2 Wrongs Don't Add Up To 1 Right In FINRA Regulatory Settlement
March 22, 2018
Imagine we got six customers with eight brokerage accounts. Now, imagine that for some four years we got a stockbroker who engages in 1,290 purportedly unauthorized transactions in those customers' accounts. Let's have a bit of fun with the math. To annualize the transactions, let's divide 1,290 by 4 and come up with 322.5. Next, let's divide 322.5 by 8 accounts and get about 40. Finally, let's divide 40 by 12 to see how that breaks down per month, which is about 3.4 trades a month per account.
So . . . each and every month for about 48 months, your stockbroker is executing between 3 and 4 unauthorized trades in one of your brokerage accounts. I have a brokerage account. I would know if there were 3 to 4 unauthorized trades in that account. I would be screaming bloody murder and you can sure as hell bet that no one is going to enter that many trades in my accounts without my consent over a four-year period.
On the other hand, there are a lot of crooks and con artists out there. Sometimes they dupe customers into believing that what looks like a trade isn't or what looks like a buy was a back-office error. Then you have customers with medical or mental conditions and they just can't follow their accounts. In the end, it often comes down to whether an apparent fraud is intentional or inadvertent, whether something was a misunderstanding or willful failure to follow instructions, whether there was a miscommunication or knowing disregard.
In a recent FINRA regulatory settlement, it sure as hell seems like a stockbroker stepped over the line repeatedly and violated the rules. In contrast, FINRA's published AWC settlement leaves out a lot of content and context and comes off as a somewhat careless attempt to wrap things up and just move on. Let's have a bit of fun with the math again. We add up two wrongs and . . . hmm . . . I still can't get one right.
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, Thomas Alan Meier submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Thomas Alan Meier, Respondent (AWC 2016049628301, March 19, 2018).
The AWC asserts that Meier entered the securities industry in 1982 and was associated with eight FINRA member firms. Meier was associated with FINRA member firm Morgan Stanley from June 1, 2009 to April 5, 2016. The AWC asserts that Meier "does does not have any disciplinary history with the Securities and Exchange Commission, FINRA, any other self-regulatory organization or any state securities regulator."
1,290 Unauthorized Transactions
The AWC describes the "Relevant Period" as running from July 2012 through March 2016, and as set forth in pertinent part:
During the Relevant Period, Meier effected approximately 1,290 unauthorized transactions in eight accounts belonging to six customers, including three married couples. None of the eight accounts were discretionary accounts. The unauthorized transactions effected by Meier included both purchases and sales of equity securities, and Meier received approximately $265,000 in commissions for those transactions. Meier did not have discussions with the customers about the trades prior to the transactions and did not obtain the customers' authorization prior to executing any of the transactions. Two of the customers realized losses of approximately $78,000 during the period 2014 through 2015. In addition, there were unrealized losses in the accounts. To date, the Firm has paid a total of approximately $1,087,610 to five of the customers in connection with complaints about Meier.
By virtue of the foregoing, Meier violated FINRA Rule 2010.
Unauthorized Discretion
The AWC futher asserts in part that:
During the Relevant Period, Meier exercised discretion in five accounts belonging to four separate customers. None of the customers gave Meier written authorization to exercise discretion in their accounts, and the Firm had not accepted any of the accounts as discretionary. Throughout the Relevant Period, the Firm's written procedures prohibited representatives from engaging in unauthorized transactions or the exercise of discretion without the prior express authorization of the client. None of the transactions were designated as discretionary in the Firm's system. As of February 29, 2016, the four customers suffered unrealized losses since inception totaling approximately $1.4 million in their accounts. In addition, during the period 2014 through 2015, one of the customers realized a loss of approximately $120,000 and another realized a net loss of approximately $520,000. In addition, there were unrealized losses in the accounts. To date, the Firm has paid a total of approximately $1,078,828 to three of the customers in connection with complaints about Meier.
In addition, during the Relevant Period, Meier stated on four annual compliance questionnaires that he did not have any accounts in which business was transacted on a discretionary basis. Meier's statements were not accurate.
By virtue of the foregoing, Meier violated NASD Rule 2510(b) and FINRA Rule 2010.
FINRA Sanction
In accordance with the terms of the AWC, FINRA imposed upon Meier a Bar from associating with any FINRA member in any capacity.
Bill Singer's Comment
In order to avoid spinning or unfairly characterizing FINRA's charges, findings, and sanctions in the AWC, I have been meticulous in today's BrokeAndBroker.com Blog to avoid interpreting or extrapolating the substantive allegations and assertions. Hopefully, you will acknowledge that I have at least succeeded to that extent.
FINRA's Lack of Content and Context
My first criticism of the AWC is that it simply defies logic. What FINRA is asking us to believe is that Meier effected 1,290 unauthorized trades in eight accounts during a nearly four-year period running from July 2012 through March 2016.. Now, before you jump down my throat, hear me out: I am NOT asserting that a stockbroker could not effect 1,290 unauthorized trades in eight accounts. I am simply making the point that it's difficult to simply accept that for some four years that not a single of the eight accounts noticed any unauthorized trading and that not a single account-holder complained to anyone about such activity. There are many, many legitimate explanations for public customers not being aware of unauthorized trading. In some cases, the stockbroker may have engaged in a devious cover-up. In other cases, the customers may have given "oral" authorization for the cited trading but in the absence of written authorization approved by the firm, such trading would still be characterized as unauthorized. Whatever FINRA's version of events and explanation, none is forthcoming in the AWC. I find that omission of content and context ridiculous given the volume of trading and the years involved.
Internal Review
As set forth in part in the AWC:
In a Uniform Termination Notice for Securities Registration ("Form U5") dated April 5, 2016, the Firm reported that Meier had resigned effective March 15, 2016 while "under internal review for potential issues involving his trade activity, including possible use of discretion." Between April 5, 2016 and October 12, 2017, the Firm filed 21 amended Forms U5 for Meier disclosing 14 customer complaints, including two arbitration claims. To date, the Firm has settled 13 of these claims and paid the customers a total of approximately $2.5 million.
How nice it is that notwithstanding Morgan Stanley's expansive and ever-so effective in-house compliance and legal staff that Meier was NOT fired or permitted to resign but - oh my! - on March 15, 2016, while he was purportedly "under internal review for potential issues," he simply resigned. That's pretty convenient for the firm, no?
Then there's that other curious bit of timing, as in that it took Morgan Stanley about 1 1/2 years from April 5, 2016, to October 12, 2017, to file disclosures about Meier's "14 customer complaints, including two arbitration claims." In somewhat breathless fashion, FINRA informs us that Morgan Stanley settled 13 of the 14 claims involving 1,290 unauthorized trades in 8 accounts belonging to 6 customers for about $2.5 million. On top of the unauthorized trading violations, remember that the AWC also alleges that Meier exercised discretion in 5 accounts belonging to 4 customers. In somewhat breathless fashion again, FINRA informs us that Morgan Stanley settled with 3 of the 4 customers for about $1.08 million.
The "relevant period" for the above unauthorized trades and unauthorized discretion was July 2012 through March 2016. This is March 2018, as in two years after the end of the relevant period.
Being most gracious to Morgan Stanley, we know that no later than March 15, 2016, the firm was investigating Meier's conduct. How do we know that? Oh . . . the AWC asserts that Morgan Stanley filed a Form U5 indicating that:
[M]eier had resigned effective March 15, 2016 while "under internal review for potential issues involving his trade activity, including possible use of discretion."
Frankly, Morgan Stanley didn't need to conduct all that much of an internal review in order to conclude that Meier had likely violated FINRA rules because the AWC further explains that:
[B]etween April 5, 2016 and October 12, 2017, the Firm filed 21 amended Forms U5 for Meier disclosing 14 customer complaints, including two arbitration claims. To date, the Firm has settled 13 of these claims and paid the customers a total of approximately $2.5 million.
So . . . Morgan Stanley started writing out settlement checks as early as April 5, 2016, and FINRA member firms don't just fill in a payor's name and a payment amount for the fun of it.
Okay, so, by way of recap, Morgan Stanley started investigating Meier's conduct in March 2016. He quit the member firm in March 2016. The firm started paying out what would add up to some $2.5 million is customer settlements in April 2016.
What the hell took two years - two years! - for FINRA to investigate and settle the charges concerning Meier?