Securities Industry Commentator by Bill Singer Esq

featured in today's Securities Industry Commentator:

Greenfield Woman Sentenced for Conspiracy to Hide $486,000 from Federally Insured Financial Institution (DOJ Release)

[In]Securities Guest Blog: What's My Name? by Aegis Frumento Esq (BrokeAndBroker.com Blog)

OATH Corporation CEO Sentenced For Wire, Tax, And Bankruptcy Fraud (DOJ Release)

FINRA Requests Comment on a Proposed Rule to Limit a Registered Person from Being Named a Customer's Beneficiary or Holding a Position of Trust for or on Behalf of a Customer / Comment Period Expires: January 10, 2020 (FINRA Regulatory Notice)

FINRA Fines and Suspends Rep for Exercising POA in Relative's Away Account. In the Matter of  John Steven Mullaly, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Borrowing from Customers. In the Matter of Ralph G. Adamo, Respondent (FINRA AWC)

FINRA Fines and Suspends Rep for Check Kiting. In the Matter of Rockney F. Garcia, Respondent (FINRA AWC)

In August 2011, Borer's brother, Jeffrey Borer, and his then-wife owed Wells Fargo Bank approximately $1.32 million in outstanding loans. In March 2012, Borer, who was acting as her brother's bookkeeper, received approximately $1.1 million, which related to a judgment from a Honduran court, into her Massachusetts bank account. $486,000 of the $1.1 million judgment belonged to Jeffrey Borer and his then-wife. A few days after Marlene Borer received the money, her brother e-mailed her to "keep [the] bulk" of their funds in her account because "Wells Fargo might be conducting an asset search on us to try and recover the judgments. Just transfer what is needed to pay bills as they arrive." Marlene Borer distributed their funds from her account as he requested.

On or about May 24, 2012, Marlene Borer prepared a false personal financial statement for Jeffrey Borer and his then-wife, stating that they only had $4,200 in the bank. Jeffrey Borer provided the personal financial statement to Wells Fargo, which relied upon it to negotiate their debt. On Oct. 31, 2012, Jeffrey Borer and his then-wife executed a settlement agreement with the bank, in which Wells Fargo agreed to forgive their personal obligations in exchange for a payment of $50,000.

In October 2019, Jeffrey Borer was sentenced to 10 months in prison.

[G]olloher was the President and Chief Executive Officer of OATH Corporation, a bullet-manufacturing company based in Brevard County. In that capacity, Golloher recruited individuals to invest significant sums of money in OATH Corporation. He defrauded one investor of nearly $70,000 by embezzling funds intended for corporate use. Golloher defrauded another individual of more than $40,000 by convincing him to purchase the rights to an "exclusive distributorship" that did not actually exist.

In addition, for six quarters in 2015 and 2016, Golloher collected payroll taxes on behalf of OATH Corporation employees, but failed to pay over that tax to the Internal Revenue Service. Golloher also failed to pay over OATH Corporation's payroll tax obligations, resulting in a total tax loss of more than $458,000.

Eventually, Golloher filed for bankruptcy on behalf of OATH Corporation.  During the course of the bankruptcy proceeding, Golloher knowingly made a false declaration, understating the amount of compensation and personal expenses he had received from OATH Corporation. Golloher admitted that he did so with the intent to deceive OATH Corporation's creditors, the bankruptcy trustee, and the bankruptcy judge.

Investment professionals often develop close and trusted relationships with their customers, which in some instances have resulted in the investment professional being named the customer's beneficiary, executor or trustee, or holding a power of attorney or a similar position for the customer. Being a customer's beneficiary or holding a position of trust may present significant conflicts of interest, and FINRA has previously taken steps to address misconduct in this area.   

To further address potential conflicts of interest, FINRA is proposing a new rule to limit any associated person of a member firm who is registered with FINRA (each a "registered person") from being named a beneficiary, executor or trustee, or to have a power of attorney or similar position of trust for or on behalf of a customer. The proposed rule would protect investors by requiring all member firms to affirmatively address registered persons being named beneficiaries or holding positions of trusts for customers. The proposed rule would require the member firm with which the registered person is associated, upon receiving written notice from the registered person, to review and approve the registered person assuming such status or acting in such capacity. The proposed rule would not apply where the customer is a member of the registered person's "immediate family."1

Recognizing that a registered person and customer may have a close and longstanding friendship or relationship that may be akin to, but not actually, a familial relationship, the proposed rule would not prohibit a registered person being named a beneficiary of or receiving a bequest from a customer's estate. However, given the potential conflicts of interest, FINRA would expect a member firm to employ heightened scrutiny in assessing a registered person's request to be named a beneficiary of or receive a bequest from a customer's estate. Approval should be given only when the member firm has made a reasonable determination that the registered person assuming such status does not present a risk of financial exploitation that the proposed rule is designed to address.

On September 30, 2015, Mullaly accepted a power of attorney over a brokerage account held by a relative at another FINRA member firm. On the power of attorney form, Mullaly indicated to the outside firm that he was not "affiliated with or employed by" a FINRA member firm. Additionally, although the power of attorney gave Mullaly full trading authority over the account, as well as the ability to make withdrawals, he did not disclose the account to William Blair at any time. To the contrary, Mullaly signed and submitted annual compliance questionnaires to William Blair, in which he falsely represented that he did not have any undisclosed outside securities accounts. 

From October 2015 through January 2018, Mullaly made several trades in the account that were prohibited by the Firm because they involved securities on the Firm's restricted list. Mullaly also made several trades in the account that required pre-approval by the Firm because they involved securities that were on the Firm's research list. 

In December 2005, FINRA's predecessor accepted a Letter of Acceptance, Waiver and Consent (No. 2005000958101) in which Adamo agreed to a 30 calendar-day suspension and a $5,000 fine for settling three customer complaints without the knowledge or consent of his firm. 

In December 2009, Adamo borrowed $200,000 from customer BW. In connection with the loan, Adamo executed a promissory note that obligated him to make quarterly interest payments and to repay the principal in December 2011. In December 2011, Adamo negotiated an extension of time until December 2013 to repay the principal and executed a second promissory note. In December 2013, Adamo repaid only a portion of the principal owed. He later negotiated a one-year extension to repay the remaining principal and executed a third promissory note reflecting the terms of the extension. Adamo repaid the remaining amount owed on the BW loan by August 2015. 

From April 2010 through November 2013, Adamo received four loans totaling $320,000 from PD, a senior customer with whom Adamo had a close personal relationship that predated the loans. Adamo did not document any of these loans but agreed to pay eight percent annual interest on the principal. Adamo repaid the first three loans by December 2012. Adamo received the fourth loan in November 2013, used the proceeds to make a partial payment of the amount that he owed on the loan from BW, and repaid the fourth loan in April 2017.

FSC prohibited its representatives from borrowing money from customers except in very limited circumstances not applicable here. Adamo never disclosed the BW or PD loans to FSC, never disclosed the modifications of the BW loan to FSC, and never received approval from the firm to borrow from firm customers.

• Securities Industry Commentator
• Bill Singer