Securities Industry Commentator by Bill Singer Esq

December 31, 2018

$575 Million Wells Fargo Settlement
On December 28, 2018, Wells Fargo Bank, N.A. entered into a $575 million settlement with all 50 states and the District of Columbia
that effectively resolves investigations by the states Attorneys General into: 
  • Force-Placed Collateral Protection Insurance
  • Guaranteed Asset/Auto Protection
  • Mortgage Rate Lock; and
  • Sales Practices related to i) consumer and small business checking and savings accounts, credit cards, unsecured lines of credit, and online bill pay services; and  ii) renters and simplified term-life insurance products for which Wells Fargo retail bank employees could qualify for incentive compensation credits.
Bill Singer's Snarky Comment: When last we heard from Wall Street self-regulatory-organization FINRA it had embarked upon  -- GASP!! -- information seeking about Wells Fargo: "FINRA Seeks Information from Former Registered Bank Employees of Wells Fargo" ( December 9, 2016)  In pertinent part, FINRA's now two-year-old press release states: 

WASHINGTON, DC - The Financial Industry Regulatory Authority (FINRA) has asked former Wells Fargo bank employees whose securities registrations were terminated to contact FINRA if they have concerns about the notice filed by Wells Fargo regarding their termination.  Recent news reports have highlighted several former Wells Fargo bank employees who believe that they were terminated from the bank for reporting or refusing to engage in allegedly fraudulent account-opening activities. Further, the reports indicate that a subset of these individuals who were also registered with FINRA to conduct securities activities have raised concerns that they did not receive a copy of their Form U5 termination notice within 30 days of being terminated as required by FINRA rules, or that their Form U5 contained inaccurate or incomplete comments related to the reason for the termination.

FINRA wants to review the facts and circumstances surrounding these allegations and has created a dedicated phone line and email address for use by former registered Wells Fargo bank employees to report instances where they believe there are material issues associated with the processing of their Form U5, including the accuracy and completeness of the language filed by Wells Fargo Advisors describing the reason for termination.  Qualifying former Wells Fargo employees can contact FINRA at (800) 334-0668 or The dedicated phone line and e-mail address will be available for the next 90 days.  Phone calls will be answered between 9 a.m. - 5 p.m. EST Monday through Friday; calls received outside of those hours will be returned. . .

I don't want to suggest that ol' FINRA is draggin' its heels or nuthin' like that when it comes to its Large Member Firm Wells Fargo Advisors, which, sure, okay, is a whole different legal entity than its parent bank but for the fact that the broker-dealer may have weaponized Uniform Termination Notices for Securities Industry Registration ("Form U5s") as a form of a coordinated corporate campaign of intimidation. How did FINRA describe such allegations in its 2016 Press Release? Oh yeah, I remember: Recent news reports have highlighted several former Wells Fargo bank employees who believe that they were terminated from the bank for reporting or refusing to engage in allegedly fraudulent account-opening activities. Not that the industry's self-regulatory-organization had any of its own knowledge of such misconduct, particularly when sooooo many Wells Fargo bank employees were also registered with FINRA as Wells Fargo Advisors employees, and especially when so many of the bank employees were also fired as broker-dealer employees for alleged misconduct at the bank side of things. I mean, after all, FINRA did and does operate in a hermetically sealed vacuum that does not allow any rumors or beliefs to penetrate into the regulator's corporate consciousness. Seriously, you don't expect FINRA to read newspapers, or watch television, or listen to the radio, or surf online for news, or, you know, put two and two together and come up with four, do you? 

For those of you who would cynically suggest that FINRA has a double-standard that favors its larger, more influential member firms, I say, "shucks," FINRA would never coddle a recidivist regulatory violator, right? FINRA diligently investigates, charges, fines, and suspends (maybe even revokes the registration) its Large Member Firms for engaging in the same misconduct as a pennystock manipulator or boiler-room, right? And to give the industrious and inveterate FINRA its due, after some two years of dedicated phone lines and email addresses that were available for a full 90-days after the publication of its December 16, 2016, Press Release, the self-regulator did issue another Press Release on October 16, 2017, which, That now one-year-old FINRA press release stated in pertinent part that:

WASHINGTON - The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC to pay more than $3.4 million in restitution to affected customers for unsuitable recommendations of volatility-linked exchange-traded products (ETPs) and related supervisory failures. FINRA found that between July 1, 2010, and May 1, 2012, certain Wells Fargo registered representatives recommended volatility-linked ETPs without fully understanding their risks and features. . .

And yet there are gadflies and cynics, such as me, who would still argue that FINRA is a day late and several millions of dollars short when it comes to effectively regulating its Large Member Firms. On the other hand, I'm sure that FINRA will assure the press, the industry, and the investing public that it is diligently, diligently I say, still following up on the three months of information provided to the regulator's "dedicated" lines concerning Wells Fargo Advisors' filing of Forms U5 concerning discharged bank/broker-dealer employees. With the New Year, we may even get an updated press release on all of that.
In my private law practice, I frequently receive telephone calls from registered representatives who have an Employee Forgivable Loan (also known as a "Promissory Note" or  "EFL") and are contemplating quitting or anticipate being fired from the employer broker-dealer. Inevitably, our conversation involves some discussion as to the "unaccrued balance" remaining on the EFL -- which prompts the client to ask if I can negotiate some discount off any repayment. In some cases, the client volunteers that there's no way in hell that he can come up with the bucks needed to repay anything (often including my legal fees). In other cases, we got "mitigating circumstances" involving discrimination, harassment, wrongful discharge, hostile workplace, racism, sexism, ageism, which might entitle the rep to keep every penny of any unaccrued EFL balance and perhaps demand damages to boot. In such EFL discussion, I inevitably admonish my potential client with a quote from George Bernard Shaw: "There are two tragedies in life. One is to lose your heart's desire. The other is to gain it." Point being that the rep might refuse to repay the unaccrued balance, get sued by his former broker-dealer, get slammed by a FINRA Arbitration Panel with compensatory damages, interest, costs, and fees. That would be the "loss." As to Shaw's referenced "gain," that would be the rep winning a smashing victory, not have to repay any of the unaccrued EFL balance, but then winding up with the now-forgiven loan balance converted to income, which then gets taxed, which then requires payments to local, state, and federal taxing authorities. If you don't have the money to repay a broker-dealer,  imagine what it will be like pleading poverty to a state or federal tax authority. With that preamble, let's embark upon a fascinating journey of one rep's apparent victory in an EFL battle with Merrill Lynch.

Federal Courts Address Government Shut-down
As the shut-down of the federal government continues, we are beginning to see the ripples spreading out. The federal courts are forced to grapple with a number of issues attendant to the ongoing furloughs as exemplified in Standing Order No. 18-4 published by the United States District Court for the District of New Jersey: In re: Stay of Civil Matters Involving the United States as a Party.
In pertinent parts, the Stay Order states:

This matter is before the Court due to the lapse of congressional appropriations funding the federal government, including the Department of Justice and the United States Attorney's Office for the District of New Jersey (the "United States Attorney's Office"). Absent an appropriation, the United States represents that certain Department of Justice attorneys and employees of the federal government are prohibited from working, even on a voluntary basis, except in very limited circumstances. including "emergencies involving the safety of human life or the protection of property." 31 U.S.C. § 1342. Therefore. the lapse in appropriations requires a reduction in the workforce of the United States Attorney's Office and other federal agencies, particularly with respect to prosecution and defense of civil cases. The Court, in response, and with the intent to avoid any default or prejudice to the United States or other civil litigants occasioned by the lapse in funding, enters this Order. As a result of the cited workforce reductions, it is hereby

ORDERED effective December 27, 2018 at all civil litigation, with the exception of Federal Trade Comnission v. Gerber, Civil Action No. 14-6771(SRC) and all pending Social Security cases, in the United States District Court for the District of New Jersey involving as a party the United States of America. its agencies. its officers or employees (whether in their individual or official capacity and whether current or former employees), and/or any other party represented by the Department of Justice or the United States Attorney's Office is immediately suspended. postponed and held in abeyance continuing either (1) until the federal government is funded through congressional appropriation or (2) for a period of thirty (30) days from the date of entry of this Order, whichever comes sooner. The Court may renew or modify this Order depending on developments during the stay period. The Court intends "civil litigation" to include all pending non-criminal cases in which the United States, its agencies, its officers or employees (whether in their individual or official capacity and whether current or former employees) is in any way a named party and any non-criminal cases in which the United States Attorney's Office or the Department of Justice is counsel of record. This Order includes, without further limitation, all other cases seeking monetary or equitable relief in which the United States is involved as a civil litigant. 

This Order suspends and continues, during the stay, any and all events and deadlines in the affected civil litigation (whether established b order. rule. or agreement), including but not limited to am' scheduled proceedings, hearings. discovers' and pleading dates, and/or compliance and administration of consent orders. No party will be required to take any steps in civil litigation affected until expiration of the stay. The Court warns litigants that this Order does not purport to affect rights to or deadlines concerning appeal from any decision of this Court. which will continue to operate and issue orders in the normal course. 

Any litigant affected by this Order may seek relief from the Order by motion. The Court may. in any particular case. vary the effect or operation of this Order by a separate ruling.. .

In the Matter of the Arbitration Between Shawn Michael Richardson, Claimant, v. 
Prudential Equity Group, LLC and 
Wells Fargo Clearing Services, LLC,
 Respondents (FINRA Arbitration 18-00578/ December 28, 2018) 
Associated person Claimant Richardson filed a Statement of Claim in February 2018, seeking the expungement from his Central Registration Depository records ("CRD") of two unsettled customer complaints. Respondents Prudential and Wells Fargo generally denied the allegations but took no position on the requested relief.  The sole FINRA Arbitrator conducted a telephonic expungement hearing at which the customers did not attend but the Respondents did participate. The Arbitrator recommended the expungement of the two complaints based upon a finding that the claim, allegation, or information is false.  As noted in the Decision:

The customer in the underlying matter alleged that Claimant failed to execute his instructions to sell assets in his account. In arriving at a decision, the Arbitrator relied on Claimant's testimony at the hearing that the customer refused to verbally instruct Claimant to sell his assets despite being advised to do so by the Claimant on multiple occasions. As reported in Claimant's BrokerCheck report, the customer had sent emails to Claimant regarding the liquidation of the assets but the report notes that the emails could not be accepted as orders by the firm. Claimant testified that in follow up phone conversations he had specifically asked if the customer wanted to sell the assets and the customer declined to authorize the sale. The Arbitrator finds the accusation to be false and recommends expungement.

. . .

The customer in the underlying matter alleged that Claimant engaged in unauthorized and self-serving trading in her account. In arriving at his decision, the Arbitrator relied on Claimant's testimony at the hearing that the customer was fully aware of and authorized the trades. Although he did not submit these to the Arbitrator, Claimant testified that the customer was sent a written confirmation of the trade and was also provided with monthly statements showing that the investment was earning dividends during the roughly one-year period following the transaction. The Arbitrator finds the accusation to be false and recommends expungement. 

In the Matter of the Arbitration Between Denise A Badgerow , Claimant, v. Ameriprise Financial Services, Inc., Thomas James Meyer, Ray Anthony Trosclair, and Gregory Alan Walters
Thomas James Meyer, Ray Anthony Trosclair, and Gregory Alan Walters
 Counter-Claimants, v. Denise A Badgerow, Counter-Respondent  
(FINRA Arbitration 16-02759/ December 28, 2018) 
Associated person Claimant Badgerow filed a Statement of Claim in February 2018,and as amended thereafter in which she asserted:

non-party REJ Properties, Inc. d/b/a Walters, Meyer, Trosclair & Associates' ("Company") unwritten compensation agreement and payment method of commissions violated SEC and FINRA regulations; Claimant was fired in retaliation for reporting the Individual Respondents' conduct to Ameriprise in violation of Louisiana Law; non-party Company tortiously interfered with Claimant's employment agreement; and Claimant's employment agreement's non-compete and non-solicitation provisions are invalid and non-party Company tortiously interfered with Claimant's book of business after wrongful termination in violation of Louisiana's Unfair Trade Practices & Consumer Protection Law ("LUPTA"). In Claimant's Second Amended and Restated Statement of Claim, she added as a cause of action that Ameriprise was a joint employer and is jointly and severally liable for the actions of the Individual Respondents and non-party Company. The causes of action relate to Claimant's allegations that she was involuntarily terminated from her employment with non-party Company, a franchise of Ameriprise. 

Claimant Badgerow sought back pay from the non-party Company; front-pay damages to cover her period of unemployment and loss of matching benefits; treble damages of $1.125 million for the non-party Company and Respondent Walters' alleged tortious interference with her book of business; fees; costs; and a declaratory judgment that Respondent Ameriprise's conduct created a joint employer relationship with the non-party Company. An allegation by Claimant that in 2015 she was subjected to harassment that was so severe by Respondent Meyers and his team that she sought medical attention was removed after Claimant objected to an Order of Production and she withdrew that allegation. Respondents generally denied the allegations, and Respondents Meyer, Trosclair, and Walters filed Counterclaims asserting breach of contract and violation of the Louisiana Trade Secrets Act. As set forth in part in the FINRA Arbitration Decision:

On November 20, 2018, the Panel and the Individual Respondents held a recorded in person conference to hear the parties' oral argument on the Individual Respondents' motions to dismiss. The Individual Respondents argued that Claimant's theories of recovery were legally and/or factually without merit. Claimant opposed the motions to dismiss. After due deliberation, the Panel granted the Individual Respondents' motions to dismiss and found that Claimant did not: 1) establish liability for the Individual Respondents under the Louisiana Whistleblower Act; 2) prove a tortious interference with contract claim against the Individual Respondents; and 3) prove any claim against the Individual Respondents under the Louisiana Unfair Trade Practice Act or establish any other basis for recovery under the Amended and Restated Statement of Claim. 

In the Matter of the Arbitration Between Lorenzo Daniel Esparza, Claimant, v. J.P. Morgan Securities, LLC, Respondent (FINRA Arbitration 18-01740, December 28, 2018)
In a Statement of Claim filed in May 2018, Associated Person Esparza sought the expungement of two customer complaints.  Respondent JP Morgan Securities generally denied the allegations, asserted affirmative defenses, but took no position on the requested expungement. Neither customer appeared at the telephonic expungement hearing. The sole FINRA Arbitrator made a Rule 2080 finding that the customers' claim, allegation, or information is factually impossible or clearly erroneous, and false. In recommending the expungement of both complaints, the FINRA Arbitrator offered the following rationale:

Both customer complaints were "automatic" reactions to a declining market, which corrected itself. This was in spite of accurate assessments of risk tolerance and balanced investment portfolios, as well as full disclosure of markets and risks. In occurrence number 1666265, Mr. D acknowledged his mistake and remained with the broker and J.P. Morgan, with no settlement or actual damages claimed. In occurrence number 1865738, Ms. Z left the broker-dealer without further claims and was given a refund of fees, to which the broker did not contribute. J.P. Morgan's reporting to CRD was required but does not represent an accurate representation of the broker.