The firm has appealed that decision.

“I would not second-guess Finra about a net-capital question [and] for erring on the side of caution in 2008,” Mr. Singer said.

But Finra has invited criticism by smaller firms such as Jesup because of uneven enforcement, he said.

Jesup's complaints are simply an attempt to “get Finra to recognize that we don't want [Florida staff] who are using their authority to harass us,” Mr. Zuckerbrod said.

E-mail Dan Jamieson at


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