National investment fraud lawyers KlaymanToskes is investigating ex-Merrill Lynch broker Joshua Nicholas (“JDN Capital Josh Nicholas Investigation”) in light of his recent ban from the securities industry. In January 2022, the Financial Industry Regulatory Authority (“FINRA”) barred Joshua Nicholson from the industry for misusing client funds for an unapproved outside business activity, JDN Capital.
In May 2020, Nicholas allegedly induced customers to enter into a promissory note with his wholly-owned entity, JDN Capital LLC. The promissory note lent JDN Capital $300,000 to invest in securities on their behalf. Instead of investing the funds, Nicholas converted $58,000 of the funds to pay for his own personal expenses.
In July 2020, the customers asked Nicholas to provide a copy of an account statement showing that JDN Capital had invested the proceeds of the promissory note. Nicholas then provided a fake account statement for a non-existent account, which contained material misrepresentations.
Also, Nicholas allegedly failed to provide written notice to Merrill Lynch that he was engaging in outside business activity.
Prior to joining Merrill Lynch and continuing after his association, Nicholas traded futures contracts through his corporate entity, JDN Capital. Among the customers for whom Nicholas engaged in futures trading were the customers at issue, who are a married couple. By February 2020, Nicholas’s futures trading for the customers had resulted in losses of more than $1 million in the trading account with Nicholas and JDN Capital.
In a purported effort to recoup some of their losses, Nicholas then convinced the customers to invest an additional $300,000 in a promissory note with JDN Capital so that entity could invest these additional funds in securities on their behalf.
On April 30, 2020, the promissory note was executed. The note obligated JDN Capital to pay 17% interest per annum and explicitly obligated JDN Capital to secure the principal balance by purchasing securities worth $300,000.
On May 4, 2020, the customer wired $300,000 to JDN Capital’s bank account. The same day, Nicholas removed most of the funds to his personal bank account, and spent $58,000 on personal expenses.
After executing the promissory note in April 2020, the customers repeatedly asked for account statements to show them whether and how the proceeds of the note had been invested. In response to these requests, in July 2020, Nicholas prepared and emailed a copy of a brokerage statement purporting to show that JDN Capital had opened a brokerage account at Firm A, a FINRA member firm, and that the account owned a number of securities to secure the note.
The brokerage statement stated, among other items, that the account was in the name of JDN Capital, that the account held shares of certain equity securities, and that the account had earned approximately $72,000 in dividend income that month. However, Nicholas had fabricated the document. Neither JDN Capital nor Nicholas had an account at Firm A, and neither JDN nor Nicholas owned any assets custodied at Firm A.
Per the FINRA AWC, Nicholas consented to a bar from associating with any FINRA member in all capacities.
Brokers are not permitted to place customers’ checks or money intended for securities transactions into their own bank account or in the accounts of businesses that you are involved with outside of your broker-dealer, regardless of the amount of money or the length of time involved. Mishandling customer funds is a serious violation of FINRA rules and could result in prosecution by state or federal criminal agencies, such as the case is with Joshua Nicholas. As noted in its 2018 Examination Findings, FINRA states that discretionary trading authorization can expose investors to material risks.
According to Financial Industry Regulatory Authority, brokerage firms are responsible for the supervision of all the activities of its financial advisors. FINRA rules require the supervision of financial advisor as well as compliance with the securities industry standards of care for the handling of customer accounts as reflected in brokerage firm compliance manuals. The financial brokerage firm compliance manuals provide written procedures designed to achieve compliance with security industry rules and regulations by financial advisors of the firm.
Brokerage firm computerized systems monitor the activities of financial advisors designed to supervise the specific activities related to the type of business conducted at the branch office. Branch office managers are the first line of defense to protect the investors from violations of FINRA rules and regulations. Brokerage firms and branch office manager are responsible for the supervision of financial advisor:
Branch office managers can delegate supervisory tasks but not the responsibilities given to them by the brokerage firm. A large number of financial advisors in a branch office may require delegation of supervisory tasks to front-line managers who supervise the day-to-day activities of financial advisors assigned to them for supervision. Due to the number of financial advisors and the number of transactions at the branch office level, an computerized, management by exception system, is used for the oversight of client accounts. The monitoring and review at the branch office is accomplished through the use of exception reports developed by the brokerage firm to flag certain activities in customer accounts.
Investors who lost money due to their broker’s misappropriation of client funds with losses in excess of $250,000, are encouraged to contact Lawrence L. Klayman, Esq., at (561) 542-5131, and download our Special Investor Report.
KlaymanToskes is a leading national securities law firm which practices exclusively in the field of securities arbitration on behalf of retail and institutional investors throughout the world in large and complex securities matters. KlaymanToskes has recovered more than $225 million for investors in FINRA arbitrations. KlaymanToskes has office locations in California, Florida, New York, and Puerto Rico.