Wall Street Regulation Understood Backwards

October 7, 2016

"Life can only be understood backwards; but it must be lived forwards," says existentialist philosopher and lesser-known Wall Street regulator Soren Kierkegaard. Today's BrokeAndBroker.com Blog time travels from a September 2016 FINRA regulatory settlement back in time to a 2001 customer complaint. Upon arriving at our final destination, we turn around, look back to the future, and wonder whether industry regulators and compliance staff should have seen trouble coming.

September 2016 FINRA Arbitration Decision

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in August 2015, public customer Claimants Joyce and Keith Reuter alleged:

unauthorized borrowing, unauthorized trading, civil theft by fraud under Wis. Stat. §§ 895.446 and 943.20, and breach of contract. Claimants alleged that Krause used his position of trust and the Reuters vulnerability as older adults to siphon money from them under the guise of "loans," as part of a false and fraudulent scheme. Claimants further alleged that Krause borrowed more than $150,000 from Claimants from 2010 to 2014. Also, Claimants alleged that, without their knowledge or consent, Krause liquidated some of their investments to finance his loans, which resulted in income tax liabilities and surrender charges. Finally, Claimants alleged that First Heartland neglected and failed to supervise Krause.

Claimants sought unspecified compensatory, punitive, and treble damages; interest; attorneys' fees; and costs. In the Matter of the FINRA Arbitration Between Joyce Reuter and Keith Reuter, Claimants, vs. First Heartland Capital, Inc. and Jerome Scott Krause, Respondents (FINRA Arbitration 15-02088, September 28 2016).

Respondent Krause did not appear.

Respondent First Heartland generally denied the allegations; asserted various affirmative defenses; and requested the expungement of the matter from its Central Registration Depository records ("CRD").

Krause Bankruptcy

In April 2016, Respondent Krause filed for bankruptcy, and, accordingly, the claims against him were stayed. In June 2016, the Reuters moved the bankruptcy court for relief from the stay. On July 13, 2016, the Court ordered that the stay be lifted as to the Reuters; FINRA arbitration against Krause.

In July 2016, the Reuters moved the FINRA Arbitration Panel for a default judgment against Respondent Krause. In their Motion for Default, the Claimants sought as against Respondent Krause $175,000 in compensatory damages and unspecified treble damages, attorneys' fees and costs. The Motion asserted that in:

[K]rause's bankruptcy petition filed with FINRA on April 26, 2016, Krause acknowledged $175,000.00 in debt to the Reuters. Claimants stipulated to this amount owed by Krause for the purpose of this proceeding.

First Heartland Settlement

On or about August 4, 2016, Claimants notified FINRA that a settlement had been finalized with First Heartland and filed a notice of dismissal with prejudice as to that Respondent. On or about September 27, 2016, First Heartland notified FINRA that it did not intend to pursue its expungement request.

Award

In consideration of the Claimants' Motion for Default, the sole FINRA Arbitrator found Respondent Krause liable and ordered him to pay to Claimants

$150,000 in compensatory damages;
$450,000 in trebled exemplary damages:
$17,980.50 in attorneys' fees; and
$375.00 in costs

Let's wish the public customers the very best of luck recovering any portion of their arbitration award against Respondent Krause. Now, fasten your seatbelts as we rev up the engine of our DeLorean Time Machine and journey back in time. First stop, three years ago to 2013.

2013 FINRA AWC

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, Jerome S. Krause submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jerome S. Krause, Respondent (AWC 2012031511501, March 14, 2013).

The AWC asserts that in 1987, Krause entered the securities industry and between August 2005 and February 2012, he was registered with FINRA member firm First Heartland Capital, Inc. The AWC asserts that Krause had no prior disciplinary history.

The AWC alleges that although First Heartland's written supervisory procedures prohibited registered representatives from borrowing money from customers; Krause borrowed a total of $51,000 from two Heartland customers on the approximate dates for the amounts indicated:

KN: September 26, 2011: $20,000; and October 12, 2011: $6,000; and
PE: November 21, 2011: $25,000

The AWC asserts that First Heartland only learned about KN's loans when she informed the about her loan. As of the date of the AWC, Krause purportedly repaid KN and had a balance due of $10,000 on PE's loan.

FINRA deemed Krause's conduct to constitute a violation of FINRA Rules 3240 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Krause a $5,000 fine and a two-month-suspension from associating in any capacity with any FINRA-registered firm. Additionally, FINRA ordered that Krause pay $10,000 plus interest in restitution to PE. The restitution is:

due and payable immediately upon reassociation with a member firm following the suspension noted above, or prior to any application or request for relief from any statutory disqualification resulting from this or any other event or proceeding, whichever is earlier. The imposition of a restitution order or any other monetary sanction herein, and the timing of such ordered payments, does not preclude customers from pursuing their own actions to obtain restitution or other remedies . . .

"KN". . . "PE" . . . hmmm . . . the initials of the FINRA Arbitration Claimants in the 2016 case would have been "JN" for Joyce Reuter and "KR" for Kevin Reuter. Seems like Krause was a busy guy. Sort of wondering, though, if FINRA and/or Heartland knew about Krause's borrowing from the Reuters when the AWC and its attendant investigation were ongoing. Oh well, let's keep moving backwards in time as we take a short cut through that upcoming time warp.

BrokerCheck Records

How about we take a gander at FINRA's online BrokerCheck records for Krause. Let's see what that treasure trove reveals to us.

Krause's BrokerCheck records as of October 7, 2016, disclose that he was registered from June 1987 to September 2005 with FINRA member firm Thrivent Investment Management Inc., and, thereafter, from August 2005 to February 2012 with First Heartland. The online record asserts that "This broker is not currently registered."

2012 First Heartland Discharge

Under the heading of "Employment Separation After Allegations" BrokerCheck indicates that First Heartland Capital Inc. "Discharged" Krause on February 8, 2012, following allegations that:

CLIENT STATES THAT REGISTERED REP BORROWED FUNDS FROM HER. THE REGISTERED REP CONFIRMED THIS TO BE TRUE. THE FUNDS LENT WERE LIQUIDATED FROM THE CLIENT'S VARIABLE ANNUITY.

In response to the customer's allegations, First Heartland stated that:

REP RECOMMENDED THAT A CLIENT REDEEM FUNDS FROM A VARIABLE ANNUITY IN ORDER TO LEND THE REGISTERED REP MONEY. THE VARIABLE ANNUITY REDEMPTION CAUSED THE CLIENT TO INCUR SURRENDER CHARGES TOTALING $804.12. FIRM POLICY PROHIBITS A REGISTERED REP FROM BORROWING MONEY FROM CLIENTS.

Krause was last registered in February 2012 but the FINRA AWC suspending Krause for two months was dated March 2013; and, at that latter date, Krause hadn't been registered for about a year and, as it would develop, he never registered again. Gee, maybe if FINRA could turn back time the self-regulator may have imposed a stiffer sanction?

2001 Customer Complaint

Under the heading "Customer Dispute - Settled," BrokerCheck indicates that on July 24, 2001, Thrivent Investment Management, Inc. received a customer complaint involving an insurance product and filed against Krause seeking $600,000 in damages and alleging:

MEMBER'S DAUGHTER INDICATES REP HAS BEEN EVADING HER FOR A LONG TIME; FEELS HER PARENTS COULD NOT AFFORD THIS COVERAGE FROM THE BEGINNING; DOES NOT FEEL IT'S APPROPRIATE TO SELL SOMETHING EXPECTING THE MEMBER IS GOING TO DIE SOON. INDICATES REP HAS BEEN TAKING MONEY FROM EVERYTHING ELSE TO KEEP THIS GOING AND SHE FEELS THIS HAS GOTTEN TOTALLY OUT OF HAND. SHE STATES REP OWNED UP TO RESPONSIBILITY AND THIS NEEDS TO BE TAKEN CARE OF.

BrokerCheck records discloses that the matter was settled on August 1, 2002 for $227,689.28 and without any contribution from Krause.

Abstract Threats?

How does FINRA's settlement involving a $10,000 restitution, a $5,000 fine, and a two-month suspension play out along the entire timeline of Krause's registered history? Did FINRA read Krause's back pages before it settled for what appear to be tepid sanctions. In the end, FINRA's AWC seems the byproduct of a regulator going through the motions rather than a sincere attempt to protect the investing public and clean up the industry.

Yes, my guard stood hard when abstract threats too noble to neglect
Deceived me into thinking I had something to protect
Good and bad, I define these terms quite clear, no doubt, somehow
Ah, but I was so much older then I'm younger than that now

Permalink

Wall Street Regulation Understood Backwards

Search BrokeAndBroker

Related Topics

Previous Entries

Tag Cloud