January 10, 2019
FINRA member firm's arbitration blows up in its face as former employee wins.
In the Matter of the Arbitration Between William and Henry Associates, Claimant/Counter-Respondent, v. Anna Marie Jacob, Respondent/Counter-Claimant/Third-Party v. David Joel Iannini, Third-Party Respondent (FINRA Arbitration 16-02914, January 8, 2019), FINRA member firm William and Henry Associates filed a FINRA arbitration Statement of Claim in October 2016 and as amended thereafter asserting breach of fiduciary duty; selling away; outside business activities and interference with contractual relationships arising from Respondent Jacob's formation of an outside business during her employment with the firm. Claimant sought unspecified compensatory and punitive damages, fees, and costs, and the FINRA Arbitration Panel's "guidance on amending Jacob's currently existing Form U5 for the events and infractions described." Respondent Jacob generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim and Third-Party Claim asserting fraudulent and defamatory filing of Form U5,
failure to pay wages in violation of the California Labor Code; harassment,
discrimination, and retaliation in violation of the California Fair Employment and Housing
Act; interference with ability to earn a substantial fee; and breach of contract. Jacob sought at least $400,00 in back wages, $783,984 in damages for the loss of a customer fee, and additional damages, costs, and fees. The FINRA Arbitration Panel denied Claimant's claims and found the firm liable to and ordered it to pay to Jacob $25,000. In recommending the expungement of the the "Reason for Termination" and "Termination Explanation" on Jacob's Form U5, the arbitrators recommended that the reason be changed to "voluntary," and the explanation left blank; and the Panel recommended further conforming changes to Questions 7(B) and (F)
Prominent corporate lawyer Aegis Frumento accepts that corporate executives find ways to put more money in their own pockets once they are incentivized to do so by lower high-end tax rates. Similarly, Frumento believes that disincentivizing high executive compensation normally forces corporations to spend their profits more wisely. In exploring those points, Frumento asks what would you do if you had the choice between paying yourself an extra dollar from which 70 cents would be taxed away; or, in the alternative, spending that dollar on a tax-deductible business expense? Pointing to the past and when the top tax rates were 91% and 70%, Frumento argues that corporate employees were paid decent middle-class incomes and disposable income. They had funded pension plans. They had medical insurance at company expense.
Barred for Starting Broker-Dealer
In the Matter of Charles Gonzalez, Respondent (AWC 20180572586-02, January 9, 2019).
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, Charles Gonzalez submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Gonzalez a Bar from associating with any FINRA member firm in any capacity. The AWC alleged that between June 2017 and January 2018, while associated with Spartan Capital Securities, LLC, Gonzalez took significant steps to create a broker dealer, whereby he engaged in an outside business activity without first notifying the firm in writing, Gonzalez violated FINRA Rules 3270 and 2010. Additionally, FINRA requested documents and information from Gonzalez and required him to appear and provide testimony; in response, Gonzalez purportedly produced falsified documents and provided false testimony to FINRA in violation of FINRA Rules 8210 and 2010. As set forth in part under the heading "FACTS AND VIOLATIVE CONDUCT";
Between June 2017 and January 2018, without first notifying Spartan in writing, Gonzalez engaged in an outside business activity involving the formation of a new broker dealer. Gonzalez did not disclose to Spartan that he formed a new business entity, retained and paid for services of a consultant, bought office equipment, rented and paid for his new company's office space, and that he solicited and raised capital from a customer at Spartan to fund his new business. By virtue of the foregoing, Gonzalez violated FINRA Rules 3270 and 2010.
Bill Singer's Comment:
A troubling aspect of this FINRA AWC is its failure to fully address the previously exempted conduct of mere "preparation" to start a broker-dealer versus substantive steps that cross over from mere preparation to the actual conduct of such an outside business. See, for example
The AWC should have noted that FINRA does not deem that a reportable outside business activity occurs when, in an effort to apply for membership as a new broker/dealer, an associated person takes only the following steps:
Clearly, Gonzalez was subject to FINRA sanctions not merely for the alleged broker-dealer outside business activity but for his apparent misconduct during FINRA's investigation. Although FINRA's investigation may well be soundly prompted by Gonzalez having solicited and raised funds for his broker-dealer, a footnote referencing FINRA's more expansive interpretative advice should have been included with this published settlement.
(2) files an application on behalf of the company to become a FINRA member; and
(3) files a Form U-4 designating such associated person as a principal of such company; provided, however, the associated person does not
(1) accept any compensation from such company or other person (other than compensation received from the current member firm with which he or she is associated);
(2) engage in any securities or investment banking activity on behalf of such company;
(3) raise capital for such company;
(4) solicit customers for such company; or
(5) generally engage in any business activity on behalf of such company.
Fine and Suspension for Discretionary Trading
In the Matter of Gregory Rusnak, Respondent (AWC 2017055797701, January 9, 2019).
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, Gregory Rusnak submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Rusnak a $5,000 fine and a 15-business-day suspension from associating with any FINRA member firm in any capacity. The AWC alleged that Rusnak exercised discretion in two customer accounts, between March 2014 and May 2017, without prior written authorization from the customers or Sigma Financial Corporation, in violation of NASD Conduct Rule 2510(b) and FINRA Rule 2010.As set forth in part under the heading "FACTS AND VIOLATIVE CONDUCT" [Ed: footnote omitted]:
Between March 2014 and May 2017, Rusnak exercised discretion in two
customer accounts by executing 140 trades without speaking to the customers on
the day of each transaction. Rusnak did not obtain prior written authorization
from the customers or Sigma's written approval for discretionary trading in the
accounts. Further, Sigma's Written Supervisory Procedures generally prohibited
representatives from exercising discretionary authority over a client's account,
with two exceptions that were not applicable to these two customer accounts.
Rusnak also falsely attested on annual compliance questionnaires that he
completed and submitted to Sigma in 2014, 2015 and 2016,that he did not have
accounts in which clients had authorized him to exercise discretion.
Sigma discovered Rusnak's use of discretion when the customers complained
about activity in their accounts, and terminated him shortly thereafter. . .