An irreverent Wall Street Blog
Solicited System Snafu Stiffs Settling Stifel Stockbroker
May 2, 2018
Oh my. You got a ticket to ride but it's a one-way ticket to the old FINRA slammer. You're supposed to check "BUY" when it's a buy and "SELL" when it's a sell and "SOL" when it's solicited and "UNSOL" when it's unsolicited and . . . well, there's lots of boxes and lines that require all the terms of the ticket. Visit enough trading desks and you'll hear the tales of the idiot who entered ABZ instead of ABC or wound up creating an artificial short when he sold 100,000 shares instead of bought them. In today's BrokeAndBroker.com Blog, we feature the tale of a stockbroker who couldn't do something but then could but his firm's order-entry system was wrongly programmed so he couldn't do what he wasn't allowed to do but now could but for the IT snafu. So . . . our enterprising stockbroker engaged in a bit of self-help. I'm guessing that, one day, they'll tell his story on the trading desk. No one's laughing today but, you know, give it some time. Wall Street loves misery and a good joke about it.
Case In Point: Fitzpatrick 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, Kevin S. Fitzpatrick submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Kevin S. Fitzpatrick, Respondent (AWC . 20110278915-01, April 26, 2018).
The AWC asserts that Fitzpatrick entered the securities industry in 1989, and in 1994 joined FINRA member firm Stifel, Nicolaus & Co., Inc. The AWC asserts that "Fitzpatrick has no prior relevant disciplinary history."
221 Unsolicited Trades
The AWC asserts during the relevant period from about July 29, 2010, through November 22, 2010, Fitzpatrick had allegedly entered 221 improperly marked "unsolicited" orders in shares of a company identified in the AWC only as "ABCD." The AWC explains that a "generic modifier has been used in place of the name of this security." The AWC offers the following explanation for Fitzpatrick's motivation in mis-marking the tickets:
4. This was due, in part, to the fact that, prior to the Relevant Period, Fitzpatrick was restricted from soliciting orders in ABCD due to his involvement in a prospective investment banking relationship with ABCD. Accordingly, Stifel programmed its order management system to block him from entering solicited orders in ABCD. The restriction was lifted on July 29, 2010, but the systemic block was not immediately removed. As a result, during the Relevant Period, Fitzpatrick marked all orders in ABCD "unsolicited".5. Upon discovering that the systemic block had not been lifted, Stifel reprogrammed its order management systems and had Fitzpatrick correct the mismarked orders. Thereafter, Stifel corrected its books and records.6. Nevertheless, Fitzpatrick's mischaracterization and improper marking of these orders caused Stifel's books and records, related to these trades, to be inaccurate.
Voluntary Termination
On October 16, 2017, Stifel filed a Uniform Termination Notice for Securities Industry Registration (Form U5) with respect to Fitzpatrick's voluntary termination.
FINRA Sanctions
FINRA deemed Fitzpatrick's conduct to constitute violation of NASD Rule 3110 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Fiitzpatrick a Censure, $5,000 fine, and a 15-days-suspension from association with any FINRA member firm.
Bill Singer's Comment
In the Fitzpatrick AWC, FINRA asserts that:
Fitzpatrick has no prior relevant disciplinary history.
Under the heading "Employment Separation After Allegations" on Fitzpatrick's online FINRA BrokerCheck record as of May 2, 2018, we find that he was "discharged" by Prudential Securities Incorporated in 1994 based upon allegations of suitability involving accounts holding low-priced stocks. In 1992, Fitzpatrick was "Permitted to Resign" by Merrill Lynch based upon allegations:
Ummmm . . . Fitzpatrick marked as unsolicited, tickets for solicited trades in 1992? Gee, I don't know about you but that sort of strikes me as something that's a "prior relevant" history in terms of a 2018 FINRA regulatory settlement involving allegations of marking solicited trades as unsolicited. Is that a prior "disciplinary" history? Maybe not. On the other hand, I don't see any explanation of the term "disciplinary" in the AWC, so, who the hell knows. Was FINRA aware of that prior 1992 incident when it negotiated the Fitzpatrick AWC. I assume so but why not at least footnote the earlier event in the AWC?THAT I SOLICITED LOW PRICE STOCKS AND MARKED TICKETS UNSOLICITED WHEN IN FACT THE ORDERS WERE SOLICITED.
Under the BrokerCheck heading "Customer Dispute-Settled," are four disclosures:
- A reporting source listed only as "Firm" settled a 1992 $177,000 customer complaint for $165,000 without contribution from Fitzpatrick. The "firm" asserted, in part, that it had "determined that Fitzpatrick solicited low price stock in violation of firm policy and improperly marked the order tickets to reflect unsolicited transactions." The "firm" asserted that it had terminated Fitzpatrick on August 11, 1992. I'm going to infer that the "firm" was Merrill Lynch based upon the 1992 disclosure under "Employment Separation After Allegations."
- Prudential Securities settled a 1997 customer complaint alleging the Fitzpatrick had provided misleading and/or incorrect information regarding deferred sales charges. The matter was settled for $6,139.85
- Stifel Nicolaus settled a 2002 customer complaint for $60,000 with a $25,000 contribution from Fitzpatrick. The allegations included failure to follow investment strategy, unethical practices, and unauthorized trades, which are described as "miscommunications."
- Stifel Nicolaus settled a 2013 customer complaint seeking $48,871.03 in damages based upon allegations of unsuitability. Stifel Nicolaus settled the claims for $39,500, which were paid in full by Fitzpatrick.
You and I can argue all you want about what constitutes a "prior disciplinary history," but we should at least be able to agree that when FINRA publishes a regulatory settlement, that the regulator should be mindful of its mandate to protect the public and educate the industry. I'm not sure that either of those goals is satisfied in the Fitzpatrick AWC because it doesn't disclose or reference the employment or customer-dispute matters noted above in my comment.
Next, I grapple with this mess of a fact pattern in the Fitzpatrick AWC:
4. This was due, in part, to the fact that, prior to the Relevant Period, Fitzpatrick was restricted from soliciting orders in ABCD due to his involvement in a prospective investment banking relationship with ABCD. Accordingly, Stifel programmed its order management system to block him from entering solicited orders in ABCD. The restriction was lifted on July 29, 2010, but the systemic block was not immediately removed. As a result, during the Relevant Period, Fitzpatrick marked all orders in ABCD "unsolicited".5. Upon discovering that the systemic block had not been lifted, Stifel reprogrammed its order management systems and had Fitzpatrick correct the mismarked orders. Thereafter, Stifel corrected its books and records.
Apparently, Stifel Nicolaus had restricted Fitzpatrick from soliciting orders in ABCD. To further said restriction, the firm programmed its order system to block Fitzpatrick from entering solicited ABCD orders. On July 29, 2010, Stifel Nicolaus rescinded its block and allowed Fitzpatrick to enter solicited ABCD. Despite the firm's okay to enter solicited ABCD orders, the firm failed to remove whatever coding it had put in place to allow its order entry system to accept solicited ABCD orders from Fitzpatrick.
If Stifel Nicolaus lifted the restriction on Fitzpatrick but failed to remove the coding that maintained it in its order system, then it seems that Fitzpatrick attempted to work-around (some may say "game") the snafu by marking ABCD solicited orders as "unsolicited." At some point, the firm figured out that it needed to reprogram its order system to remove Fitzpatrick's block, which it did. In a sense, the issue wasn't so much a compliance concern as an IT failure. Of course, anytime you're knowingly marking as unsolicited a solicited order, that's going to raise compliance concerns. I get it and I want you to know that I'm not blind to the valid concern. Which sort of leaves us with an if my aunt were a man she'd be my uncle problem.
A $5,000 fine and a 15-day suspension for this? On the one hand, when you consider his background, maybe you don't give Fitzpatrick the benefit of the doubt -- but none of his background is recited in the AWC. On the other hand, now that we understand Fitzpatrick's motivation and his firm's programming error, you'd sort of think that the explanation of what he did and why would simply elicit a go-and-sin-no-more response from FINRA.
Case In Point: Stifel Nicolaus 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, Stifel, Nicolaus & Co., Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Stifel, Nicolaus & Co., Inc., Respondent (AWC 20110278915-02, April 26, 2018).
The AWC asserts that Stifel, Nicolaus & Co. has been registered with the Securities nd Exchange Commission and a FINRA member firm since 1936. The AWC asserts that the firm "has no prior relevant disciplinary history." Largely restating the allegations in its Fitzpatrick AWC, the Stifel, Nicolaus AWC asserts that:
7. Nevertheless, Respondent's registered representative's mischaracterization and improper marking of these orders caused Stifel's books and records, related to theses trades, to be inaccurate.8. Based on the foregoing, Respondent violated Section I 7(a) of the Exchange Act, Rules 17a-3(a)(6) and 17a-4(4), thereunder, and NASD Rule 3110.
In accordance with the terms of the AWC, FINRA imposed upon Stifel, Nicolaus & Co. a Censure and $25,000 fine.
Bill Singer's Comment
There is no cross reference in the Fitzpatrick AWC to the Stifel Nicolaus AWC or vice versa. I first stumbled upon the firm's settlement and inferred that we had a con-artist stockbroker who had mischaracterized a solicited order as unsolicited in order to wrongfully circumvent his firm's explicit policy of preventing him from entering such orders. Turns out, the firm had lifted its bar but had failed to ensure that its order system was reprogrammed to allow the now permitted unsolicited order entries. As such Fitzpatrick comes off more sympathetic when you read his settlement and he even if he is wrong in his conduct, he is also somewhat of a victim of his firm's conflicting verbal authorization but computer programming failure. Again, we can argue whether the facts and circumstances required a Censure and $25,000 fine on Stifel Nicolaus.
As I always note when commenting on an AWC, and will do so here again, it's not my place to second guess the wisdom of settling or the wording of the settlement document. The respondents opted to settle and if the settlements are fine with them, then they are fine with me. Moreover, the AWC represents an end-product of negotiation and there are often facts and characterizations that are left out of the final draft as a result of the give-and-take of settlement.
Regardless, FINRA still needs to do a better job of quality control in ensuring that each AWC has adequate content and context so as to render the published document intelligible and compelling. FINRA failed in that effort with both of these AWCs. I come away with the sense of inadvertent errors or misguided but somewhat understandable actions -- which should be disapproved by a firm's compliance staff and by an industry regulator. I concede that wrong occurred in both cases. I'm just not sure that the appropriate redress was some $30,000 in fines that goes into FINRA's pocket and a 15-day-suspension.