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Disturbing FINRA Settlement Involving Elderly Client With Dementia
March 13, 2018
In today's BrokeAndBroker.com Blog, publisher Bill Singer, Esq. presents us with a disturbing FINRA regulatory settlement -- disturbing in so many ways. Disturbing in that we are presented with alleged misconduct by a veteran stockbroker in a elderly client's account. Disturbing in that the alleged misconduct spans some four years. Disturbing in that the client was in his 90s with dementia. Disturbing in that the stockbroker had a disturbing history of settled customer complaints. Disturbing in that FINRA member firms seem all too willing to take on what we will euphemistically call "baggage." Disturbing in that despite clanging alarms and blazing flares, those in compliance and regulation seem deaf and blind. Disturbing in that we see similar signs and similar settlements over and over again but no one pushes the STOP button. Disturbing in that FINRA thinks it's doing its job by simply barring folks long after the damage and harm is done. Disturbing in that the BrokeAndBroker.com Blog keeps publishing these settlements and keeps complaining about the impotent regulatory and compliance response but once the harangue dies down, nothing changes . . . and, apparently, nothing will.
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, Mark Kaplan submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Mark Kaplan, Respondent (AWC 2015045984001, March 7, 2018).
Kaplan was first registered in 1989 and by March 2011, he was registered with FINRA member firm Vanderbilt Securities LLC, until he voluntarily resigned on February 22, 2018. The AWC asserts that Kaplan had no prior relevant disciplinary history.
93-Year-Old Client
The AWC asserts that in March 2011, "BP," a "93-year-old retired clothing salesman" opened accounts with Vanderbilt Securities LLC that were serviced by Kaplan. The AWC asserts that the accounts were worth about $507,544.64 and that BP's only source of income during the relevant period between March 2011 and March 2015, was Social Security. Further, the AWC asserts that during the relevant period, Kaplan exercised de facto control over BP's accounts because the elderly customer:
relied on Kaplan to direct investment decisions in his accounts, contacting Kaplan frequently. In addition, Customer BP was experiencing a decline in his mental health. In April 2015, the Court granted an application by BP's nephew to act as his legal guardian and manage Customer BP's financial affairs after he was diagnosed with dementia during January 2014.
Losses and Costs
In pertinent part, the AWC asserts that during the relevant period Kaplan effected over 3,500 trades in BP's accounts, resulting in some $723,000 in trading losses and $735,000 in commissions and mark-up for Kaplan and Vanderbilt Securities, LLC. Accordingly, the average annualized cost-to-equity ratio in BP's "two primary accounts" was purportedly 31.7% and 301.6%. In those same primary accounts, the annual cost-to-equity ratios ranged from 16.5% to 814.41 and the annual turnover rates ranged from 2.34 to 118.15.
The AWC asserts that Kaplan:
never discussed with Customer BP the extent of his total losses or the aggregate amount he paid in sales charges and commissions.
Further, the AWC asserts that
The high turnover rates and cost-to-equity ratios reflect how difficult it would have been for Customer BP to obtain sufficient profits to cover the costs of Kaplan's active trading. This level of trading was excessive and unsuitable for Customer BP given his investment profile, including his age, risk tolerance, and income needs.
Sanctions
FINRA deemed that Kaplan's conduct constituted violations of '34 Act Section 10(b) and Rule 10b-5 thereunder; NASD Rule 2310 (Pre-July 9, 2012 conduct); and FINRA Rules 2020, 2111 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Kaplan a Bar from associating with any FINRA member in any capacity.
Bill Singer's Comment
Sort of lost in the flurry of details in the AWC are some essential and troubling facts. First, we should keep in mind that the "relevant period" cited in the AWC is between March 2011 and March 2015, which adds up to four years. That's a long time for a stockbroker to be exercising so-called de facto control over an elderly client's accounts. Factored into that consideration is the AWC's assertion that not only was BP "experiencing a decline in his mental health," but in January 2014 he was "diagnosed with dementia," and in April 2015, his nephew became his guardian.
Against that background, let's also recall that the AWC asserts that during the relevant period "Kaplan effected over 3,500 trades in BP's accounts, resulting in some $723,000 in trading losses and $735,000 in commissions and mark-up for Kaplan and Vanderbilt Securities, LLC."
Keep in mind that the AWC discloses that "On April 4, 2016, the Firm and Kaplan made a settlement payment totaling
$470,000 to the guardian for customer BP's accounts." Also keep in mind that despite all of the assertions by FINRA in the AWC, Kaplan was not fired by Vanderbilt Securities, LLC in 2016 or 2017 but the AWC asserts that "he voluntarily resigned on February 22, 2018."
You can draw whatever conclusions and inferences you wish but given the allegations and asserted facts, Kaplan's dealings with BP doesn't exactly paint a reassuring picture of the present state of Wall Street regulation or compliance.
2011 MSSB Discharge
Online FINRA BrokerCheck records as of March 13, 2018, disclose under the heading "Employment Separation After Allegations" that Morgan Stanley Smith Barney had "Discharged" Kaplan on March 11, 2011, based upon allegations that:
FA KAPLAN WAS DISCHARGED AS A RESULT OF A RECENT CLIENT COMPLAINT AND OTHER CONCERNS REGARDING ACTIVITY IN CLIENT ACCOUNTS.
In response to the above disclosure, Kaplan commented that:
BROKER BELIEVES THE ALLEGATIONS TO BE UNFOUNDED. MANAGEMENT APPROVED ALL PRIOR ACTIVITY WITHOUT EXPRESSING ITS SO-CALLED "CONCERNS" OR SUGGESTING CORRECTIVE ACTION PRIOR TO TERMINATION.
Settled Customer Disputes
Online FINRA BrokerCheck records as of March 13, 2018, disclose under the heading "Customer Dispute - Settled" seven disclosures.
Vanderbilt:
On January 19, 2016, customer filed FINRA Arbitration alleging unsuitable investments and sought $1,130,000 in damages; matter settled on June 6, 2017, for $500,000 with Kaplan contributing $50,000On November 17, 2015, customer filed FINRA Arbitration alleging unsuitable recommendations and sought $50,000; matter settled on May 17, 2016, for $25,000 with Kaplan contributing $19,050.On June 26, 2015, customer's Guardian filed FINRA Arbitration alleging unauthorized and unsuitable trading and sought $800,000; matter settled on April 4, 2016, for $470,000 with Kaplan contributing $25,000. (NOTE: This appears to be BP's claim)
Morgan Stanley/Citigroup Global Markets:
On March 2, 2016, customers filed FINRA Arbitration alleging unsuitable and excessive trading and sought $700,0000; matter settled by Citigroup Global Markets/Morgan Stanley on August 9, 2016 for $240,000 ($120,000 from each firm) with no contribution from Kaplan
Morgan Stanley Smith Barney:
Citigroup Global Markets Inc.On March 29, 2011, customer alleged excessive trading and sought unspecified damages; matter settled by Morgan Stanley Smith Barney on March 29, 2011, for $45,000 with no contribution from Kaplan
On April 23, 2007, customers alleged that Kaplan failed to follow instructions and engaged in unauthorized trade and sought $21,490; matter settled by Citigroup Global Markets on April 24, 2007, for $11,587.88 with no contribution from Kaplan
Morgan Stanley Dean Witter/ Citigroup Global Markets, Inc.:
On July 23, 2007, customers filed NASD Arbitration alleging unsuitable and excessive trading and sought:
$50,000; matter settled by Morgan Stanley Dean Witter on February 26, 2008, for $24,750 with no contribution from Kaplan; and
$34.313. matter settled by Citigroup Global Markets Inc. on January 28, 2008 for $24,750 with no contribution from Kaplan.