An irreverent Wall Street Blog
WTF? FINRA AWC OBA LPL RS CK
September 30, 2016
NOTE: After the initial date of publication and at the sole discretion of the BrokeAndBroker.com Blog, the name of the Respondent referenced in this article was redacted.
If you're a supervisor on Wall Street, it sort of goes without saying that you need to supervise. Unfortunately, a number of folks at Wells Fargo may be having an "ah ha!" moment as they read those wise words about the mechanics of supervision. In a recent FINRA regulatory settlement, the self regulator presented us with the case of a supervisor who seems to have had trouble engaging in effective supervision. In reading through the fact pattern of this case, you may be reminded of a moth getting too close to the flame.
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, [REDACTED at the discretion of BrokeAndBroker.com Blog] submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of [REDACTED at the discretion of BrokeAndBroker.com Blog], Respondent (AWC 2015045352901, September 20, 2016).
In 1998, [REDACTED at the discretion of BrokeAndBroker.com Blog] entered the securities industry and in 2004, he was registered with FINRA member firm LPL Financial LLC. The AWC asserts that [REDACTED at the discretion of BrokeAndBroker.com Blog] had no prior disciplinary history in the securities industry.
The Unknown RS
Between October 2009 and September 2013, [REDACTED at the discretion of BrokeAndBroker.com Blog] supervised an LPL registered representative assigned to [REDACTED at the discretion of BrokeAndBroker.com Blog]'s branch office. The AWC refers to this supervised registered rep only as "RS."
RS Borrows From [REDACTED at the discretion of BrokeAndBroker.com Blog]
Sometime around December 2011, the AWC asserts that [REDACTED at the discretion of BrokeAndBroker.com Blog] loaned funds to RS, who was the sole owner and operator of Hawaiian real estate that he was developing into a vacation rental property and which opened for business in 2012. Oddly, the AWC does not set forth the amount of [REDACTED at the discretion of BrokeAndBroker.com Blog]'s loan to RS or any of the terms for repayment.
The AWC asserts that RS had failed to notify LPL of his real estate activity, which the AWC characterizes as an outside business activity ("OBA").
RS Borrows From LPL Customers
From about May 2009 through November 2012, RS purportedly borrowed about $2.25 million from seven LPL customers for the purpose of purchasing Hawaiian real estate and constructing the previously referenced rental property. Each of the seven lenders were LPL customers of RS at the time of the loans.
2012/2013: [REDACTED at the discretion of BrokeAndBroker.com Blog] On Notice of RS's OBA
The AWC asserts that by February 2012, [REDACTED at the discretion of BrokeAndBroker.com Blog] knew that "RS's real estate investment in the property was an outside business activity" because [REDACTED at the discretion of BrokeAndBroker.com Blog] was, by then, aware of the involvement of outside investors in the property. Similarly, the AWC asserts that [REDACTED at the discretion of BrokeAndBroker.com Blog] further manifested his knowledge of RS's OBA in:
- March 2013, when [REDACTED at the discretion of BrokeAndBroker.com Blog] had e-mailed a link to the property's website to an LPL customer; and
- in May 2013, when [REDACTED at the discretion of BrokeAndBroker.com Blog] knew that RS had a separate bank account for the property.
CK
Enter, stage left, yet another registered representative (referenced in the AWC only by her monogram) supervised by [REDACTED at the discretion of BrokeAndBroker.com Blog]:
In August 2013, CK, who also loaned money to RS for the outside business, submitted a disclosure form to the Firm in which she stated that her loan to RS was for RS's "home." In August 2013, RS submitted disclosure forms to the Firm in which he stated that his loans from CK and [REDACTED at the discretion of BrokeAndBroker.com Blog] were for his "personal residence."
Twiddling Supervisory Thumbs
By way of recap, the AWC asserts that [REDACTED at the discretion of BrokeAndBroker.com Blog] loaned money to RS for the development of a vacation rental property. Further, the AWC asserts that registered rep CK misstated on a disclosure form submitted to LPL that her loan to RS was for a "home," rather than for the OBA of developing the vacation rental business. Additionally, the AWC asserts that RS submitted to LPL a disclosure that falsely presented the loans from CK and [REDACTED at the discretion of BrokeAndBroker.com Blog] as being for his personal residence rather than the OBA.
Given those predicates, the AWC alleges that [REDACTED at the discretion of BrokeAndBroker.com Blog] was aware of RS had not disclosed to LPL his OBA. Accordingly, the AWC concludes that [REDACTED at the discretion of BrokeAndBroker.com Blog] failed to properly supervise because he did not investigate, prevent and/or report RS's misconduct to LPL. Also, although [REDACTED at the discretion of BrokeAndBroker.com Blog] knew that CK's and RS's above-referenced disclosure forms failed to disclose the OBA nature of RS's activity (in contradistinction to use for a home/personal residence), the supervisor still approved the forms. FIINRA deemed [REDACTED at the discretion of BrokeAndBroker.com Blog]'s conduct in this regard to constitute a violation of NASD Rule 3010(b) and FINRA Rule 2010.
As to RS's borrowing from seven LPL customers, the AWC asserts that LPL's written procedures prohibited registered representatives from borrowing money from a customer subject to certain exceptions not applicable here. Although [REDACTED at the discretion of BrokeAndBroker.com Blog] knew of the improper borrowing by June 2013, the supervisor did not investigate the activity and did not report the undisclosed loans to LPL. FINRA deemed [REDACTED at the discretion of BrokeAndBroker.com Blog]'s conduct to constitute a violation of NASD Rule 3010(b) and FINRA Rule 2010.
Answering "NO"
The AWC alleges that in July 2012 and July 2013, [REDACTED at the discretion of BrokeAndBroker.com Blog] submitted LPL compliance questionnaires on which he wrongly responded "NO" to the question of:
Have you, or any related person or entity, borrowed or loaned any money or securities from or to another individual or entity?
Pointedly, [REDACTED at the discretion of BrokeAndBroker.com Blog] had personally loaned funds to RS in December 2011. The AWC observes that [REDACTED at the discretion of BrokeAndBroker.com Blog]'s loan had not been repaid by July 2013.
During a July 2013 LPL compliance examination of [REDACTED at the discretion of BrokeAndBroker.com Blog]'s branch office, he purportedly answered "NO" to the query:
Do you have any concerns with any financial advisors or other personnel under your supervision?
In addressing [REDACTED at the discretion of BrokeAndBroker.com Blog]'s alleged lack of "concerns," in July 2013, the AWC offers this:
[I]n the letter, [REDACTED at the discretion of BrokeAndBroker.com Blog] stated that he had "no [c]ompliance or [s]upervision concerns regarding [RS] becoming a [Firm] OSJ branch manager."
At the time [REDACTED at the discretion of BrokeAndBroker.com Blog] made these statements to the Firm, he had concerns about RS's compliance with Firm policies and applicable FINRA rules, because [REDACTED at the discretion of BrokeAndBroker.com Blog] knew that RS was engaged in an outside business activity that had not been
disclosed to the Firm, and knew that RS had obtained unauthorized loans from
Firm customers. Therefore, [REDACTED at the discretion of BrokeAndBroker.com Blog]'s statements were false.
Home Run
In July and August 2013, [REDACTED at the discretion of BrokeAndBroker.com Blog] submitted disclosure forms to LPL in which he described the purpose of his loan to RS as related to the completion of his subordinate's "home."
SIDE BAR: Note that the AWC previously asserted that in July 2012 and July 2013, [REDACTED at the discretion of BrokeAndBroker.com Blog] denied having borrowed or loaned money to any third party. Either [REDACTED at the discretion of BrokeAndBroker.com Blog] did or didn't disclose the loan in July 2013. Which is it?
Regardless of the AWC's inconsistent chronology of [REDACTED at the discretion of BrokeAndBroker.com Blog]'s loan disclosure, it appears that the supervisor falsely stated that the loan was for RS's home. Further, [REDACTED at the discretion of BrokeAndBroker.com Blog] purportedly knew that RS was continuing to be involved in a non-disclosed OBA.
August 2014 Compliance Conversation
If this AWC were a movie, we would see the screen filled with pages of a calendar ripping off and falling to the floor. About a year's worth of time passes without explanation and we find ourselves at an August 2014 conversation between an LPL Compliance Examiner and [REDACTED at the discretion of BrokeAndBroker.com Blog] concerning:
[RS]'s vacation rental property and loans from Firm customers. During these discussions, [REDACTED at the discretion of BrokeAndBroker.com Blog] told the Firm compliance employee that he had recently learned that CK and Firm customers were involved in RS's vacation rental property. Because [REDACTED at the discretion of BrokeAndBroker.com Blog] knew, by no later than February 2012 and June 2013, that CK and Firm customers, respectively, had loaned RS funds for his unapproved outside business activity, [REDACTED at the discretion of BrokeAndBroker.com Blog]'s statement to the Firm's compliance employee was false.As a result of the foregoing conduct, [REDACTED at the discretion of BrokeAndBroker.com Blog] violated FINRA Rule 2010.
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon [REDACTED at the discretion of BrokeAndBroker.com Blog] a $15,000 fine; and a 6-month-suspension from association with any FINRA member in any principal capacity and a 4-month suspension from associating with any FINRA member in any capacity, to be served concurrently.
Bill Singer's Comment
In terms of the presentation of the underlying facts, compliments to FINRA on a job well done. Given the many nuances of this case, the AWC tackled the facts in a lucid manner and gave us a fairly decent picture of who did what and when.
The monetary sanction of $15,000 is certainly a measured one and the imposition of different Principal-only and All-Capacities suspensions shows that much thought was given to the terms of settlement. For my part, it strikes me that the terms of this settlement were far too benign and I'm not quite sure what additional lapses a supervisor would need to engage in for FINRA to impose a Principal-only Bar. As such, [REDACTED at the discretion of BrokeAndBroker.com Blog] appears to have benefited from some superb lawyering.
By way of adding a bit more texture to the underlying facts in this settlement, note that online BrokerCheck records as of September 29, 2016, disclose under the heading "Customer Dispute - Pending" the following allegations pertaining to a civil lawsuit filed in California sometime around November 2015:
PLAITIFFS [sic] ALLEGE BREACH OF FIDUCIARY DUTY, CONSTRUCTIVE FRAUD, UNFAIR BUSINESS PRACTICES, VIOLATION OF CA CORPORATIONS LAWS, PROFESSIONAL NEGLIGENCE, AND BREACH OF DUTY TO SUPERVISE IN CONNECTION WITH LOANS THEY MADE TO ANOTHER REPRESENTATIVE (OTHER FIRM EMPLOYEE) IN 2011 AND 2012 TOTALING $850,446.57 TO DEVELOP INVESTMENT PROPERTY. REPRESENTATIVE [REDACTED AT THE DISCRETION OF BROKEANDBROKER.COM BLOG] DENIES ALL CLAIMS, SPECIFICALLY INCLUDING BUT NOT LIMITED TO THE CLAIM THAT HE HAD ANY KNOWLEDGE OF, PARTICIPATION IN, OR RESPONSIBILITY FOR THE ALLEGED "INVESTMENT PROPERTY" ACTIVITY INVOLVING THE PLAINTIFFS AND [OTHER FIRM EMPLOYEE]. REPRESENTATIVE [REDACTED AT THE DISCRETION OF BROKEANDBROKER.COM BLOG] MAINTAINS THAT HE ACTED APPROPRIATELY AT ALL TIMES, INCLUDING WITH RESPECT TO HIS SUPERVISION OF FORMER REPRESENTATIVE, [OTHER FIRM EMPLOYEE].
For reasons that may make sense to FINRA but only confound me, this regulatory settlement largely involves [REDACTED at the discretion of BrokeAndBroker.com Blog]'s failed supervision of RS, who was, in fact, registered with a FINRA member firm during the times relevant to this case and was subject to the self-regulatory organization's jurisdiction. This key participant in the failed supervision, this individual who also seems to have engaged in misconduct in his own right, this individual's name is hidden from us by FINRA and we are left with only the monogram of "RS." According to the BrokerCheck disclosure, the undisclosed OBA involved a whopping $850,000-plus in disputed investments. Not exactly chump change.
As I have long and often argued, this policy of regulatory hide-and-seek is baffling, particularly in cases where the unidentified, initialed participant has either committed wrongdoing in his or her own name and/or has caused another registered individual or registered entity to engage in misconduct.