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FINRA Fines and Suspends Former Morgan Stanley Rep For Putting Compliance Cart After the Horse
May 18, 2022
At first blush, a recent FINRA AWC seems to be piling it on against a former Morgan Stanley rep over some silliness involving unapproved emails about a private placement offered by the firm. It's not like the rep was pushing an outside deal involving a algorithm-based meme-stock trading program funded by a crypto-mining platform powered by municipal waste. Yeah, I know, where can you get into that hot deal, right? But, getting back to the seemingly beleaguered rep, as it turns out, FINRA was justified in fining and suspending him; and Morgan Stanley may have been on similarly firm ground when it discharged the employee. What could go so horribly wrong? Read today's blog.
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, Nikolay Zotenko submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.In the Matter of Nikolay Zotenko, Respondent (FINRA AWC 2021071532701)
https://www.finra.org/sites/default/files/fda_documents/2021071532701
%20Nikolay%20Zotenko%20CRD%206334022%20AWC%20va.pdf
%20Nikolay%20Zotenko%20CRD%206334022%20AWC%20va.pdf
The AWC asserts that Zotenko was first registered in 2015 with Morgan Stanley Smith Barney.
600 Emails During One Week in 2021
The AWC alleges that beginning on January 19, 2021, and continuing through January 28, 2021, Zotenko sent emails describing an "Exclusive Venture Capital Investment Opportunity" to over 600 prospective customers. The cited emails were allegedly sent from Zotenko's Morgan Stanley email account but had never been submitted to the firm for approval. As set forth in part in the AWC:
[W]hile the communications did not specify the name of the investment opportunity, they described a private placement investment that Morgan Stanley offered, which was designed to build a portfolio of venture capital funds that invest in certain business sectors. The communications, however, failed to provide a fair and balanced presentation and sound basis for evaluating the proposed investment. In particular, the communications failed to identify the name of the investment and failed to balance the discussion of the potential benefits of the investment with its risks, including that the investment was speculative, illiquid, and subject to specific risks related to the investment's portfolio companies.The communications also violated the prohibition on unwarranted and misleading statements as there was no basis for various claims. For example, the communications stated without justification that the investment was an "exclusive" opportunity that was "typically closed to new investors," and described the returns generated from the investment's portfolio companies as having "far exceeded the industry average."
The Number "26"
After sending the mails to over 600 prospects without his firm's approval, the AWC asserts that:
[Z]otenko requested and received access to an internal Morgan Stanley system that allowed registered representatives (on behalf of themselves or other approved representative team members) to send marketing and related emails to multiple recipients without the need to enter each email address individually. In connection with obtaining access to this system, Zotenko learned that he needed to obtain approval of retail communications because the system automatically rejected messages that were to be made available to 26 or more customers or prospects within a 30-day calendar period without applicable approval information.
Seeking Approval
So . . . let's just put things into some continuum before moving on. On Tuesday, January 19, 2021, Zotenko started sending out emails to 600 prospects. This barrage of communications ended on Thursday, January 28, 2021. That's a ten-day span if we count the 19th and the 28th.
The AWC isn't particularly clear as to the "when" Zotenko had gained access to the referenced internal system, but, using a bit of inference and filling in some blanks, it appears that the conduct took place sometime after Thursday January 28th but before Monday February 1st. Just for the hell of it, let's agree -- even if only to make an admittedly arbitrary point -- that the bolt of lightning struck Zotenko on Friday, January 29th.
The AWC alleges that on Monday February 1, 2021, Zotenko submitted the emails' content for approval to Morgan Stanley, which, on that same day, denied the requested approval. In explaining its denial, the firm purportedly cited such issues an "impermissible promissory statements."
Uh oh . . . as in, oh crap!
To some extent, Zotenko demonstrated an effort at compliant behavior, belated as it were, when he realized on Friday, January 29th, that he should have gotten his firm's okay for the previously transmitted emails. As such, we can understand that when Zotenko put the cart after the horse on Monday, February 1st and submitted a request through Morgan Stanley's systems, he was likely hoping that he would get an "okay." And after he sent his request for approval he held his breath. And held it. and held it. And as he waited to exhale things went from bad to worse. Morgan Stanley said "NO." But it wasn't a "NO" to what he was planning to do. It was a "NO" to what he had already done. Already done as in what he should not have already done without first getting his firm's okay, which is what he tried to do belatedly, except the hoped-for "YES" turned out to be a disappointing "NO."
Doublin' Down
Unfortunately, despite getting a denial from his employer, Zotenko then decided to do the kind of thing that keeps lawyers like me busy. Throwing common sense and caution to the wind, Zotenko sent out additional emails to about 550 additional prospects. Not only did Zotenko unleash his email barrage on February 2nd, the day after he got the February 1st denial, but, to make a bad situation worse, he also sent out another wave of emails on February 3rd. Sigh . . .
At this point, as I was reading through the AWC, I was pulling for Zotenko. I figured he didn't know what he didn't know. Then I figured that once he knew what he didn't know, well, taking responsibility, he would fess up, chalk it up to an inadvertent misunderstanding, and ask for some consideration from his firm. As to my misplaced confidence in humanity, the AWC explains in part that:
[I]n order to circumvent the system's restrictions on unapproved communications, Zotenko falsely affirmed in Morgan Stanley's internal system that he did not "intend to send th[e] campaign to more than 25 recipients." However, Zotenko sent the communications in multiple separate batches to 25 recipients at a time -- each time falsely indicating the messages were intended for no more than 25 recipients.The 550 communications Zotenko sent on February 2 and 3, 2021 indicated that Zotenko's colleague, MH, was the sender notwithstanding that Zotenko sent all of the emails through Morgan Stanley's system. Zotenko obtained MH's permission to send the emails using MH's name, but MH was not aware Zotenko entered false information into Morgan Stanley's system or that the firm had previously denied approval of the proposed content of the communications.
Discharge
Online FINRA BrokerCheck disclosures as of May 18, 2022, alleged that Zotenko was "discharged" on April 26, 2021, by Morgan Stanley Smith Barney, LLC based upon allegations that:
Concerns that the representative sent email to many client prospects with content about an investment opportunity, after he had sought approval for the content of the email and not received it, and took steps to avoid further review of the email by the Firm.
FINRA Sanctions
In accordance with the terms of the AWC, FINRA found that Zotenko violated FINRA Rules 2210(b)(1), 2210(d)(1)(A), 2210(d)(1)(B), and
2010; and imposed upon him a $10,000 fine and a one-year suspension from associating with any FINRA member in all capacities.
Bill Singer's Comment
In many private securities transaction ("PSTs") cases, FINRA cites to outside, third-party deals. In contrast to that typical scenario, Zotenko was promoting "a private placement investment that Morgan Stanley offered, which was designed to build a portfolio of venture capital funds that invest in certain business sectors." Okay, that's a small check in a box in Zotenko's favor. The investment opportunity was actually one offered by Morgan Stanley. Moreover, when the AWC details the shortcomings of Zotenko's purportedly unfair and unbalanced communications, the litany of no-no's ain't all that bad:
- failed to identify the name of the investment; and
- failed to balance the discussion of the potential benefits of the investment with its risks, including that the investment was speculative, illiquid, and subject to specific risks related to the investment's portfolio companies.
Like I said, failing to name the name of what is first being raised in an email as an investment opportunity doesn't raise to the highest levels of disclosure failures. At some point, before an investor writes out a check to invest in the deal, you sort of figure out that the unnamed investment will get named. On top of that, keep in mind that it was, after all, a Morgan Stanley offering. Similarly, as to the unbalanced discussion, well, that's not a great way to solicit investments but let's again put things in context: We're talking about an email that's being sent to prospects as part of the first round of promotion by Zotenko. No . . . that doesn't excuse his failure to comply with industry disclosure rules but, like I said, it is "context."
Truly, I was pulling for Zotenko. After all, January 2021 and February 2021 were smack dab in the middle of the Covid pandemic. I've heard enough stories from enough reps who couldn't get a hold of anyone in their firm's compliance departments because of the remote working arrangements. I've also heard about reps who thought they understood what they were and were not allowed to do, but not being in the branch, and not being able to "ask around," they opted to go with their gut and, oh boy, that was a mistake. That just doesn't seem to be the fact pattern in the Zotenko AWC.
As I was reading through the AWC, I was disposed to cut Zotenko a break. Up until his February 2nd and February 3rd idiocy: a second wave of emails to some 550 prospects. Making matters worse, Zotenko claimed he had only intended to contact 25 recipients. Exacerbating his misconduct, Zotenko used MH's email address to disguise the real sender; and, as if that weren't bad enough: "MH was not aware Zotenko entered false information into Morgan Stanley's system or that the firm had previously denied approval . . ." Sorry, but there's a limit to my compassion and empathy. As harsh as that one-year suspension initially struck me, I understand where FINRA is coming from.