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FINRA Settlement Not Fussing And Fighting But Working It Out
March 25, 2019
Our publisher Bill Singer, Esq. often criticizes FINRA's heavy hand, which he sees as coming down in disparate fashion upon the self-regulatory-organization's smaller firms and the industry's associated persons. In today's blog, Bill takes FINRA to task for what appears to be a light hand in the form of an incomprehensibly short suspension. The Respondent stockbroker lied and lied and lied. He lied to his firm. Lied to FINRA. Lied orally. Lied in writing. He just kept getting it wrong. In response, FINRA just seems to want to work it out, and then say good night.
Case In Point
In response to the filing of a Complaint on August 1, 2017, by the Financial Industry Regulatory Authority's ("FINRA's") Department of Enforcement, Respondent Farrukh S. Kazmi submitted an Offer of Settlement dated March 13, 2019, which the regulator accepted. Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Farrukh S. Kazmi consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Farrukh S. Kazmi, Respondent (Order Accepting Offer of Settlement, FINRA Office of Hearing Officers,2014039169602, March 22, 2019) (the "FINRA Settlement Order").
The FINRA Settlement Order asserts that Kazmi was first registered in 1997; and since January 2010, he was registered with FINRA member firm Berthel Fisher.
Berthel Fisher's Electronic Communications Policy
The FINRA Settlement Order: alleges that upon Kazmi's registration with Berthel Fisher, the firm's "Electronic Communications Policy" in its written supervisory procedures ("WSP") restricted electronic communications with customers to company-sponsored or otherwise approved facilities. Further, said policy prohibited the use of non-firm devices such as personal digital assistants; and also prohibited reps from using instant messaging for business matters. Upon registering with Berthel Fisher in 2010, Kazmi was allegedly provided with a firm email address.
Unapproved Communications
The FINRA Settlement Order: alleges that around November 30, 2010 (about 11 months after Kazimi had become registered with Berthel Fisher), Kazmi's supervisor learned that Kazmi had been communicating with a customer via instant messaging in violation of the firm's policies; and, accordingly, the supervisor reminded Kazmi that he was in violation of the policies. That same day, Kazmi confirmed in writing that he was cease his non-compliant instant messaging activities. As set forth in the FINRA Settlement Order:
11. Despite the firm's admonition and his own explicit agreement to cease using instant messaging to communicate with customers, Kazmi continued to use instant messaging in conducting securities business with VP and with two other Berthel Fisher customers, MD and RS.12. In addition, during 2013 and 2014, Kazmi regularly corresponded with at least 11 Berthel Fisher customers via text messaging regarding securities activity in their accounts. Kazmi estimated that he sent to or received from customers 200-400 text messages per month during this time.13. Kazmi did not inform Berthel Fisher that he used text messaging or instant messaging to conduct securities business between December 1, 2010 and December 31, 2014, nor did he provide copies of these communications to Berthel Fisher.
False Statements About Instant Messaging
The FINRA Settlement Order asserts that Kazmi signed and submitted to Berthel Fisher compliance questionnaires in November 2012, April 2013, and June 2014. Allegedly, Kazmi falsely denied on each of the cited questionnaires his use of instant messaging related to
his securities business; however, during his sworn testimony before FINRA, Kazmi acknowledged that his responses were false.
About four months after Kazmi had signed off on the June 2014 compliance questionnaire, FINRA examination staff was conducting an examination of Berthel Fisher's Marlton, NJ branch and in October 2014, provided the firm with a Personal
Activity Questionnaire ("PAQ") for Kazmi to complete. Item 5 of the PAQ asked:
Do you utilize instant messaging, text messaging . . . and/or third-party applications and communication systems (e.g., Gmail, Snapchat, Yahoo, AOL) for business purposes? If yes, provide the details regarding the application utilized, user-name/email addresses, the frequency, and approximately how many customers.
Pursuant to his attestation sometime around October 10, 2014. Kazmi provided the following response to Item 5 of the PAQ:
Yahoo IM, just for communication with one client [REDACTED]. This is clients preferred mode of communication. Text message [RL], [LO] per customer request.
FINRA deemed Kazmi's PAQ response to be false because he had allegedly used instant messaging to communicate with at
least three Berthel Fisher customers and used text messaging to communicate with at least 11
Berthel customers. Worse, the FINRA Settlement Order alleges that in the three days preceding the date of his PAQ signature, Kazmi had exchanged at least 90 text messages with customer "LW, " whom he did not identify in the PAQ
as a client with whom he texted.
The FINRA Settlement Order alleges that on December 18, 2014, Berthel Fisher's Chief Compliance Officer sent Kazmi a letter noting that a FINRA auditor had found that Kazmi had used instant messaging. The CCO asked Kazmi to respond in writing and explain the discrepancy between FINRA's finding and his prior denial on the annual questionnaire. By letter dated December 18, 2014, Kazmi allegedly falsely stated that he only used instant messaging to communicate with one client and asserted that Berthel Fisher's compliance department had approved his use of instant messaging with that client.
Unauthorized Discretion
The FINRA Settlement Order alleged that although Kazmi had received verbal authorization from six Berthel Fisher customers (referenced as "KP, SF, MK, PD, NT, or ZR"), the stockbroker never sought or obtained written authorization from the customers to exercise discretion in any of their accounts between May 1, 2013 and July 31, 2014; and, further, the firm never approved any of these customer accounts as discretionary accounts.
False Statements About Discretion
Items 17 and 18 on the previously referenced FINRA PAQ asked, respectively:
Do you service accounts on a discretionary basis?
In the last 12 [months], have you utilized time and price discretion when entering customer transactions?
The FINRA Settlement Order alleges that Kazmi falsely responded to Items 17 and 18 with the same response:
"none n/a."
The FINRA Settlement Order alleges that on December 18, 2014, Berthel Fisher's Chief Compliance Officer sent Kazmi a letter asking for an explanation of his trading strategy for two clients in
whose accounts he exercised discretion, and for a list of any other clients for whom he had exercised discretion. By letter dated December 18, 2014, Kazmi allegedly falsely stated that he did not use discretion with
any other clients besides the two whom the CCO's letter identified.
IPO Sales to Restricted Person
The FINRA Settlement Order alleges that between June 2010 and November 2014, Berthel Fisher customer "IBM" was
associated with another broker-dealer, and that Kazmi knew of said association. Notwithstanding, Kazmi allegedly placed 37 orders for IBM to purchase new issues in 36 separate initial public offerings, and he received a total of $10,350.71 in commissions for the purchases and subsequent sale. FINRA deemed said new-issue transactions to involve a so-called "restricted person" given IBM's association with another member firm.
SIDE BAR: FINRA Rule 5130: Restrictions on the Purchase and Sale of Initial Equity Public Offerings(a) General Prohibitions
(1) A member or a person associated with a member may not sell, or cause to be sold, a new issue to any account in which a restricted person has a beneficial interest, except as otherwise permitted herein.(2) A member or a person associated with a member may not purchase a new issue in any account in which such member or person associated with a member has a beneficial interest, except as otherwise permitted herein. . .
FINRA Sanctions
FINRA deemed Kazmi's use of instant messaging and text messaging to conduct securities business violated Berthel Fisher's procedures and prevented the firm from reviewing and retaining correspondence with the public, as required by NASD Conduct Rule 3010(d): Supervision, and making and preserving books and records, as required by NASD Rule 3110: Books and Records, FINRA Rule 4511: General Requirements, and Exchange Act Rule 17a4(b)(4). Additionally, FINRA deemed Kazmi's other misconduct to constitute violations of NASD Conduct Rules 2510(b): Discretionary Account and 3110: Books and Records; and FINRA Rules 4511: General Requirements, 5130(a)(1): Restrictions on the Purchase and Sale of Initial Equity Public Offerings, and 2010: Standards of Commercial Honor and Principles of Trade.
In accordance with the terms of the FINRA Settlement Offer, FINRA imposed upon Respondent Kazmi a $20,000 fine and a five-month suspension from associating with any FINRA member in any capacity; and required him to disgorge $10,350.71 in partial commissions plus interest.
Bill Singer's Comment
Holy crap -- really? Only a five-month suspension?
If we go by what's alleged in the FINRA Settlement Order, we got a stockbroker who is depicted as a serial liar when it comes to responding to his firm's compliance staff and to FINRA's staff -- and not just on an isolated basis or in regard to one issue. Setting aside the roughly $30,000 in fines and disgorgement, the suspension appears on the light side. Which either means that FINRA waaaaay oversold the seriousness of Kazmi's alleged misconduct; or, in the alternative, FINRA has not disclosed mitigating factors.
Talking about things that were not disclosed in the FINRA Settlement Order, online FINRA BrokerCheck records as of May 25, 2019, disclose under the heading "Employment Separation After Allegations" the following "Discharges":
Sterne Agee Financial Service, Inc. (March 18, 2005)"Allegations":
RAISING CAPITAL FOR UNIVERSITY IMAGING CENTERS OF AMERICA WITHOUT FIRM APPROVAL
Morgan Stanley Dean Witter (October 20, 1998):
"Allegations":
N/A
"Broker Statement":
INTERNAL REVIEW N/A. THE FIRM REVIEWED MR. KAZMI'S HANDLING OF CERTAIN ORDERS -- THE FIRM TERMINATED MR. KAZMI'S EMPLOYMENT ON OR ABOUT 10/30/1998:
In fairness to FINRA, its Settlement Order is very well crafted and compelling -- the question, however, is whether it may have been a tad too-well drafted for its own good. If we discount Kazmi's substantive violations of his firm's electronic communications policies and his violations of various discretionary and IPO rules and regulations, it's still tough to ignore his pattern of lies, which seem, in part, designed to cover-up his prior lies and substantive misconduct.
It's all as if FINRA is channeling the old Beatles tune: Life is very short, and there's no time for fussing and fighting, my friend. I have always thought that it's a crime, So I will ask you once again. And in the end, Kazmi got asked again and again if he was telling the truth. Eventually, he fesses up. In response, FINRA tries to work it out. Maybe we can all just sing along?