The Grandfather FINRA OBA Paradox

March 15, 2021

In the "Grandfather Paradox" we are asked to wonder whether you could travel back in time to kill your grandfather before he conceived your father. If your time travel was successful, then how were you able to kill your grandfather and prevent your birth if, in fact, you were never born? In a variation on this theme, the "FINRA Paradox," we are asked whether you could backdate a document that was supposed to be submitted before you got approval to engage in an outside business activity. Which prompts the obvious question: If your backdating was successful, then would your grandfather have hired you to engage in outside business activity if a tree fell on Wall Street while you were clapping with one hand and no one heard the tree fall but, nonetheless, everyone bought GameStop shares on Robinhood in the face of naked shorting?

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, Ernest D. Kappotis submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Ernest D. Kappotis, Respondent (FINRA AWC 2019064685902)

https://www.finra.org/sites/default/files/fda_documents/2019064685902
%20Ernest%20D.%20Kappotis%20CRD%204871251%20AWC%20va.pdf

The AWC alleges that Kappotis was first registered in 2005, and from January 2019 to November 2020, he was registered with CBC Securities, Inc. The AWC asserts that Kappotis "does not have any relevant disciplinary history."

Backdating

In pertinent part, the AWC alleges that:

On October 22, 2019, in connection with a routine examination of the firm, FINRA Staff requested that the firm provide lists of the outside business activities (OBAs) of the firm's registered persons, and, if available, documents showing the firm's approval of those OBAs. On November 4, 2019, Kappotis created a document containing a list of his OBAs. Kappotis backdated that OBA list to October 1, 2019. Kappotis knew that the document would be submitted to FINRA when he created and backdated it. The backdated document was, in fact, produced to FINRA.

Although the firm had approved Kappotis' OBAs, the backdated document that Kappotis created purported to show that he had provided prior written notice to the firm of his OBAs in the form of a list when, in fact, that was not the case.

Sanctions

In accordance with the terms of the AWC, FINRA found that Kappotis violated FINRA Rule 2010 and imposed upon him a $5,000 fine and a two-month suspension from associating with any FINRA member firm.

Bill Singer's Comment

Ah yes . . . the old do-it-yourself-Nunc-Pro-Tunc gambit!

As noted in the AWC, during his association with CBC Securities, Kappotis was registered "as a Financial and Operations Principal (FINOP), among other capacities . . ." Online FINRA BrokerCheck records as of March 10, 2021, disclose under "Registration and Employment History," that among Kappotis' prior employers:

05/2011 - 04/2015 FINRA SALES PRACTICE EXAMINER . . .

"Other Business Activities":

Ernest D. Kappotis solely owns Curwen Capital LLC, a financial services consulting firm, under which he serves as the FINOP for BMI Capital International LLC (15 hours per month) and Ustocktrade Securities Inc. (40 hours per month). Mr. Kappotis also owns half of Intersource Consulting Group LLC, a securities compliance consulting firm, under which he serves as the FINOP for Wright Investors' Services Distributors, Inc. (10 hours per month) and Detwiler Fenton & Co. (10 hours per month), and as a compliance consultant for broker-dealers Lakeridge Capital Inc. (10 hours per month) and USCA Securities LLC (3 hours per month).

Recently, BrokeAndBroker.com published "FINRA Suffers Stunning Rebuke by SEC in Tysk Appeal" (BrokeAndBroker.com Blog / March 8,. 2021)
http://www.brokeandbroker.com/5738/finra-sec-tysk/ In that over-a-decade long saga, we came across a public customer FINRA arbitration involving allegations about allegedly unsuitable annuity recommendations. Following the arbitration's conclusion, FINRA-the-regulator investigated additional allegations that the stockbroker had altered customer contact notes after receiving the customer's complaint; and, further, he had failed to notify the client and the employer brokerage about the edits. As the headline to the blog suggests, FINRA's regulatory case blew up in its face.

Since Kappotis opted to settle FINRA's allegations via an AWC, it's certainly not my place to second guess him. In keeping with my standard disclaimer on this topic, I don't know what I don't know and I accept the fact that in reaching a settlement, FINRA may have deleted or softened some aspects of the fact pattern. Without question, the alleged misconduct is serious: FINRA asserts that Kappotis "backdated" a "document containing a list of his OBAs." Making matters worse, after creating/backdating the cited document, the AWC alleges that "Kappotis knew that the document would be submitted to FINRA . . ." It's tough to put any kind of a positive spin on Kappotis' conduct and, frankly, I'm not going to try. What he did is, if nothing worse, incredibly stupid.

And still I pause. What gives me pause is this statement in the AWC:

Although the firm had approved Kappotis' OBAs, the backdated document that Kappotis created purported to show that he had provided prior written notice to the firm of his OBAs in the form of a list when, in fact, that was not the case.

Let's slowly walk through FINRA's above-stated assertions:

Kappotis' employer approved his engaging in outside business activities;
Per FINRA's Rule, Kappotis should have provided prior written notice to the employer;
Kappotis did not provide said prior notice;
Notwithstanding the absence of prior notice, Kappotis' employer apparently approved his OBAs subject to after-the-fact notice.

So . . . Kappotis gave notice to his firm but not in a prior written form, and, notwithstanding, the lack of prior written notice, the firm approved the OBAs subject to an after-the-fact list, which, for reasons that Kappotis now likely regrets, he revised via backdating.

Kappotis was supposed to do X as a prerequisite to getting his firm's approval but the firm gave approval before he did X; but then after he was supposed to have done X, Kappotis backdated documents to show that he had, in fact, done X on an earlier date when it could have been timely done but wasn't; and, despite all of this, the backdated document showing that the belated X was done on a timely basis was maintained in the firm's file as proof that X was timely done before approval; and, notwithstanding, Kappotis provided a document in support of his having done X before gaining approval despite the fact that the documentation was created on a date after X was supposed to have been done but the backdated documentation demonstrated that what hadn't been timely done had been timely done but for the fact that by backdating the document it was actually untimely despite disclosing a timely date.

My -- that's very Zen-like if you think about it, however, if you do think about it too much, your head might explode.