Securities Industry Commentator by Bill Singer Esq

January 15, 2019

Edward Jones Hit With $2 Million ADA Damages In FINRA Arbitration In the Matter of the Arbitration Between Rodney Hunter Schurg, Claimant, v. Edward D. Jones & Co., L.P., Respondent (FINRA Arbitration Decision 16-03495 / January 11, 2019)
In a FINRA Arbitration Statement of Claim filed in December 2016, associated person Claimant Schurg asserted in part, employment discrimination in violation of the Americans with Disabilities Act ("ADA"); interference and retaliation in violation of the Family Medical Leave Act ("FMLA"); and defamation by slander. The claims arose in connection with Claimant's former employment with Respondent Edward D. Jones & Co. Ultimately, Claimant sought $900,000 in back pay plus interest; $1.2 million in three-years of front-pay; $100,000 in disability discrimination damages; $300,000 in punitive damages; $100,000 plus interest; between $200,000 and $400,000 in defamation damages; fees, and costs.  Respondent Edward D. Jones & Co. generally denied the allegations and asserted various affirmative defenses. In November 2018, Claimant Schurg filed an Unopposed Motion to Withdraw Claims for FMLA Retaliation and Employment Discrimination; and, accordingly, the FINRA Arbitratio Panel made no determination with regard to those claims. The FINRA Arbitration Panel found Respondent Edward D. Jones liable and ordered the firm to pay to Claimant Schurg $2 million in back- and front-pay damages with respect to Claimant's claim of employment discrimination in violation of the ADA. The Panel stated that it had "considered Claimant's claims of FMLA interference in violation of 29 U.S.C. § 2615(a)(1) and defamation by slander and found those claims to be without merit."

FINRA Gets Email Snafu Right But Its Regulatory Role Wrong ( Blog)
Nuance is lost in today's era of bombast. Live long enough and you realize that few things in life are black or white -- maybe it's my failing eyesight, but as I get older, I'm noticing lots of shades of gray. In today's featured FINRA AWC regulatory settlement, the self-regulatory-organization sanctions a member firm for inadequate supervision of outside email usage. Without question, FINRA is on point and presents its case with merit. On the other hand, there's a bit of so-called gotcha regulation at play here, and that needs to be called out. On the other hand (yes, the dreaded "third" other hand), it's not FINRA's job to run a member firm's compliance department. On the other hand (oh my, the rare "fourth" other hand), there are times when FINRA has to be more energetic in preemptively inserting itself into any firm's compliance structure and insisting that the public is protected. Reading toe-tags in the morgue is not effective Wall Street policing.

SEC Alleges Auditor Failure With PCAOB Standards In the Matter of LBB & Associates Ltd., LLP and Carlos Lopez, CPA, Respondents (SEC Order Instituting Public Administrative Proceedings, ' 34 Act Rel. No. 84983, Acct. and Aud. Enf. Rel. No. 4014, Admin. Proc. File No. 3-18967 / January 14, 2019). LBB & Associates Ltd., LLP, is a PCAOB-registered accounting and auditing firm with approximately 28 public company clients. LBB has two partners and approximately eight accountants on staff. CPA Carlos Lopez is LBB's managing partner and majority owner, and he served as the engagement partner for Behavioral Recognition Systems, Inc.'s ("BRS's") 2012 audit and as the ")engagement quality reviews  ("EQR") partner for its 2013 and 2014 audits. Under the heading "Summary", the SEC Order alleges that:

1. For annual audits of years 2012, 2013 and 2014, Respondents engaged in a pattern of improper professional conduct as auditors. Specifically, Respondents failed to comply with Public Company Accounting Oversight Board ("PCAOB") standards in their audit of Behavioral Recognition Systems, Inc. (now known as Giant Gray, Inc.) ("BRS") for fiscal year 2012 and in their engagement quality reviews ("EQR") of the 2013 and 2014 fiscal year audits. Lopez, LBB's managing partner and majority owner, served as LBB's engagement partner for the 2012 audit and as its EQR partner for the 2013 and 2014 audits. 

2. During the 2012 audit, Lopez did not comply with PCAOB standards regarding: (i) the identification of related party transactions or (ii) the audit procedures required when examining known related party transactions. 

3. First, Lopez relied exclusively on BRS's management to disclose related party transactions to him, despite the fact that he was aware of certain red flags indicating that additional related party transactions existed. As a result, although Blackstone Group, Inc. ("Blackstone") received payments of approximately $1.5 million in 2012 and was one of BRS's largest vendors that year, Lopez failed to apply the audit procedures set forth in AU § 334 and failed to identify those payments as transactions involving a related party controlled by BRS's then-CEO, Ray Davis ("Davis").

4. Second, Lopez also failed to comply with PCAOB standards in Respondents' 2012 audit of known related party transactions because, among other things, he did not (i) properly assess the risks associated with those transactions; (ii) complete audit procedures designed to confirm the business purpose, nature, and extent of the payments made; or (iii) exercise due professional care in performing his audit work. Here, again, Lopez relied exclusively on BRS management to explain an almost three-fold increase in expenses to an individual he knew was related to Davis ("Related Party A") without, for example, reviewing any invoices or taking any other steps to determine the purpose, nature, and extent of the expenses and their effect on the financial statements. 

5. Respondents also failed to comply with PCAOB standards in connection with their EQRs for both the 2013 and 2014 BRS audits. In particular, PCAOB standards prohibit a person who served as the engagement partner on either of the two preceding audits from serving as the EQR partner on an audit. Thus, because Lopez served as the engagement partner on the 2012 BRS audit, Respondents failed to comply with these PCAOB standards when Lopez served as the EQR partner on the 2013 and 2014 audits. 

6. By failing to conduct the BRS audits in accordance with PCAOB standards, LBB and Lopez engaged in improper professional conduct. 

The plan was to withdraw $2,000 a month. The customer withdrew $175,000. In the Matter of the Arbitration Between David Richard Stack, Claimant, v. Morgan Stanley and Arthur Steiner, Respondents (FINRA Arbitration Decision 18-00615 / January 11, 2019)
In a FINRA Arbitration Statement of Claim filed in February 2018, associated person Claimant Stack sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Respondent Morgan Stanley took no position and did not oppose expungement. In November 2018, Claimant voluntarily dismissed his claim against Respondent Steiner. The customer did not participate. Following an expungement hearing, the sole FINRA Arbitrator recommended the expungemetn of the customer complaint based upon a FINRA Rule 2080 finding that the customer's claim, allegation, or information is false. The Arbitrator offered this rationale:

Claimant managed the customer's accounts at Morgan Stanley from 1998 to 2002. Claimant left Morgan Stanley in 2004. On August 29, 2006, the customer filed a complaint against Morgan Stanley alleging that he had lost $65,000.00. In fact, the customer's accounts made money through those years. The main issue was that the customer withdrew approximately $175,000.00 for his expenses, substantially more than the $2,000.00 per month withdrawals that were the planned withdrawals. Morgan Stanley denied the complaint and the customer did not pursue the issue further.