Securities Industry Commentator by Bill Singer Esq

April 22, 2021

Wall Street Compliance Professionals Need FINRA Like A Heart Attack 

Former Chase Bank Teller Charged With Bank Fraud For Targeting Older Adult Victim (DOJ Release)
FINRA just published another unnecessary Regulatory Notice in which the regulator reminds us about what it believes could constitute a violation of its rules. To which many veteran industry regulatory/compliance lawyers and staff would respond: Who gives a crap what FINRA merely believes? If it's a rule, enforce it. If it's an interpretation, publish it. Say what you mean and mean what you say. We can't run Wall Street compliance departments by attempting to read FINRA's mind and divine its beliefs.
In an Indictment filed in the United States District Court for the Eastern District of Michigan, former Chase Bank teller Alan Lee Hardy was charged with one count of bank fraud. As alleged in part in the DOJ Release:

[I]n August 2016, while working as a teller at the Chase Bank located at 3300 E. Jefferson Ave. in Detroit, Hardy defrauded a victim's account of at least $32,000 in a single withdrawal. The victim in this case was over 90 years old at the time of the fraud.  To date, the victim, has received no compensation for the money taken from his account.
Thomas pleaded guilty guilty in the United States District Court for the Northern District of Ohio to wire fraud and aggravated identify theft, and he was sentenced to 39 months in prison. As alleged in part in the DOJ Release:

[F]rom November 2018 to November 2019, Thomas was employed as a Call Center Representative for an insurance company with an office in Cleveland, Ohio, tasked with speaking to clients and their agents regarding annuities, updating client bank account information and processing withdrawal transactions.

During this time, Thomas devised a scam to defraud three elderly victims by transferring money from his victim's annuities into his personal bank accounts. Court documents state that Victim 1 was an 84-year-old woman in Avon, Connecticut; Victim 2, an 83-year woman with dementia in Philadelphia, Pennsylvania; and Victim 3, a 96-year-old woman and a resident of Metairie, Louisiana, were all victims of the scheme to defraud.

Victim 1, Victim 2's power of attorney and Victim 3 all called Thomas to inquire about a policy-related matter.  Thomas spoke to all of the victims or their agents and had access to their accounts.

Thomas would then use the company's computer system to make unauthorized transfers from the annuities of Victim 1, Victim 2 and Victim 3 into his personal bank accounts. As a result of the unauthorized transfers, Victim 1, Victim 2 and Victim 3 suffered a total loss of approximately $62,600.
The United States District Court for the District of Connecticut entered a final Consent Judgment against cardiologist Dr. Edward J. Kosinski, whereby he is enjoined from future violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In a parallel criminal action, Kosinski was convicted on two counts of securities fraud and sentenced to 6 months in prison and ordered to pay a $500,000 fine. As alleged in part in the SEC Release, Kosinski:

traded in advance of two negative announcements by Regado Biosciences, Inc. in the summer of 2014. In June 2014, Kosinski, who served as principal investigator of a drug trial sponsored by Regado, learned that patient enrollment in the trial was being suspended because patients had experienced severe allergic reactions. He sold all 40,000 shares of his Regado stock the following day to avoid approximately $160,000 in losses when the news became public and the stock price dropped. A month later, Kosinski learned that enrollment in the trial was going to be halted because a patient had died, and used this information to make approximately $3,000 by trading options, betting that Regado's stock price would drop when the news was made public.
On December 4, 2019, the SEC filed a Complaint in the United States District Court for the District of Connecticut against investment adviser Lester Burroughs. In a parallel criminal action, Burroughs pleaded guilty to one count of wire fraud, and he was sentenced to 33 months in prison plus three years of supervised release, and he was ordered to pay $575,000 in restitution. As alleged in part in the SEC Release:

On April 21, 2021, the U.S. District Court for the District of Connecticut entered a final judgment by consent against Burroughs. Pursuant to the final judgment, Burroughs, without admitting or denying the allegations in the SEC's complaint, was permanently enjoined from violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The judgment against Burroughs also orders him to pay disgorgement of $560,000. The disgorgement order is deemed satisfied by the criminal restitution order.

The Commission previously issued an order barring Burroughs from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating organization, as well as participating in the offering of a penny stock.
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, Elias Moses Hakimian submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Elias Moses Hakimian was first registered in 2001 and by October 2005, he was registered with LPL Financial LLC. The AWC asserts that Hakimian "does not have any relevant disciplinary history." In accordance with the terms of the AWC, FINRA found that Hakimian violated FINRA Rules 3240 and 2010. Accordingly, the self regulator imposed upon Hakimian a $5,000 fine, and a three-month suspension from associating with any FINRA member in all capacities. As alleged in part in  the AWC:

In March 2011, Hakimian borrowed $120,000 from an LPL customer with whom he had a close friendship. Hakimian signed a loan agreement and agreed to pay 10 percent interest per year, with the note to be repaid within two years. The loan was then extended and restructured several times. In 2019, Hakimian fully repaid the loan. LPL's policies prohibited its registered representatives from borrowing money from customers except in certain limited circumstances, none of which applied to the loan Hakimian received from the customer. The firm's policies also required its registered representatives to receive approval prior to borrowing money from customers. At no time did Hakimian seek or receive approval from LPL to enter into the loan agreement. 

In addition, in eight separate annual compliance questionnaires from 2011 to 2018, Hakimian falsely represented that he had not borrowed money from another individual or entity. The firm only learned of the loan after the customer complained.
Regulators and prosecutors like to exaggerate the nature and extent of their allegations; but let's not pretend that defense lawyers don't participate in similar subterfuge through their own fanciful pleadings. Such is the stuff of our adversary system of justice. When regulators/prosecutors have a settlement to work with, however, things really get blown out of proportion -- such unbridled excess produces settlements in which the sanctions imposed don't appear to fit what is presented to us as another crime of the century. In a recent FINRA AWC, we are left somewhat breathless by a series of seemingly outrageous allegations by the regulator only to be asked to accept what comes off as tepid sanctions.
There are times when FINRA gets it right. The self-regulatory-organization conducts a diligent investigation and finds a violation of its rules. Thereafter, FINRA presents its compelling case to a respondent, but also accepts a fair settlement. That's how it should work. But for the fact that it doesn't always work like that and but for the fact that it doesn't work like that as often as it should. But, okay, let's just stand back for a moment and offer a round of applause to encourage FINRA to do more of the same as demonstrated in a recent settlement involving loans from customers and outside business activities.
With surprising regularity, we have reported about families with a stockbroker, and how such a relationship proves fertile ground for over-reaching or fraud. In a recent FINRA regulatory settlement, we come across the scenario of a mother with an Edward Jones account and her daughter who is not a stockbroker but who is an Edward Jones Branch Office Administrator. Astute readers will likely infer that since this blog is about a "FINRA regulatory settlement" that the daughter took improper advantage of the mother.