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Two Friends, Their Option Deal, A Stockbroker, His Restaurant, UBS, and FINRA
August 29, 2018
All that BrokeAndBroker.com Blog publisher Bill Singer wanted to do was go on a Labor Day vacation and publish a few puff pieces to hide his absence. But no, FINRA had to go out and work over a registered rep for his alleged violation of the regulator's Private Securities Transactions and Outside Business Activities rules. Bill doesn't like either of those rules -- at least as they are written. He thinks that they are too often speed traps on FINRA's regulatory highway. Bill ain't pulling no punches in today's slice-and-dice analysis.
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, James Arthur Kujawski, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of James Arthur Kujawski, Respondent (AWC 2016049307701, August 23, 2018).
In 1990, Kujawski first became registered and by February 2009, he joined FINRA member firm UBS Financial Services Inc. The AWC asserts that "Kujawski has no relevant disciplinary history with the Securities and Exchange Commission, any self-regulatory organization or any state securities regulator."
PST
In order to avoid even the hint that I am spinning FINRA's words, let me quote directly from the pertinent part of the AWC:
In the spring of 2012, two long-time friends, neither of whom were UBS customers, were interested in executing a transaction through which one friend, the owner of VT, would buy back a call option VT issued to the other friend, the owner of LTU.In April of 2012, the owner of LTU requested that Kujawski help facilitate the repurchase of the VT option for a percentage of the sale price. Kujawski agreed, but did not disclose the arrangement to UBS, or seek approval as required until many years later. Kujawski participated in the repurchase of the VT option by: (i) introducing a commercial lender to participate in the transaction; (ii) attendingmeetings with the parties; (iii) reviewing draft sale contracts and providing comments; and (iv) accepting $73,444.90 in compensation for his participation, which was paid by February 4, 2014.NASD Rule 3040 prohibits any person associated with a member from "participat[ing] in any manner in a private securities transaction" without first providing written notice to his member firm. NASD Rule 3040(e) defines a private securities transaction as "any securities transaction outside of the regular course or scope of an associated person's employment with a member." The sale of a call option on common stock is a securities transaction within the scope of the Rule.By virtue of the foregoing, Respondent violated NASD Rule 3040 and FINRA Rule 2010.
PST: Bill Singer's Comment
Here we go again with FINRA's nonsense in applying and interpreting its so-called Private Securities Transaction ("PST") Rule. For my analysis of the FINRA PST Rule:
More than six years ago in the spring of 2012, two non-customers of UBS concocted some options transaction. Frankly, who gives a crap? It's over six years ago and the two financial wizards who cooked up this odd-ball options transaction were not UBS customers. Moreover, who cares if they were cousins, lovers, or friends -- how does the relationship between them have anything to do with Respondent Kujawski or his alleged role in whatever it is that these two friends engineered?
Moving along with the two unnamed friends and their option deal, the AWC asserts that something happened in April 2012. I'm not sure exactly what happened because the AWC's version of events reminds me of a football play that we diagrammed in the schoolyard some 60 or so years ago:
Johnny, you're the bottle cap; Peter, you're the pebble -- what? You don't want to be the pebble? Why? Well only one of you can be the bottle cap. Okay, fine, let's start over again. Johnny you're the pebble; Peter, you're the bottle cap. Okay, now, don't look behind you because we don't want to tip our hand here, but on the count of three, Johnny you hike the ball to me. I'll take two steps to my right like I'm gonna run. When I get to Two Mississippi, Johnny, you grab your left leg like you pulled a muscle. Peter, you stand still until Johnny grabs his leg and then run as fast as you can to about where the crack is in the cement next to the water fountain. When you get right next to the fountain, yell "I'm open." I will fake it to you, at which point, you run towards me three steps and then make like you're going to run to your right and if Manny goes with you to cover you, spin around and head for the goal line; if Manny doesn't go for the fake, just do what you can to get free. Now, Johnny, when Peter yells "I'm open," you run on a diagonal for the goal line and if you're open, I throw it to you. If you're not open, I'll throw it to Peter. If neither of you are open, I'll run back to my left and try to score. Of course, just as we start the three-on-three schoolyard football championship play, Johnny hikes the ball on two and Manny grabs the bouncing ball and scores a touchdown. At which point, we huddle up again with another equally complicated play.
Anyway, back in FINRA's AWC huddle, we got an unnamed "owner of VT" (we'll make him the bottle cap), who will buy back a call option that that VT issued to the "owner of LTU" (we'll make him the pebble). Keep in mind that as of the spring of 2012, the bottle cap and pebble were apparently contemplating a transaction, which, at that time, was only something that the two friends "were interested in executing." All of which suggests that the buy-back was nothing more than a plan or a discussion. A proposed transaction, at best.
Along comes April 2012, and the pebble asks Kujawski to "help facilitate the repurchase of the VT option for a percentage of the sale price." Interesting request: help facilitate. Think about that. We're talking about helping to facilitate an option repo that two friends were "interested in executing." What exactly is it that Kujawski would be disclosing to UBS at this point? When does a proposed transaction cross the threshold into a disclosable transaction? And while you're pondering that bit of metaphysics, is being asked to facilitate a proposed transaction the same as engaging in a transaction (especially when the proposed transaction hasn't occurred yet?)
As to Kujawski's facilitation of the option repo, how did that satisfy the PST Rule's requirement that he participate in the underlying transaction? Somewhat lost in the mess of FINRA's words is the fact that Kujawski did not appear to have any role in the initial sale of the call option that the two friends are now trying to reverse via a buy-back. As the AWC awkwardly tries to explain, these are the alleged steps that took Kujawski:
Kujawski participated in the repurchase of the VT option by: (i) introducing a commercial lender to participate in the transaction; (ii) attending meetings with the parties; (iii) reviewing draft sale contracts and providing comments; and (iv) accepting $73,444.90 in compensation for his participation, which was paid by February 4, 2014.
I see that Kujawski introduced a commercial lender -- so what? If I give you the phone number of a banker and say to mention my name, does that mean I have participated in a PST? The AWC further asserts that Kujawski attended meetings but, notably, there is no assertion that he engaged in any of the ensuing discussions at the meetings or that he played any material role other than having parked his possibly fat ass on a chair in a room where a meeting was ongoing. Last I understood, if I sit in a movie theater and watch the featured film, it doesn't mean that I directed, produced, or acted in it.
Kujawski was paid $73,444.90 "compensation for his participation." That's the most damning thing in FINRA's quiver. I am not going to downplay that fact. It is what it is. As I often note in critiquing these PST AWCs, Kujawski chose to settle FINRA's charges. As such, I'm not going to second-guess the wisdom of that choice because I don't know what I don't know, and the facts that were set down in the AWC may have avoided referencing further facts that would buttress FINRA's case and weaken Kujawski's. Similarly, Kujawski may have been happy to pay a fine and get on with his life rather than battle FINRA to the bloody end via hearings and appeals. Regardless, let's not lose sight that Kujawski's signature adorns the bottom line of a settlement agreement setting forth everything that I am not pulling apart.
Why, then, do I make criticize this AWC? It's a simple answer. FINRA will point to this AWC as proof of X, Y, and Z. The next respondent may not be so disposed to settlement. The next respondent may wish his or her day before a FINRA hearing panel. I just want to make it clear that whether FINRA bullied a respondent into a settlement or that respondent embraced the settlement, the facts of every case are often different and a successful defense may sometimes prevail.
OBA
Not content to hit Kujawski with a PST violation, FINRA tacks on another shot for an alleged Outside Business Activity ("OBA"). Again, let me quote the pertinent source language in the AWC:
Between November 9, 2013 and September 19, 2014, Kujawski purchased a restaurant, hired an architect and obtained a liquor license with the intention of opening the restaurant for business. He also filed articles of incorporation and became the registered agent for the business. Later, at the end of 2014, Kujawski sold the restaurant to his business partner before it opened. Kujawski neverdisclosed the purchase or sale of the restaurant to UBS, or sought approval for this outside business as required.FINRA Rule 3270 provides, in relevant part, that "[njo registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he has provided prior written notice to the member, in such form as specified by the member."The Firm's written supervisory procedures similarly required employees to receive approval prior to initiating any new outside business activity.As described above, Kujawski bought and sold a restaurant without disclosing the business to the Firm, or seeking the Firm's approval as required.By virtue of the foregoing, Respondent violated FINRA Rules 3270 and 2010.
OBA: BIll Singer's Comment
Again, here we go again with FINRA's nonsense in applying and interpreting another of its rule; this time, its Outside Business Activities ("OBA") Rule. For my analysis of the FINRA OBA Rule:
Again, let's engage in a bit of AWC dissection. We are told that some four years ago:
Kujawski purchased a restaurant, hired an architect and obtained a liquor license with the intention of opening the restaurant for business. He also filed articles of incorporation and became the registered agent for the business. Later, at the end of 2014, Kujawski sold the restaurant to his business partner before it opened. Kujawski never disclosed the purchase or sale of the restaurant to UBS, or sought approval for this outside business as required.
Yes, Kujawski bought a restaurant and did several things in preparation for opening the business; however, note that the AWC concedes that Kujawski had "the intention of opening the restaurant for business." The "intention" as in he "sold the restaurant to his business partner before it opened." Intention. Before it opened. Does that sound even remotely like Kujawski engaged in an OBA? I buy a car. It's engine turns out to be dead. I sell it for scrap. Does that sound like I drove the car? What "activity" involved in running a restaurant did Kujawski engage in if he sold the business before it opened?
If you want to argue that Kujawski's "sale" of his restaurant constitutes his engaging in an outside business activity, have at it. Frankly, that strikes me as a stretch and not in keeping with the spirit of FINRA's OBA Rule. Kujawski's sale of the restaurant was an aborted ending to whatever plans he didn't realize. He was never in the restaurant business. He bought a restaurant with the intent of engaging in that business but never managed to move far enough forward to cross over the line from preparation to realization
UBS Discharge
Online FINRA BrokerCheck records as of August 29, 2018, disclose under the heading "Employment Separation After Allegations" that UBS discharged Kujawski on February 20, 2018, based upon allegations that:
FA discharged for continued failure to disclose some of his outside business activities/outside business investments.
Oh, my! How encouraging. UBS had a robust compliance protocol that was outraged in February 2018 by the continued failure of Kujawski to alleged disclose some of his OBA. Not too robust though because this purportedly dastardly bit of non-compliance was going on at least since 2012, but, sure, UBS did bounce Kujawski's ass out of there in February 2018.
Hmmm . . . February 2018? That reminds me. I don't want to be too cynical here but y'all remember this March 21, 2018, headline from the New York State Attorney General's Office: "A.G. Schneiderman Announces $230 Million Settlement With UBS Over Misconduct Leading Up To Financial Crisis / Settlement Secures $189 Million in Consumer Relief for New Yorkers Impacted By the Housing Crash; $41 Million in Cash for New York State / Today's Settlement Brings Total Cash and Consumer Relief Secured by AG Schneiderman in Aftermath of Financial Crisis Up to $3.93 Billion" https://ag.ny.gov/press-release/ag-schneiderman-announces-230-million-settlement-ubs-over-misconduct-leading-financial READ the FULL TEXT Settlement Agreement https://ag.ny.gov/sites/default/files/ubs_settlement.pdf
Okay, sure, I get it. UBS was so caught up in ferreting out Kujawski's horrific misconduct that the financial institution was totally distracted by the whole residential mortgage-backed securities fraud perpetrated on RMBS investors. Thankfully, UBS cleaned house about a month before it settled its own regulatory claims. That's great timing. Very convenient, no?
FINRA Sanctions
In determining the appropriate sanctions in this matter, FINRA noted that in 2016, UBS had fined Kujawski for his alleged participation in the call option sale. How nice that UBS let Kujawski stay with the firm until the month before it settled with the New York Attorney General in 2018.
In accordance with the terms of the AWC, FINRA imposed upon Kujawski a $10,000 fine and a four month suspension from association with any FINRA member in any capacity. Not content with a fine and suspension, FINRA imposed a $38,000 disgorgement to be paid to FINRA itself.
Explain to me why it's not okay for Kujawski to financially benefit from his alleged participation in the PST but it's okay for FINRA to financially benefit via the disgorgement of the purported proceeds of that improper participation. Yeah, I know, sure, FINRA is merely going to act as a custodian for the disgorged funds and it will find its way into the coffers of so many worthwhile organizations -- which beckons the question as to why FINRA is still so dead against creating an Anti-Fraud Fund for the benefit of defrauded public investors.