Securities Industry Commentator by Bill Singer Esq

January 25, 2019
READ the INDICTMENT alleging one count of obstruction of an official proceeding, five counts of false statements, and one count of witness tampering.

The Comedic Styling of Commerce Secretary Wilbur Ross: The Ebenezer Scrooge Impression -- Live on CNBC!

FINRA Arbitrators Find Santander Bank's "defense of this matter was wholly insubstantial, frivolous and not advanced in good faith"
In the Matter of the Arbitration Between Michael Klein, Claimant, v. Santander Bank, N.A., Perry Vachon, and  Charles Wemuth, Respondents (FINRA Arbitration Decision 17-02674, January 22, 2019)
In a FINRA Arbitration Statement of Claim filed in October 2017, associated person Claimant Klein asserted violation of public exception to employee at will doctrine; wrongful interference with advantageous business relationship; breach of covenant of good faith and fair dealing, promissory estoppel, fraudulent misrepresentation, breach of contract, and retaliation.Ultimately, Claimant sought $337,227.00 in back-pay; $376,010.00 to $890,032.00 in front-pay; and $77,500.00 in attorneys' fees. Respondents Santander Bank and Vachon generally denied the allegations and asserted affirmative defenses. Respondent Wemuth did not enter an appearance.The FINRA Arbitration Panel found Respondent Santander Bank liable and ordered it to pay to Claimant Klein $1,227,259.99 in compensatory damages plus $112.40 daily interest from September 23, 2015 to December 31, 2018; $435 daily interest from January 1, 2019 until the Award is paid; $77,500 in attorneys' fee; and $375 in FINRA's filing fee. The FINRA Arbitration Panel drafted what I can only describe as a stunning explained decision replete with content and context sufficient to render the arbitrators' findings and rationale persuasive. Kudos to these three individuals for going about their business with professionalism! The Panel published these findings:

1. The pertinent activities of Respondent Santander, Claimant and the sales representatives reporting to Claimant, were regulated under the Securities and Exchange Act of 1934 and FINRA regulations. 

2. Claimant was hired by Respondent Santander into the position of Senior Vice President in April 2014. 

3. In that position Claimant was responsible for the activities of approximately twenty-two sales representatives who, among other things, sold and recommended the sale of regulated securities products. 

4. At the time Claimant was hired by Respondent Santander, Claimant had approximately twenty years' experience as a regulated person and in conducting regulated activities.

5. Within one month to six weeks after commencing his employment with Respondent Santander, Claimant became aware that one of the sales representatives reporting to him did not have the appropriate licensure to recommend and sell products in that the particular representative had repeatedly failed the Series 65/66 examination and had, in fact, ceased taking it. That person is referred to as "employee". 

6. At the time Claimant discovered this, the employee had a book of business of approximately $50 million, approximately 35% of which was products requiring the Series 65/66 license. 

7. Claimant reported this matter to the compensation staff at Santander inquiring as to why it was the employee was being paid commissions on the sale of products requiring the Series 65/66 license when he did not have one. 

8. Claimant was told that the employee was one of approximately nineteen individuals in Respondent Santander's employment who were "grandfathered" under an unidentified loophole in Massachusetts law which allowed unlicensed individuals to sell managed products. Respondent Santander's compensation staff agreed the "loophole" was no longer applicable and that Respondent Santander had to do something about the issue. Respondent Santander never provided any documentation of the "loophole" or any indication as to what period of time that "loophole" would have provided authority for unlicensed individuals to sell managed products. The employee was employed by Respondent Santander since 2012.

9. Respondent Santander had created and continued to maintain a series of internal "partnerships" where a licensed individual recorded transactions in products requiring the Series 65/66 license for the customers of unlicensed individuals in order to ensure that the transactions would occur and that any automated reporting system to prevent transactions in products requiring the Series 65/66 license by unlicensed individuals would not be triggered. The employee's "partner" was a regulated individual who is still employed by Respondent Santander. 

10. The "partnerships" and the circumvention of automated exception monitoring in the regulated product trading software was augmented by Respondent Santander's maintenance of a manual system of splitting commissions on regulated product sales where unlicensed individuals were involved in the transactions. In the particular "partnership" between the employee his partner, commissions on managed product transactions were manually split 50/50 between the two of them by Respondent Santander.

11. Claimant followed up with Respondent Santander's management and compliance staff and the employee was a subject of monthly conversations with the compliance department. As a result, just before Christmas 2014 Respondent Santander ended the practice of manually splitting the commissions on managed product transactions the employee was involved in. 

12. Despite the termination of the payment of commissions to the employee on managed product transactions, his customers were never advised and he continued to counsel customers on transactions requiring the Series 65/66 license through the end of his association with Respondent Santander. 

13. Prior to Claimant's employment by Respondent Santander the employee had been the subject of various warnings including a final warning which was signed by the employee in November 2014 when Claimant went to the employee's home to obtain that signature. At that time the employee made Claimant extremely uncomfortable by showing him a collection of guns and maintaining a pistol on the table used by the two of them to meet. Claimant immediately reported this to Respondent Santander's management. 

14. For several months beginning in November 2014 there was a series of meetings, telephone conference calls and electronic mail communications regarding the employee's attitude and performance. These communications centered on the employee's attitude and demeanor with respect to female associates including the employee's partner and contained reports that the employee's partner was afraid of the employee to the extent of taking measures to protect her home from him. It was also learned during these communications that the employee had violated FINRA regulations in two other ways - by failing to report a change of address and by failing to report that he was engaged in activities outside of the sale of securities. Respondent Santander's compliance department handled those two issues. 

15. In spite of months of communications including learning that the employee had posted pictures on the Internet of him posing in aggressive stances with automated weapons, Respondent Santander did nothing but record copious notes of these issues to no avail. 

16. In the middle of all these communications it was discovered that the employee had left his laptop in an unsecured location in one of Respondent Santander's offices. Finally, the Customer Complaint & Disciplinary Committee determined in an August 2015 meeting that for this and a series of other reasons, the employee's employment be terminated. 

17. Meanwhile, Claimant continued to discuss the fact that the employee maintained a book of business including transactions in managed products and that his customers were unaware they were being counseled by an unlicensed person. 

18. On September 21, 2015, nearly 11 months after conversations about the employee's performance issues commenced and after a meeting where the termination decision arrived at by the Customer Complaint & Disciplinary Committee in August was to be delivered to the employee, the meeting was cancelled by Respondent Santander. The employee was instead sent a letter by Respondent Santander indicating that his failure to report to work since September 2, 2015 and his failure to log into his computer and any of the "securities systems" since July 9, 2015 was considered to be job abandonment and a voluntary resignation of employment. This determination allowed Respondent Santander to report the employee's separation from Respondent Santander as a resignation to FINRA and his customers thus avoiding any implication arising from his lack of licensure. 

19. The record shows Respondent Santander's management was aware that the employee was at least inconsistent in his use of its computer systems since at least September 2014. Indeed, the "partnership" was designed to make use by the employee of the "securities systems" unnecessary to avoid any reporting to the compliance department of actual or attempted transactions by an unlicensed person in transactions requiring licensure. 

20. On September 23, 2015, Claimant was called in to a meeting at which his employment was terminated without prior notice, warning or any explanation. No letter stating the reasons for Claimant's termination was provided. 

21. Respondent Santander's disciplinary policy contains five potential steps of warnings, notices and progressive discipline. With regard to the employee all of these steps were followed, in many cases, repeatedly. With regard to Claimant none of these steps were followed. 

22. At the time Claimant was hired by Respondent Santander, the sales group he was hired to manage had the third lowest performance level of Respondent Santander's groups in the comparison. At the time Claimant was terminated by Respondent Santander, the sales group he was hired to manage had the third highest performance level of the groups in the comparison. 

23. During Claimant's employment, Respondent Santander faced a series of FINRA complaints and investigations for failure to supervise its sales staff in connection with Puerto Rico public debt. Those matters ended with fines of several million dollars. 

24. The fact that Respondent Santander's records contain none of the documentation its disciplinary policy mandates be created and which its witnesses stated was normal business practice, creates an inference that Claimant's employment was terminated for an illegal reason. In this case, this inference is bolstered by the lack of credibility of most of Respondent Santander's witnesses and the amazing lack of candor of its witnesses, especially Respondent Vachon. We also draw an adverse inference from the fact that Respondent Santander failed to call the employee's partner as a witness even though she is still employed by Respondent Santander and many of Respondent Santander's defenses were based on characterizations and interpretations of her statements and actions, all of which would have been unnecessary with her actual testimony. 

25. We determine that the termination of Claimant's employment was principally motivated by retaliation for his reporting the violation of FINRA rules to Respondent Santander's management and his pressing for their resolution in the face of Respondent Santander's determination to avoid exposing the fact that it was managing a process of subverting its securities software package and allowing unlicensed individuals to effect transactions which required licensure. 

26. We find Respondent Santander's legal defenses to the claim to be without merit. Massachusetts law is clear that termination of employees in retaliation for reporting illegal activity is a violation of public policy. We further find that the National Banking Act does not override the expressed public policy of any level of government. 

27. Massachusetts law allows for the award of attorney fees in cases where it is found that that all or substantially all of the claims, defenses, setoffs or counterclaims, whether of a factual, legal or mixed nature, made by any party who was represented by counsel during most or all of the proceeding, were wholly insubstantial, frivolous and not advanced in good faith. We find that the defense of this matter was wholly insubstantial, frivolous and not advanced in good faith. Respondent Santander has agreed on the record that the claim for attorney fees in this matter is reasonable. 

28. Based on the fact that three other courts have refused to accept or follow the expert testimony of Respondent Santander's expert witness, we likewise decline to consider that testimony. 

Hennion & Walsh Inc. Settles FINRA Unsuitability Allegations
In the Matter of Hennion & Walsh, Inc, Respondent (FINRA AWC 2013039202501, January 23, 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,  Hennion & Walsh, Inc submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon  Hennion & Walsh, Inc a Censure and $165,000 fine; and the firm agreed to pay $305,438.83 in restitution. As set forth in the "Overview" heading of the AWC:

Between December 1, 2011 and December 31, 2016 (the "Relevant Period"), certain Hennion & Walsh registered representatives recommended 645 unsuitable series-to-series switches between substantially similar Unit Investment Trusts ("UITs") that had substantially similar investment objectives. The Firm's registered representatives did not reasonably assess whether the alleged benefits to the customers from the switches outweighed the additional sales charges the customers would incur by making the switch. The Firm also failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to detect and prevent unsuitable series-to-series UIT switching. Based on the foregoing, the Firm violated NASD Rule 2310 (for conduct prior to July 9, 2012), FINRA Rule 2111 (for conduct on or after July 9, 2012), NASD Rule 3010(a) (for conduct prior to December 1, 2014), FINRA Rule 3110(a) (for conduct on or after December 1, 2014), and FINRA Rule 2010.

Forging Ahead Leave Stockbroker Behind the FINRA Eight Ball
In the Matter of Jenna A. Brown, Respondent (FINRA AWC 2018057513901 , January 24, 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, Jenna A. Brown submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Jenna A. Brown a $5,000 fine and a three-months suspension from association with any FNRA member in any and all capacities. As set forth in the "Facts and Violative Conduct" heading of the AWC:

Brown and another registered representative, KA, became registered through Cadaret Grant in August 2017. Brown and KA previously had been registered through a different FINRA member firm, and many of their customers opened brokerage and investment advisory accounts at Cadaret Grant when Brown and KA moved from the other FINRA member firm to Cadaret Grant. Although the customers initially opened such accounts with KA only, they did so with the expectation that Brown would be added as a registered representative and investment advisor on their accounts at a later date. 

In January 2018, Cadaret Grant added Brown as a joint representative on the customers' brokerage accounts, with the approval of both KA and the customers. I lowever, in order to add Brown as an advisor on the customers' investment advisory accounts, the Firm required that a new investment advisory agreement be executed for each account, with original signatures from Brown, KA, and the customer. 

Although KA and the customers in question approved of adding Brown as an advisor on their investment advisory accounts, Brown did not obtain the necessary signatures on some of the investment advisory agreements. Instead, she forged the signatures of seven customers who lived out of state, without the customers' knowledge or approval, in order to avoid mailing the agreements to the customers for their signature. Brown also forged KA's signature on seventeen investment advisory agreements, without KA's knowledge or approval, in order to avoid the inconvenience of driving to KA's office to obtain his genuine signature. 

Cadaret Grant's Advisory Services Department determined that the investment advisory agreements in question submitted by Brown contained forged signatures and, as a result, the Firm did not approve or process the investment advisory agreements. 

Forgery of a signature is a violation of FINRA Rule 2010, which requires that associated persons observe high standards of commercial honor and just and equitable principles of trade. 

By virtue of the foregoing, Brown violated FINRA Rule 2010.

You Know How You Ask Me If You Can Avoid Repaying aCn EFL If You Concoct a Lawsuit Against Your Former Broker-Dealer?
In the Matter of the Arbitration Between 
Stephen Todd Walker, Individually Stephen Todd Walker Retirement Account Rollover, IRA, Acct. Dorothy S. Walker & F. Scott Donahue TTEES Stephen Todd Walker, Irrevocable Trust, DDT 12/08/2004 Dorothy S. Walker Cust. for Stephen Todd Walker Jr., UGMA/PA Pennstone, LLC Marilyn G. Schade and John E. Schade, Claimants, v. Morgan Stanley Smith Barney, LLC and Daniel Foote Thompson, Respondents (FINRA Arbitration 14-00011 / January 22, 2019)
In a FINRA Arbitration Statement of Claim filed in December 2013, public customer Claimants asserted negligence, failure to execute, failure to supervise, breach of contract, and breach of fiduciary duty. Claimants sought $200,000 in compensatory damages, interest, costs, and fees. Respondents Morgan Stanley and Thompson generally denied the allegations and asserted various affirmative defenses; and Respondent Thompson filed a Counterclaim asserting abuse of process/malicious prosecution, and unfair competition. The Counterclaim sought $500,000 in compensatory damages, punitive damages, fees, and the expungement of the customers' complaint. In May 2018, the FINRA Arbitration Panel granted Respondents' Motion to Dismiss Claimants' claims of refusal to execute trades and blocking Claimants' access to accounts. In July 2018, the Claimants notified FINRA that the parties had settled the claims. The Decision then proceeds to mix metaphors by referencing both a "Panel" (of arbitrators) and a sole Arbitrator in its rationale: 

Pursuant to Rule 12805 of the Code, the Panel has made the following Rule 2080 affirmative finding of fact: 

The claim, allegation, or information is false. 

The Arbitrator has made the above Rule 2080 finding based on the following reasons: 

When one looks at the pleadings in this matter the proceeding in the Federal District Court for the Eastern District of Pennsylvania and the provisions of the Forbearance Agreement and Release, it is evident that any statement to not oppose expungement was a minor provision of the overall settlement. 

While employed by Morgan Stanley, Mr. Walker engaged in conduct prohibited by his employer. Morgan Stanley sought to recover funds lent to Mr. Walker under a promissory note after termination of his employment. Mr. Walker then raised claims in this separate case on behalf of himself and his family that, from the pleadings, were clearly not true in order to avoid payment of the promissory note. 

Pleased-But-Not-Pleased Customer Complaint Expunged
In the Matter of the Arbitration Between Brandi Rose Stahl, Claimant, v. Lincoln Financial Advisors Corporation, Respondent (FINRA Arbitration 18-01168 / January 22, 2019)
In a FINRA Arbitration Statement of Claim filed in March 2018, associated person Claimant Stahl sought the expungement of a unsettled customer complaint from her Central Registration Depository record ("CRD"). Respondent Lincoln Financial Advisors did not contest the requested expungement, stipulated to the expungement. Although the customer had notice of the arbitration, she did not appear. The sole FINRA Arbitrator recommended expungement after making a FINRA Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or clearly erroneous; and false. The Arbitrator provided a comprehensive and persuasive rationale:

The claim that the Customer, "was not appropriately informed of various fees and product features of the [Jackson Variable Annuity] at the time she purchased it in October 2016" is clearly erroneous, factually impossible, and false and therefore meets both the FINRA Rule 2080(b)(1)(A) standard and the Rule 2080(b)(1)(C) standard for expungement. 

Beginning in 2013, Claimant began working with the Customer on more in-depth retirement planning matters. The Customer and her husband provided Claimant with a list of their assets, liabilities, cash flow and income. In every meeting with the Customer, Claimant would gather data and then use that data to present solutions that were suitable for the Customer's retirement investment objectives. 

The Customer and her husband selected the Jackson Variable Annuity ("Annuity") which offered a Life Guard Freedom joint guaranteed income rider. Based on the Statement of Claim and testimony of Claimant, the Customer and her husband liked the idea that their expenses would be covered and this would free up their other assets to be spent as desired or needed. 

Claimant met with the Customer and her husband to go over all the costs, features, fees and potential advantages and risks associated with the Annuity. This was an in-depth two hour meeting during which the Customer and her husband were provided with the Annuity prospectus. Claimant thoroughly explained and discussed all of the fees and surrender charges associated with the Annuity including all details of the Life Guard Rider. Per Claimant's testimony, the Customer and her husband stated they had no issues with the fees and they did not mind a surrender charge as they were not planning on accessing these assets until a much later date. On November 14, 2016, the Customer signed a delivery receipt for the Annuity stating that she had reviewed the contract and application, and acknowledging that she had been given a prospectus for the Annuity. 

On January 19, 2017, Claimant had a discussion with the Customer in which the Customer stated that she and her husband were so pleased with the performance of the Annuity that they were potentially going to add additional funds. However, on January 31, 2017, the Customer sent a letter to the Respondent indicating she was not happy with the "various fees" associated with the Annuity and her understanding, later found to be erroneous, was that her beneficiaries would not be able to access their assets once the Customer began taking guaranteed income payments. 

In light of the Customer's complaint, Claimant testified that she called the Customer and the Customer stated that her son, who worked in the investment industry, had looked at the Annuity policy and told the Customer that it had too many fees and "wasn't worth it." Claimant further testified that the Customer apologized to her for causing a problem with her letter, which had been categorized as a complaint, and stated that she would be moving her account over to her son's firm. 

After completing an investigation, Respondent found no evidence to support the allegations in the complaint and determined that the Customer received the necessary information and appropriate disclosures to make an informed investment decision. Respondent does not contest this action and stipulates to the expungement of the above referenced matter from Claimant's CRD.