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2004
CASE ANALYSIS

 DEPARTMENT OF ENFORCEMENT, Complainant, v. GREGORY A. EASTMAN, Respondent
Disciplinary Proceeding No. C3A030012 
HEARING PANEL DECISION February 18, 2004 

 A Little Background

Beginning in about 2001, RBC Dain Branch Manager Mark Delton attempted to recruit Piper Jaffray Registered Representative Gregory A. Eastman. However, Delton was only interested in recruiting representatives who were generating at least $300,000 in annual gross commissions and had at least $30 million in assets under management. In early 2002, Eastman advised Delton that he was interested in moving to RBC Dain and that he met those criteria.

WHAT HE SAID

Eastman provided Delton with a hand-written month-by-month and quarter-by-quarter summary of his commissions for 2001, which indicated a quarterly increase from 1Q/2001 of  $125,000  to 4Q/2001 of $190,000. He supported his representations with a Piper Jaffray "Commission Sheets" showing quarter-ending total commissions. Eastman also told Delton he had $41.6 to $42.5 million in assets under management for 1Q/2002, which did not include an additional $3.5 million invested in annuities. He gave Delton a Piper Jaffray "Individual Performance History" to substantiate the assets under management. 

 

THE TRUTH
Unfortunately, Eastman had only $114,517 gross commissions at Piper Jaffray during all of 2001, which was less than than 20% of the $619,134 he claimed he had generated for the entire year. The 2001 quarterly amounts he provided were actually his four highest quarters from 1999 and 2000 (and he never reached the $619,000 figure during either of those years). In addition,  Eastman's 1Q/2001 assets under management  ranged from $14.6 to $15.3 million.

Eastman made photocopies of the Commission Sheets that combined the dated top portions of his Commission Sheets for the four quarters of 2001 with the bodies of Commission Sheets from his four best 1999 and 2000 quarters, so it appeared that the commissions he had actually generated in 1999 and 2000 were earned in 2001.  He also falsified the assets under management disclosed in the Individual Performance History by taking a document showing the correct figures to a photocopy shop, which replaced those figures with the false numbers that Eastman had given Delton.

Based upon Eastman's representations, RBC Dain offered him a position, and as an inducement, offered him a 72-month forgivable loan of $400,000. On May 31, 2002, Eastman signed an Employment Agreement stating that "[a]s a major inducement for the employment of [Eastman] with RBC Dain, [Eastman] agree[d] and/or warrant[ed] and represent[ed]" among other things, that his "total commissions … for the twelve month period immediately preceding [his] employment with RBC Dain was $620,000" and that his "total assets under management … in the month immediately preceding [his] employment with RBC Dain was $46 million." 

During the course of a routine conversation, however, Eastman's former Piper Jaffray branch manager told Delton that Eastman's claims regarding his 2001 commissions and his assets under management were not correct, and provided Piper Jaffray documents showing Eastman's true commissions and assets under management. Delton  asked Eastman for an explanation. According to Delton, Eastman claimed that the numbers he had given Delton were correct, and when asked for additional supporting documentation, said that he had given Delton all the documentation that he had. ( At the NASD hearing, Eastman denied that he told Delton that the numbers he had claimed were correct, but admitted that he did not acknowledge that he had misrepresented the amounts.) On June 5, 2002, RBC Dain withdrew the $400,000 loan proceeds from Eastman's account, and a few days later, as RBC Dain planned to terminate Eastman, he submitted his resignation. 

 Admit the Crime, Argue the Fine

The NASD Department of Enforcement filed a Complaint charging that Eastman engaged in unethical conduct, in violation of Rule 2110, by falsely representing his commissions and assets under management at his then- current employer in order to obtain employment with another NASD member firm. Eastman filed an Answer in which he admitted the violation, but requested a hearing on the issue of sanctions.  Notwithstanding Eastman's admission of liability, the Hearing Panel independently considered the charge and found the violations had occurred.

Enforcement requested that the Hearing Panel fine Eastman $20,000 and suspend him in all capacities for 18 months. Eastman, who had no prior disciplinary history, proposed a fine of less $20,000 and a suspension of no more than 90 days. Although there are no directly applicable NASD Sanction Guidelines for the acts alleged, The Hearing Panel deemed Eastman's misconduct warranted analogizing to the guidelines for  intentional misrepresentations, which recommend a fine of $10,000 to $100,000 and a suspension for 10 days to two years, or, in egregious cases, a bar. In applying the NASD's Principal Considerations to the ultimate determination of sanctions, the Hearing Panel found the following highly- aggravating. circumstances particularly relevant. 

  • Eastman did not accept responsibility for and acknowledge his misconduct to RBC Dain prior to detection. 
  • Although this was a single episode, Eastman made his misrepresentations over several months.  He could have told the truth, or simply said that he had changed his mind about leaving Piper Jaffray. 
  • Finally, Eastman's misconduct was intentional, and it resulted in the potential for very substantial gain. 

Eastman points to several mitigating factors. 

  • He did not attempt to move or spend the $400,000 loan before RBC Dain reclaimed the funds. The Panel found Eastman  entitled to little credit because, given the speed with which RBC Dain reclaimed the funds, he had little opportunity to spend or move them --- moreover, Eastman did not voluntarily return the funds.
  • He was not motivated by any pressing need for funds.  The Panel noted that the $400,000 loan was sought by Eastman and was substantially larger than what RBC Dain initially offered.  Further, he admitted that he wanted the additional money he would obtain from RBC Dain, compared to what he would earn at Piper Jaffray. 
  • He had no prior disciplinary history, but while a prior history may be an aggravating factor, the lack of a prior history is not mitigating. 
  • No customers were hurt by his actions, but the fact that he employed misrepresentations to obtain funds from a firm, rather than from a customer, is hardly mitigating. 
  • RBC Dain did not suffer a loss, but that was attributable to RBC Dain's prompt action in reclaiming the funds, not to anything that Eastman did. 
  • He assisted NASD staff during the investigation by providing requested documents and testimony, and by admitting his actions during his testimony. Regardless, he was required to provide requested documents and testimony, however, pursuant to NASD Rule 8210, and he is entitled to little credit for telling the truth, at last, when compelled to testify under oath. 

Decision

The Hearing Panel suspended Eastman in all capacities for two years and imposed a $20,000 fine. 

Bill Singer's Comment

Okay, look, I'm not defending Eastman's conduct in any way, shape, or fashion.  We all clear on that from the git-go?  Nonetheless, here's what troubles me.  The NASD has come down on a stockbroker for misrepresenting his production --- plain and simple.  Bottom line:  fraud is fraud.  However, I thought we just read in the newspapers and watched on television a slew of stories about major brokerage firms engaging in wholesale fraud by lying about their research practices, their IPO allocations, and the manner in which they entered late trades at mutual funds.  Now, just taking this Eastman case to its logical conclusion, weren't a lot of stockbrokers induced into signing on with the major BDs because they were told about the firm's reputation for having top-rated, independent research . . . and for making bona fide public distributions of their IPOs . . . and for generally having a reputation for integrity in the industry?  If you think I'm stretching the point, why not look at some of the recruiting ads some of the big boys ran the past few years.  While you're at it, watch some of their television spots.

It's nice that the NASD suspends Mr. Eastman for 2 years and fines him $20,000.  But what about the thousands of men and women on Wall Street who were induced to leave their former firms  --- with the added enticement of a loan --- and woke up one day to learn that the shop they came to wasn't all it was cracked up to be?  What about those folks who now want to leave because their firm's name was tarnished when its misconduct was publicized but are now being held hostage by the threat of repayment of the loan?  Will NASD also prosecute the employer BD for fraudulently inducing its employees to leave their jobs?  Or is it yet another double standard on Wall Street?



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