Jay K. Chitnis, of Atlanta, Georgia, a stockbroker with YieldQuest Securities, LLC, was permanently barred from associating with any Financial Industry Regulatory Authority (FINRA) member in any capacity in connection with a FINRA Office of Hearing Officers’ Order Accepting Offer of Settlement containing findings that Chitnis committed securities fraud, converted funds, engaged in unauthorized trading, falsified firm documents, and failed to supervise the firm’s trading business. Department of Enforcement v. Jay Kumar Chitnis, No. 2015047037401 (Sept. 6, 2016).

According to the Order, from November of 2014 through September of 2015, Chitnis, while working for Yieldquest in the capacity of the firm’s chief compliance officer, chief executive officer, and operations and finance principal, concocted a fraudulent scheme to obtain funds from a clearing firm that Yieldquest utilized in order to keep the company’s business in-tact. Chitnis also reportedly engaged in the scheme for his own personal gain.

Particularly, Chitnis’ fraudulent scheme involved making fictitious trades, four-hundred and eighty in total, in eighteen of the firm’s customer accounts. The Order stated that Chitnis effected the scheme through purchasing from institutional clients various corporate bonds and other fixed income securities, such as agency instruments issued through the United States government.

The Order stated that Chitnis would place the purchased securities into the firm’s inventory account, only to sell such securities from the firm’s inventory account to other institutional clients. In executing these offsetting trades, Chitnis reportedly utilized extended settlement dates when selling securities from the firm’s inventory accounts. The clearing utilized by Yieldquest reportedly provided profits to the firm in connection with the inventory trading prior to such trades settling.

According to FINRA, Chitnis acted to conceal these advanced payments by the clearing firm through cancelling customer trades, only to rebook the inventory and customer trades by utilizing a farther out settlement date. The Order noted that the customers, several of whom were registered investment advisories, and all of whom Chitnis was the broker of record for, never authorized the trading activity.

The Order stated that Chitnis engaged in this scheme with the intention for his firm to keep the clearing firm’s payments through an ongoing practice of the cancelling and eventual re-booking of trades. FINRA found that Chitnis acted willfully in causing the fraudulent transactions, which led the firm to obtain $680,917.36 in unearned advanced payments.

FINRA found that Chitnis’ scheme was violative of Securities Exchange Act of 1934 Section 10(b), SEC Rule 10b-5, MSRB Rules G-17 and G-14, as well as FINRA Rules 2010 and 2020. FINRA also found that Chitnis’ unauthorized and intentional ownership of the aforementioned advance payments constituted conversion in violation of FINRA Rule 2010.

Further, the Order stated that Chitnis never communicated with customers prior to making trades, and received no authorization from such customers prior to effecting two-hundred and thirty-nine trades. FINRA found that Chitnis violated MSRB Rules G-14 and G-17, as well as FINRA Rule 2010 as a result of Chitnis’ unauthorized trading in the accounts of customers.

FINRA additionally stated that Chitnis’ effecting of the aforementioned transactions caused his firm’s records and books to be inaccurate, and caused information pertaining to the illegitimate sales and purchases to be disseminated through communications and reports. As a result, Chitnis was found by FINRA to have violated FINRA Rules 2010, 6730, 5210, and 4511, as well as MSRB Rules G-14, G-8, and G-9.

FINRA stated that from November of 2014 through September of 2015, Chitnis failed to enforce YieldQuest’s written supervisory procedures regarding the maintenance of order tickets in order to be in compliance with the rules of the MSRB and SEC. Particularly, the firm failed to indicate when orders were executed, and by whom. The firm, according to the Order, also failed to have a written supervisory procedures and other supervisory protocols which would ensure that a principal would review cancelled trades.

Further, between June of 2015 through September of 2015, the firm reportedly had no trade blotter which would be approved or signed off by a principal, which violated YieldQuest’s own written supervisory procedures. Throughout such time frame, the firm also had no principal who legitimately reviewed transactions of municipal securities. FINRA found that Chitnis, who was responsible for supervising the aforementioned business activities, was found to have violated MSRB Rule G-27, as well as FINRA Rules 3110(a), 3110(b), and 2010.

Public disclosure records via FINRA’s BrokerCheck reveal that Chitnis had previously settled a customer dispute for $9,999.00 in damages on March 29, 2001, after the customer alleged that Chitnis breached his fiduciary duty to the customer, effected unsuitable transactions, and failed to disclose information to a customer in connection with municipal leases that later turned out to be a Ponzi scheme.

Guiliano Law Group

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