April 26, 2019
Bloomberg/Businessweek authors Katia Porzecanski and Max Abelson published a jaw-droping story about the alleged harassment, discrimination, and retaliation involving former Cantor Fitzgerald trader Lee Stowell. Stowell fought Cantor's efforts to compel her claims into mandatory FINRA arbitration, and she is now fighting it out in court. A MUST READ for all Wall Street professionals.
In today's blog we consider a former Ameriprise stockbroker who attacked Wall Street's compliance rulebook with abandon. He got two loans from customers but didn't provide his firm with the necessary prior notices. Next, he engaged in a private securities transaction without providing prior notice. Then, our subject engages in an outside business activity without -- you guessed it -- the prior notices. Undaunted, the broker submits false answers to three years of annual compliance questionnaires. So many rivers to cross but he just can't seem to find his way past FINRA.
In 2018, the FINRA Report asserts that FINRA issued $61.0 million in fines. We are next informed that the FINRA Board has determined that there were $81.1 million in fines-eligible expenditures in 2018 (i.e., capital initiatives, strategic expenditures and other activities eligible to be funded by fine monies based on the criteria set forth above). Just doing the simple math, when you got $61 million coming in and $81.1 million going out, that's going to produce a shortfall of $20.1 million, which was allegedly funded from FINRA's reserves. As to that $81.1 million in liabilities, the FINRA Report asserts that $15.4 million is earmarked for:
Bill Singer's Snotty Comment: Amazing that FINRA has $15.4 million to set aside to educate investors, the industry, and its own employees but not a penny to fund an Anti-Fraud Fund to compensate defrauded public customers who are unable to collect compensatory damages from insolvent firms and associated persons. Seems to me that the public would willingly trade off the dubious education for a safety net against the horrors of Wall Street fraud.
Activities to educate investors, promote compliance by member firms through education, compliance resources or similar projects, or ensure our employees are highly trained in the markets, products and businesses we regulate.
FINRA Sanctions Firm for 4 Years of Non-Compliant AML Testing. In the Matter of Gelband & Co., Respondent
(FINRA AWC 2018056465601, April 25, 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, Gelband & Co. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Gelband & Co. has been a FINRA member firm since 1993, is primarily a "placement agent for private placements and advising on mergers and acquisitions," and employs 2 registered representatives at two branches. The AWC asserts that Gelband does not have "any prior disciplinary history with the Securities and
Exchange Commission, any state securities regulator, FINRA or any other self-regulatory organization. " In accordance with the terms of the AWC, FINRA found that Gelband violated FINRA Rules 3310(c) and 2010; and, accordingly, FINRA imposed on Gelband $5,000 fine. As set forth in part in AWC:
As a placement agent, Gelband was required to conduct independent testing of its AML program on an annual basis. For calendar years 2014, 2015, 2016 and 2017, the Firm had its designated AML Compliance Officer, or someone who reported to him, conduct the annual testing of its AML program. This testing was not "independent." Therefore, Gelband did not conduct the required independent testing of its AML program for calendar years 2014, 2015, 2016 and 2017.
Bill Singer's Pissy and Snarky Comment: Oh for godsakes -- really? The firm has all of 2 reps! What the hell does FINRA expect -- should the firm have gone out and hired a dozen in-house compliance idiots, who will sit on their fat asses all day long just so the firm could have conducted an "independent" test? I mean, c'mon, the Respondent firm apparently conducted testing from 2014 through 2017 -- it was NOT the case that Gelband hadn't conducted any AML testing. The issue in the AWC was that some four years of AML testing wasn't sufficiently independent. Okay, fine: How about FINRA just admonishes the member firm and explains EXACTLY what this small member firm with 2 reps was supposed to mechanically have done in order to satisfy the independent AML testing standard when its AML Compliance Officer is also the guy who changes the toilet paper in the bathroom and answers the telephone and has all the menus for the places where lunch is ordered. Of course there are plenty of outside consulting firms capable of providing such independent testing, but at some point how much more overhead can you impose upon the bulk of FINRA's small firm community before it is no longer financially feasible to run a smaller firm? Oh, and by the way, just where the hell was FINRA in 2014, 2015, 2016, and 2017, when the purportedly independent self-regulatory-organization was supposedly conducting annual oversight of its member firms? Seems to me that FINRA is also failing to adequately supervise if it took until 2019 for Wall Street's self-regulator to first discover that one of its member firms hasn't been conducting independent AML testing for four years in a row! As you can imagine, I detest this type of gotcha regulation. Given everything set forth in the AWC, FINRA could have warned the firm about its alleged lack of independence, required an Affidavit from the firm acknowledging the non-compliance and setting forth the remediation, and let the small firm off with a warning -- this time and only this time. Frankly, I would have thought it a saner regulatory agenda to have required Gelband to undertake to spend no less than $5,000 retaining a reputable AML consultant rather than foolishly fine the small firm.
FINRA Sanctions Firm and Its Principal for Supervisory Lapses. In the Matter of Buckman, Buckman & Reid, Inc. and Harry John "Chip" Buckman,Jr., Respondents
(FINRA AWC 2018058266301, April 25, 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, Respondents submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Buckman, Buckman & Reid, Inc. ("BBR") has been a FINRA member firm since 1989 and employs 50 registered representatives at two branches. Harry John Buckman ("Buckman") was first registered in 1992 and by 1994, he was registered with BBR. The AWC asserts that neither BBR or Buckman have "any relevant formal disciplinary history with the Securities and Exchange Commission, any self-regulatory organization, or any state securities regulator." In accordance with the terms of the AWC, FINRA found that Respondents violated NASD Rule 3010 (for conduct before December 1, 2014), FINRA Rule 3110 (for conduct on or after December 1, 2014), and FINRA 2010; and, accordingly, FINRA imposed on BBR a Censure, $205,554 restitution to customers plus interest, and the firm undertook to review/revise its supervisory system and written supervisory procedures regarding excessive trading and unsuitable concentration levels, and of reps with disciplinary histories; additionally, FINRA imposed on Buckman a $20,000 fine, a three-month suspension from association with any FINRA member in any Principal capacity, and he undertook to attend and complete 40 hours of continuing education pertaining to supervisory responsibilities. As set forth in part in the "Overview" section of the AWC:
From January 2013 through April 2017, BBR failed to establish and maintain a
supervisory system, and failed to establish, maintain, and enforce written
supervisory procedures ("WSPs"), that were reasonably designed to achieve
compliance with FINRA's suitability rule. In addition, BBR and Buckman -- who
was the Firm's designated supervisory principal responsible for conducting
suitability reviews failed to reasonably supervise two former registered
representatives, GK and RI, who, while registered through BBR, recommended
excessive and unsuitable trades in multiple customer accounts. . . .
As set forth in various portions of the AWC:
[F]irst, although the Firm's WSPs identified
Buckman a Senior Vice President and one of the owners of the Firm as the
principal responsible for reviewing the suitability of representatives'
recommendations, Buckman did not perform suitability reviews, claiming instead
that he relied on the Compliance Department to perform such reviews. However,
BBR did not memorialize any purported delegation of supervisory responsibility
in its WSPs or elsewhere.
Second, the WSPs did not identify who at the Firm had responsibility for
reviewing exception reports and alerts. Through its monitoring service, BBR
received a number of automated exception reports and alerts that were relevant to
identifying excessive trading and unduly concentrated positions. Prior to May
2017, however, no one at the Firm reviewed those exception reports or alerts. For
example, the Firm had access to monthly exception reports that flagged high
turnover rates and commission amounts relative to the amount of equity in an
account, both of which are relevant to detecting excessive trading. However, the
WSPs did not mention those reports or provide any guidance about how to use
them. Similarly, the Firm also received alerts that identified potentially
unsuitable concentration levels in customer accounts but, again, the WSPs did not
mention the alerts or provide any guidance about how to use them.
. . .
For example, GK recommended that customers LA and RA a retired couple
with an investment objective of "balance,conservative growth" buy and then
promptly sell UITs and other long-term investments on 15 separate occasions in
2014. The customers held these long-term securities for an average of only 69
days. GK's frequent and short-term trading of UITs and other long-term products
in the customers' account resulted in an annualized cost-to-equity ratio of more
than 16 percent. GK recommended that another customer with an investment
objective of "growth" buy and sell UITs and other long-term investments on 17
occasions in 2014, with an average holding period for these securities of only 53 days. GK's frequent trading in that customer's account resulted in an annualized
cost-to-equity ratio of more than 21 percent.
. . .
Respondents were aware that RI had recommended that some of his customers
hold concentrated positions in the stock. But neither Buckman nor anyone at the
Firm took any measures to determine the specific concentration levels, much less
to determine whether the concentration levels were suitable for the customers in
question. No one at the Firm contacted the customers to determine whether they
were aware of the concentrated positions in their accounts.
Collectively, RI's recommendations that these customers concentrate their
account holdings in a single, speculative security resulted in losses of approximately $32,078 for the four customers. . . .
In response to an Information filed in the United States District Court for the Southern District of Indiana https://www.justice.gov/opa/press-release/file/1157196/download and pursuant to a Deferred Prosecution Agreement https://www.justice.gov/opa/press-release/file/1157191/download, Celadon Group Inc. agreed to pay $42.2 million in restitution for knowingly filing materially false and misleading statements to investors and falsified books, records and accounts with regard to the values of assets involved in four trade transactions that were recorded at inflated values and not fair market value. Additionally, In addition, Celadon's former President of Quality Compnaies LLC (a wholly-owned Celadon subsidiary that leased tractors and trailers), Danny Williams, entered into a plea agreement in response to an Information charging him with one count of conspiracy to commit securities fraud, to make false statements to a public company's accountants, and to falsify books, records and accounts of a public company in connection with Celadon's crimes. In a parallel proceeding, the SEC file a Complaint https://www.sec.gov/litigation/complaints/2019/comp-pr2019-60.pdf , which charges Celadon with fraud and with reporting, books and records, and internal control violations. Celadon admitted to those violations and agreed to a permanent injunction and to remediate the material weaknesses in its internal control over financial reporting; and, further, the company agreed to pay a $7 million, which will be deemed satisfied by payment of restitution in the criminal settlement. As set forth in part in the DOJ Release:
[Q]uality's financial performance began to struggle in 2016 due in part to a slowdown in the trucking market. In addition, Quality owned a significant number of a truck models with mechanical issues, which many drivers did not want to lease. By 2016, many of Quality's trucks were idle, unleased and overvalued on Quality's books by tens of millions of dollars.
Instead of properly reporting Quality's financial difficulties to investors, members of Celadon's and Quality's senior management team, all acting within the scope of their employment, participated in a scheme that resulted in Celadon falsely reporting inflated profits and inflated assets to the investing public through Celadon's financial statements. Between approximately June 2016 and October 2016, Quality engaged in a series of trades as a means to dispose of its aging and unused trucks. In order to avoid disclosing the losses connected to these trucks, executives executed the trades using invoices purposely inflated well above market value. Celadon ultimately used these invoices and inflated truck values to hide millions of dollars of losses from investors.
In December 2016, after allegations of misconduct had arisen publicly, Celadon's management approved a memorandum that falsely stated the trucks involved in the above-described transactions were purchased and sold at fair market value, and were accounted for properly on Celadon's books. Further, beginning in approximately January 2017, Celadon's independent auditors conducted an investigation into the allegations of misconduct. In response, multiple members of Celadon's and Quality's management falsely represented to independent auditors that the transactions were done at fair market value and that they were not trades. Celadon's auditor ultimately withdrew its audit opinion for certain Celadon financial statements. The resulting disclosure by Celadon of the auditor's withdrawal caused a significant drop in the price of Celadon's stock, which resulted in investors losing tens of millions of dollars. . . .
In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2017/comp-pr2017-223.pdf,, former Four Points Capital Partners LLC broker Zachary S. Berkey was charged Berkey with violating the antifraud provisions, Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and sought permanent injunctions, disgorgement plus prejudgment interest and civil monetary penalties. Without admitting or denying the SEC's allegations, Berkey consented to a judgment permanently enjoining him from future violations of the antifraud provisions, and he was ordered to pay $106,000 in disgorgement, plus prejudgment interest, and $71,000 in civil penalties. As set forth in part in the SEC Release:
[B]erkey conducted in-and-out trading that was almost certain to lose money for customers while yielding commissions for himself. According to the complaint, Berkey's customers incurred significant costs with every transaction and the securities were held briefly; thus, the price of the securities had to rise significantly for customers to realize even a minimal profit. The complaint also alleged that Berkey churned customer accounts and concealed material information from his customers, namely that the costs associated with their recommendations, including commissions and fees, would almost certainly exceed any potential gains on the trades.