Securities Industry Commentator by Bill Singer Esq

December 27, 2019

as featured in the Securities Industry Commentator:

FINRA Sanctions Five Firms for Failing to Reasonably Supervise Custodial Accounts / Firms Did Not Know Essential Facts About Customers With Custodial Accounts Established Pursuant to the Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) (FINRA Release)

SEC Obtains Final Judgments in Pay-To-Play Scheme (SEC Release)

Expungement Recommended in Stop Loss Complaint involving Netflix Stock. In the Matter of the Arbitration Between Brian W. Armstrong, Claimant, v. First Financial Equity Corporation and Securities America, Inc., Respondents (FINRA Arbitration Decision)

$1.55 Million Award Ordered In FINRA Customer Complaint Arbitration. In the Matter of the Arbitration Between Michele Schultz, individually and as Trustee of the Michele C. Schultz Family Living Trust, Claimant, v. Jerry Lou Guttman and United Planners Financial Services of America, a Limited Partnership, Respondents (FINRA Arbitration Decision)
In today's featured Wall Street regulatory settlement, we got a lawyer. He was lawyering while stockbrokering. The lawyering earned the stockbroker about $19 an hour over a six-month span. This stockbrokering lawyer (or lawyering stockbroker, if you prefer) also made about $90,000 over a 17-month stretch doing document scanning and uploading. So . . . we got a stockbrokering-paper-pushing-lawyer, so to speak. In this gig economy, how does all that gigging get you into trouble with FINRA? Ah, now that's why this is today's featured story!
Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; LPL Financial LLC; Morgan Stanley Smith Barney LLC; and Merrill Lynch, Pierce, Fenner & Smith Incorporated entered into Acceptance, Waiver and Consent regulatory settlements with FINRA, without admitting or denying the charges, for failing to reasonably supervise compliance with FINRA Rule 2090.The five settling firms paid combined fines totaling $1.4 million, and agreed to review their policies, systems, and procedures to ensure that they are reasonably designed to supervise custodial accounts and to achieve compliance with FINRA Rule 2090. 

SIDE BAR: FINRA Rule 2090: Know Your Customer

Every member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.

Supplementary Material:

.01 Essential Facts. For purposes of this Rule, facts "essential" to "knowing the customer" are those required to (a) effectively service the customer's account, (b) act in accordance with any special handling instructions for the account, (c) understand the authority of each person acting on behalf of the customer, and (d) comply with applicable laws, regulations, and rules.

The five cited settling firms allegedly failed to establish, maintain, and enforce reasonable supervisory systems and procedures to track or monitor whether custodians timely transferred control over custodial property in Uniform Transfers to Minors Act ("UTMA") and Uniform Gifts to Minors Act ("UGMA") account beneficiaries. As a result, UTMA Account Custodians were allegedly authorizing account transactions months/years after the beneficiaries had reached the age of majority and the subject custodial property should have been transferred from the account. See the AWCs:
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that Navnoor S. Kahn had investment responsibility for about $50 million in assets of the New York State Common Retirement Fund, and that in violation of his fiduciary duty to the Fund, he directed over $2.5 billion in state business to Gregg Z. Schonhorn and Deborah D. Kelley (representatives at two different broker-dealers). In exchange for said business, Schonhorn and Kelley provided Kahn with tens of thousands of dollars in undisclosed benefits, among which were gifts, dining, vacations, and so-called "illicit entertainment." As alleged in part in the SEC Release:

The Court entered the final judgments based upon Kang's, Schonhorn's, and Kelley's consent to resolve all claims. The final judgments permanently enjoin Kang, Schonhorn, and Kelley from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and permanently enjoin Kang from participating in any decisions involving investments in securities by public pensions as a trustee, officer, employee, or agent. The SEC previously issued administrative orders barring Kelley and Schonhorn from the securities industry. Kang, Schonhorn, and Kelley agreed to disgorge $182,422, $3,598,046, and $168,721, respectively, plus prejudgment interest, which is deemed satisfied by the restitution and/or forfeiture ordered in connection with parallel criminal actions brought by the U.S. Attorney's Office for the Southern District of New York.

In a FINRA Arbitration Statement of Claim filed in February 2019, associated person Armstrong sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Respondent First Financial took no position and Respondent Securities America did not oppose. In November 2019. Claimant Armstrong withdrew his request for the expungement against Respondent Securities America. The sole FINRA Arbitrator recommended expungement based upon a Rule 2080 finding that the customer's claim, allegation, or information is false. As set forth in part in the FINRA Arbitration Decision:

The customer became a client of Claimant several years ago, and brought to Claimant her account which consisted of one stock, Netflix. At their initial meeting, Claimant counseled the customer to consider diversifying her account, which she was not ready to do. He then suggested she at least consider a stop loss order so if the market went down, she would protect most of her gains in the stock. She thought about it for a couple of days, then talked to Claimant about going ahead with the stop loss order, which he then did. 

Some months later, Claimant moved to another brokerage, and the customer moved her account with him to his new firm. This transition took a month or so to finalize and when the customer received her new statement, she simply saw that her Netflix stock had been sold, and thus wrote the complaint letter to the brokerage asking for her money back for her sales losses. 

Soon after writing this complaint letter, she realized that she had, in fact, authorized the stop loss order, and had simply forgotten that she had done this. The customer wrote a second letter explaining the error and stating that she had authorized the stop loss order. Copies of both letters were introduced as exhibits by Claimant. 

The customer remains a customer of Claimant today. 

It would serve no useful purpose to the public to keep this occurrence on Claimant's registration records in the CRD.

In a FINRA Arbitration Statement of Claim filed in April 2018, customer Schultz asserted violation of Arizona securities statutes and consumer fraud statutes; unsuitable investment recommendations; violation of Section 3010 Conduct Rules of the NASD and FINRA Rule 3110; breach of fiduciary duty; negligence and negligent supervision; breach of contract; and respondeat superior. The allegations arose in connection with Claimant's investment in Serenity Cemeteries V and VI. Claimant sought $1.7 million in compensatory damages, punitive damages, fees, and costs. Respondents generally denied the allegations and asserted affirmative defenses. In June 2019, Claimant dismissed with prejudice her claims against United Planners. Pursuant to a Stipulated Award entered into by Claimant and Respondent Guttman in December 2019, the FINRA Arbitration Panel found Guttman liable and ordered him to pay to Claimant Schultz $1.55 million.