The 93 Year Old Customer with Dementia, The Guardian, The Stockbroker, and the Compliance Officer

Customer BP, a 93-year-old retired clothing salesman, opened accounts at Vanderbilt with Kaplan during March 2011. As of Match 31, 2011, the value ot Customer BP's accounts was approximately $507,544.64. Social Security was Customer BP's only source of income during the Relevant Period.

During the Relevant Period, Kaplan exercised de facto control over BP's amounts. Customer BP 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.

During the Relevant Period, Kaplan effected more than 3,500 transactions in Customer BP's accounts, which resulted in approximately $723,000 in trading losses and generated approximately $735,000 in commissions and markups for Kaplan and the Firm.

Kaplan never discussed with Customer BP the extent of his total losses or the aggregate amount he paid in sales charges and commissions.

FA KAPLAN WAS DISCHARGED AS A RESULT OF A RECENT CLIENT COMPLAINT AND OTHER CONCERNS REGARDING ACTIVITY IN CLIENT ACCOUNTS.

SIDE BAR: Given BP's age, his dementia, the court-appointed guardianship, and the alleged churning and excessive trading, we were left to wonder at the conclusion of the Kaplan AWC whether any compliance-related issues arose at Vanderbilt Securities that prompted supervisory intervention. In plain terms: what did Vanderbilt Securities know, when did it know it, and what did the firm do about it?

Vanderbilt did not systemically track the turnover rates and cost-to-equity ratios in customer accounts. The Firm performed these calculations manually, on an ad-hoc basis, generally when a customer complained. Accordingly, the Firm had no reasonable system to detect unsuitable excessive trading based on turnover rates or cost-to-equity ratios.

Rather, the Firm prepared a monthly report ("Activity Report") that identified accounts in which there were more than 40 trades in that particular month. The Firm's written supervisory procedures did not address the Activity Report or provide any guidance about how to use it. In addition, the Activity Report did not capture patterns of activity across multiple months.

During the Relevant Period, Champney reviewed the monthly Activity Report and determined, in his discretion, whether the appearance of a customer account on the report warranted action.' The Firm's WSPs did not provide any guidance about how to determine whether further action was warranted. The Firm's procedures did not require that any action be taken when a customer's account appeared on the Activity Report.

In certain instances, Champney had the Firm send customers a "Satisfaction Letter" when their accounts appeared on the Activity Report. However, this form letter did not contain any information about the level of trading in the account or any losses or commissions associated with those transactions. Additionally, the Firm's WSPs did not provide guidance about whether any steps should be taken if a customer did not acknowledge a Satisfaction Letter, even though the letter requested that customers acknowledge receipt.

at least two customers at Kaplan's prior firm had alleged that he traded excessively in their accounts. Champney was also aware that Kaplan had been terminated by that firm because of a client complaint and other concerns about the activity in his customers' accounts.

Kaplan effected numerous trades in BP's accounts from the outset, effecting 43 trades in April 2011, 34 in May 2011, and 66 in June 2011. In September 2011, approximately six months after BP opened his accounts with the Firm, Champney sent Customer BP a Satisfaction Letter. The letter did not include any information about the level of activity in BP's accounts or the losses or commissions associated with that activity. At that point, BP's accounts had experienced a net loss of approximately $167,000 and generated commissions of almost $63,000. Champney did not discuss the activity, commissions, or losses with BP or take steps, as Kaplan's supervisor, to ensure that Kaplan did so.

As Kaplan's supervisor, Champney subsequently became aware of continued trading, losses, and commissions in Customer BP's accounts. Champney observed that Customer BP's accounts appeared on the Finn's Activity Report 23 out of 30 months of the Relevant Period and BP experienced heavy losses and paid significant commissions throughout the Relevant Period. During these four years, Champney met with Customer BP once, in July 2013, with BP's son, after BP misplaced his debit card. During this meeting, neither Kaplan nor Champney raised with Customer BP the extensive losses and commissions associated with the trading in his accounts. One day later, Champney sent a second Satisfaction Letter to Customer BP. Champney did not include any information about the level of activity in Customer BP's accounts or the losses or commissions associated with that activity in this letter or in any other communication with Customer BP during the Relevant Period.

As Kaplan's supervisor, Champney knew that Customer BP called Kaplan nearly every day, often multiple times a day, and he knew that BP relied on Kaplan for information about his accounts. Champney was also aware of an email that Customer BP's son, who lived with Customer BP, sent to Kaplan in February 2013, after Customer BP had sustained substantial losses, acknowledging the depth of his father's interest in the markets and in seeing his money grow, and urging him to be careful with his father's accounts. Neither Kaplan nor Champney followed up with Customer BP in response to his son's email.

• FINRA
• AWC
• Elderly
• Dementia
• Guardian
• Vanderbilt Securities
• Cost To Equity
• CCO
• Exception Run
• Satisfaction Letter
• Happiness Letter
• WSP
• Turnover
• Churning
• Excessive Trading
• FINRA Rule 3010
• FINRA Rule 3110
• BrokeAndBroker
• Bill Singer