Online Coupon Business Cuts Registered Person

March 6, 2015

A registered representative put on his entrepreneur's hat and came up with what he says is a revolutionary online platform for the dissemination of promotional offers. To put it in a bit more mundane fashion, he came up with a way to tailor the creation and distribution of online coupons for goods and services. Whether it strikes you as a dramatic step forward or not, you still have to give the guy credit for taking an idea and making it into a business. In this age of enhanced Wall Street regulation, however, getting credit for improving the mouse-trap isn't always a good thing. On the way to an outside business success, a few detours are sometimes taken around industry and employer rules and regulations. In a recent FINRA regulatory settlement, the cost of innovation proved disastrous.

Case In Point

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Michael Willard Korson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Michael Willard Korson, Respondent (AWC #2013036033801, February 27, 2015).

In 1991, Korson first became registered with FINRA member firm PFS Investments, Inc.,("PFSI") where he remained until February 21, 2013. From January 27, 2014, through July 21, 2014, Korson was registered with FINRA member firm HBW Securities, LLC ("HBW").

An Outside Business

The AWC asserts that Korson is the founder, chief executive officer, board member, and majority owner of My Coupon Genie, Inc. ("MCG"). As explained on MCG's website:

myCouponGenie revolutionizes the delivery of promotions to consumers, using the most dynamic intelligent system saving everyone time & money. We allow consumers to control offers delivered to them, while providing businesses a social media, promotional mobile platform., which provided an on-line platform for retailers to share promotional offers on goods and services directly with consumers.

2011 Activity

The AWC asserts that by February 2011, Korson had begun the patent application process for MCG's technology. In September 2011, the company was purportedly incorporated in Michigan by Korson's wife, who serves as MCG's President and a board member, and she also opened an MCG checking/savings account. In December 2011, the AWC asserts that Korson began to receive $600 from MCG for car lease payments.

2012 Activity

In January 2012 and April 2012, the AWC asserts that payroll checks from MCG's checking account were issued in the amounts of $15,000 and $25,000, respectively, and made payable to a joint account in Korson's and his wife's names.

WATCH this October 2012 video about MCG featuring Korson:

By The Rules

Many registered persons engage in other professions and careers; and such Outside Business Activities ("OBA") typically require prior written notice to your employer and obtaining the firm's approval. Consider the following [Ed: yellow highlight supplied]:

FINRA Conduct Rule 3270. Outside Business Activities of Registered Persons

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.

*** Supplementary Material ***

.01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers or (2) be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member's review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).

A Matter Of Notice

The AWC asserts that during the times relevant to this matter, PFSI's policies required prior notice and approval of all proposed OBAs. Although Korson appears to have engaged in OBA through MCG in 2011, the AWC asserts that it was only on August 2, 2012, that he first notified PFSI in writing of the covered conduct. Fruther, although Korson revealed to PFSI on the August 2012 disclosure form that he had received compensation from MCG, nonetheless, he purportedly mis-stated the date of his initial involvement as July 31, 2012, instead of earlier dates in 2011 as noted above. Also, as set forth in detail below, Korson allegedly failed to disclose on the August 2012 disclosure form his:

September 19, 2011, sales of MCG convertible debentures; and
August 23, 2012, sale of MCG preferred stock.

Investments

The AWC further alleges that on September 19, 2011:

two of Korson's PFSI customers purchased a total of $200,000 in MCG convertible debentures; and
Korson's wife purchased a $216,000 MCG convertible debenture.

The AWC asserts that the funding for the wife's $216,000 debenture purchase came from a joint personal bank account in her and Korson's name.

On August 23, 2012, the AWC asserts that another investor (introduced to Korson by an MCG sales consultant) purchased 4,750 shares of MCG preferred stock, at a cost of $990,000. This same investor subsequently invested an additional $11,214 into MCG on May 14, 2014, when Korson was registered with HBW Securities. This investor was not and had not been a brokerage customer of Korson's at either PFSI or HBW.

PST

In connection with the sales of the convertible debentures to the three investors noted above, the AWC alleges that Korson collaborated with counsel in drafting the documentation for what FINRA deemed Private Securities Transactions ("PSTs") and met with each investor in order to discuss MCG and the terms of the investments.

Let's examine FINRA's PST Rule and make sure that we understand what's required. Note my commentary after each section:

NASD Rule 3040. Private Securities Transactions of an Associated Person

(a) Applicability

No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.

Bill Singer's Comment: "No" means "no." There is no nuance here at all. Associated persons are prohibited from participating in any PST EXCEPT as permitted under this rule.

(b) Written Notice

Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.

Bill Singer's Comment: The PST Rule's basic premise is that of prior notice. It is incumbent upon the associated person to provide prior written notice to his/her member firm. Two things here tend to trip a lot of folks up:
you must submit the notice before you undertake any PST activity -- not after you begin or contemporaneous with your activity; and
it must be written notice. That's doesn't mean via telephone or pursuant to a conversation in your boss's office. Trust me, this latter lapse is the killer -- yeah, you told your firm but now they're denying it and, worse, the Rule doesn't allow you to "tell" anything about the PST other than in written form.
You must also focus on the required content of your written notice:
A detailed description of the proposed PST. Detailed does not mean something briefly written on a cocktail napkin. It doesn't mean the rough outline of the transaction. It calls for as much specifics as exist.
Your proposed role must be set forth. If that role morphs over time, that's okay, but when you submit the prior written notice, you better make sure to accurately characterize what you understand your proposed role to be.
Too many folks get cute is in trying to avoid disclosing that they already received selling compensation --- which is a problem because you were not supposed to be involved in any PST before you submitted a prior written notice to your firm. On top of that dilemma, you must disclose any anticipated selling compensation.

(c) Transactions for Compensation

(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:

(A) approves the person's participation in the proposed transaction; or

(B) disapproves the person's participation in the proposed transaction.

(2) If the member approves a person's participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.

(3) If the member disapproves a person's participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.

Bill Singer's Comment: PSTs involving your receipt or anticipated receipt of "compensation" not only require that you submit prior written notice but that you also receive prior notice approving or disapproving your proposed participation. If approved, the PST gets put on the firm's books and records, and you are supervised as if the deal were executed at the firm. If not approved, hey, you look pretty sharp and I'm sure you can figure out what that means.

(d) Transactions Not for Compensation

In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.

Bill Singer's Comment: PSTs not involving your receipt or anticipated receipt of "compensation" not only require that you submit prior written notice but that you also receive prior notice acknowledging your proposed participation. Your firm may impose conditions upon your participation in this type of PST.

(e) Definitions

For purposes of this Rule, the following terms shall have the stated meanings:

(1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3050, transactions among immediate family members (as defined in Rule 2790), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.

(2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.

Bill Singer's Comment: The definition of PST is quite broad and literally covers "any" securities transaction outside of your regular course of employment. When in doubt, ask for a lawyer's opinion. Note that "selling compensation" may consist of an indirect consideration in the form of compensation that may be paid from sources other than the proposed deal's principals. The consideration need not be limited to cash but may include profits, tax benefits, or expenses.

Corporate And Personal Expenses

The AWC alleges that in September 2011, Korson's wife opened an MCG corporate credit card account on which Korson was an authorized user; and in October 2011, he began to use the card. Funds from the MCG checking account (the majority of which were allegedly from MCG investors) were allegedly used to pay the MCG corporate credit card balances. The AWC asserts that among the purchases made on the corporate card by Korson were some $2,000 in personal expenditures for day spa and dental services. FINRA alleged that the use of the two PFSI investors' funds to pay personal expenses was improper. Consider this FINRA Rule:

FINRA Rule 2150. Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts

(a) Improper Use
No member or person associated with a member shall make improper use of a customer's securities or funds.

(b) Prohibition Against Guarantees
No member or person associated with a member shall guarantee a customer against loss in connection with any securities transaction or in any securities account of such customer.

(c) Sharing in Accounts; Extent Permissible

(1)
(A) Except as provided in paragraph (c)(2), no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member; provided, however, that a member or person associated with a member may share in the profits or losses in such an account if:

(i) such person associated with a member obtains prior written authorization from the member employing the associated person;
(ii) such member or person associated with a member obtains prior written authorization from the customer; and
(iii) such member or person associated with a member shares in the profits or losses in any account of such customer only in direct proportion to the financial contributions made to such account by either the member or person associated with a member.

(B) Exempt from the direct proportionate share limitation of paragraph (c)(1)(A)(iii) are accounts of the immediate family of such member or person associated with a member. For purposes of this Rule, the term "immediate family" shall include parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the member or person associated with a member otherwise contributes directly or indirectly.

(2) Notwithstanding the prohibition of paragraph (c)(1), a member or person associated with a member that is acting as an investment adviser may receive compensation based on a share in profits or gains in an account if:

(A) such person associated with a member seeking such compensation obtains prior written authorization from the member employing the associated person;
(B) such member or person associated with a member seeking such compensation obtains prior written authorization from the customer; and
(C) all of the conditions in Rule 205-3 of the Investment Advisers Act (as the same may be amended from time to time) are satisfied.

*** Supplementary Material ***

.01 Inapplicability of Rule to Certain Guarantees. For purposes of paragraph (b) of this Rule, a "guarantee" that is extended to all holders of a particular security by an issuer as part of that security generally would not be subject to the prohibition against guarantees.
.02 Permissible Reimbursement by Member of Certain Losses. Nothing in this Rule shall preclude a member, but not an associated person of the member, from determining on an after-the-fact basis, to reimburse a customer for transaction losses; provided, however, that the member shall comply with all reporting requirements that may be applicable to such payment. For example, if the payment can reasonably be construed as a settlement, the member shall report the payment as a settlement under the applicable reporting requirement(s). In addition, nothing in this Rule shall preclude a member, but not an associated person of the member, from correcting a bona fide error. This Supplementary Material .02 does not apply to an associated person of a member because of the concern that any such payment may conceal individual misconduct.
.03 Record Retention. For purposes of paragraph (c) of this Rule, members shall preserve the required written authorization(s) for at least six years after the date the account is closed.
.04 Applicability of Other Rules to Sharing Arrangements. Members and associated persons should be aware that participation in a sharing arrangement permitted under paragraph (c) of this Rule does not affect the applicability of other FINRA rules, including paragraph (b) of this Rule, FINRA Rule 3270 and NASD Rules 3040 and 3050, to such sharing arrangement.

Away Brokerage Account

Finally, the AWC asserts that on October 4, 2011, when Korson was still registered with PFSI, his wife opened an MCG brokerage account at another member firm without disclosing to that other firm that Korson was involved with MCG or that he was registered with PFSI. The AWC alleges that starting October 10, 2011, Korson managed the trading activity in the away account via funding from the MCG checking account. The MCG brokerage account statements were sent to Korson's home address and listed him as the account advisor. The AWC asserts that Korson did not disclose the opening or activity in the away account to PFSI and, to the contrary, falsely certified to PFSI in November 2011 that he had disclosed all brokerage accounts held away from the firm. Consider this NASD Rule:

NASD Rule 3050. Transactions for or by Associated Persons

(a) Determine Adverse Interest
A member ("executing member") who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member ("employer member"), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.

(b) Obligations of Executing Member
Where an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:

(1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;
(2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and
(3) notify the person associated with the employer member of the executing member's intention to provide the notice and information required by subparagraphs (1) and (2).

(c) Obligations of Associated Persons Concerning an Account with a Member
A person associated with a member, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the other member; provided, however, that if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated.

(d) Obligations of Associated Persons Concerning an Account with a Notice-Registered Broker/Dealer, Investment Adviser, Bank, or Other Financial Institution
A person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a broker/dealer that is registered pursuant to Section 15(b)(11) of the Act ("notice-registered broker/dealer"), a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall:

(1) notify his or her employer member in writing, prior to the execution of any initial transactions, of the intention to open the account or place the order; and
(2) upon written request by the employer member, request in writing and assure that the notice-registered broker/dealer, investment adviser, bank, or other financial institution provides the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;
provided, however, that if an account subject to this paragraph (d) was established prior to a person's association with a member, the person shall comply with this paragraph promptly after becoming so associated.

(e) Paragraphs (c) and (d) shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.

(f) Exemption for Transactions in Investment Company Shares and Unit Investment Trusts
The provisions of this Rule shall not be applicable to transactions in unit investment trusts and variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities.

At HBW in 2014

Upon registering with HBW in 2014, Korson disclosed MCG as an OBA but the AWC asserts that he failed to provide the brokerage firm with prior written notice of the May 14, 2014, $11,214 investment.

Summing Up

The AWC asserts that, in summation, Korson violated:

FINRA Rules 3270 and 2010 by failing to disclose to PFSI his MCG during the period February 2011 through August 2012;
NASD Rule 3040 and FINRA Rule 2010 between September 2011 and May 2014, when he participated in MCG private securities transactions without providing prior written notice to either employer firm;
FINRA Rules 2150(a) and 2010 by misusing investor funds when charging personal expenses to the MCG corporate credit card; and
NASD Rule 3050(c) and FINRA Rule 2010 by opening and trading in an outside brokerage account without providing prior written disclosures to his employer firm or to the away account member firm .

In accordance with the terms of the AWC, FINRA imposed upon Korson a Bar in all capacities from any FINRA member firm.

Bill Singer's Comment

Frankly, this AWC was both exhaustive and exhausting. A very complicated fact pattern that was well-presented by FINRA and set forth a number of themes in an understandable and compelling fashion.

Some may argue that in this case a Bar was an extreme response when you consider that there was no suggestion that any investors lost money or sued, and the MCG appears to be a bona fide, ongoing business. Also, I feel that FINRA really stretched things in a way to find jurisdiction over certain conduct that doesn't necessarily seem to fall within a self-regulator's purview. On the other hand, as I often note, this AWC was a settlement proposed by Korson and voluntarily entered into by him. If he was happy with what he negotiated, who the hell am I to second guess him?

Still -- I often wonder why there are so many of these OBA and PST cases. Clearly, many of these regulatory matters are prompted by the misconduct of registered reps; on the other hand, given the volume of these cases, you have to wonder whether it's incumbent upon FINRA to conduct a comprehensive review of its rules and consider whether there should be more flexibility -- or whether there needs to be more industry education of the potential violations. I would underscore this concern by noting that the alleged violations are still cited by NASD Conduct Rules 3040 and 3050 for OBA and PST respectively. FINRA has been in existence since 2007. After some 8 years, you would think that the self-regulatory organization would have gotten its act together by now and codified these frequent violations under its own rulebook.

According to FINRA online BrokerCheck records as of March 6, 2015, PFS reported that on February 20, 2013, Korson was "Permitted to Resign" based upon allegations:

THE AGENT WAS PERMITTED TO RESIGN AFTER INFORMATION WAS OBTAINED INDICATING THAT THE AGENT WAS INVOLVED IN AN UNAPPROVED OUTSIDE BUSINESS ACTIVITY FOR WHICH HE HAD SOLICIATED [sic] AT LEAST ONE INVESTOR.

In response to PFS's report, Korson replied:

I INVENTED TECHNOLOGY AND PRESENTED IT. TECHNOLOGY AWARENESS GREW AND ATTRACTED A NON-AFFILIATED INVESTOR. I NOTIFIED MY OSJ AND REPORTED MY INVOLVEMENT ON MY U4. MY BROKER DEALER HAD A KNOWN ACCEPTANCE TO THIS CIRCUMSTANCE BUT DID NOT APPROVE OR DISAPPROVE THE ACTIVITY FOR 8 MONTHS FINALLY DISAPPROVING THE ACTIVITY FORCING ME TO RESIGN.

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