Articles Posted in FINRA AWC

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On March 18, 2020, FINRA barred FA James Daughtry for his refusal to appear for an on-the-record interview, which is akin to a deposition.  Daughtry consented to the bar from the securities industry by executing the Letter of Acceptance, Waiver and Consent (AWC) in Department of Enforcement v. James Blake Daughtry, Matter No. 2020065293201.

Background

According to BrokerCheck, Daughtry entered the securities industry in 1999.  He registered with Kestra Investment Services, LLC in February 2015 and remained with Kestra until his termination in March 2020.  James Daughtry worked from a branch located in Dothan, Alabama.

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This is a classic case of buyer’s remorse.  In the case at hand, FA Jeffrey Mohlman settled with FINRA by executing a letter of Acceptance, Waiver and Consent (called an AWC) and, in so doing, agreed to a bar from the securities industry.  Apparently displeased with his decision, he filed an action in court seeking almost $900,000 in damages by claiming that FINRA “committed fraud by inducing Plaintiff to fail to testify at a second disciplinary interview, thus allegedly fraudulently avoiding an alleged requirement that Defendants consider mitigating factors in the Plaintiff’s disciplinary case…”   Mohlman’s claims received a chilly reception by the U.S. District Court for the Southern District of Ohio (Mohlman v. FINRA, et al., Case No. 19-cv-154), which granted FINRA’s motion to dismiss on February 24, 2020.

Background

Mohlman entered the securities industry in 2001.  In March 2015, Mohlman’s then-employer, Questar Capital Corporation, terminated his registration and filed a Form U5 claiming that Mohlman “resigned while under internal review for failure to follow firm policies and procedures regarding his participation in private securities transactions.”  FINRA then launched an investigation and requested his appearance at an on-the-record interview (OTR) on September 11, 2015.  On September 9, 2015, Mohlman’s lawyer informed FINRA that Mohlman received the OTR request but would be declining to appear.  On September 17, 2015, Mohlman signed an AWC in which he agreed to a bar from the securities industry and waived various procedural rights.

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Courts call a lifetime bar “the securities industry equivalent of capital punishment.”  PAZ Sec. Inc. v. SEC, 494 F.3d 1059, 1065 (D.C. Cir. 2007).  It is a draconian measure which not only permanently removes you from the securities industry but also subjects you to “statutory disqualification” under Section 3(a)(39)(A) of the Securities Exchange Act of 1934 and all the collateral consequences that come with it.

Given the seriousness of a lifetime bar, a recently released AWC presents an alarming fact pattern in which a supervisor was barred due to the transgressions of an FA he failed to properly supervise.  Let’s consider the case of Michael Leahy, FINRA Case No. 2019063631802.  The question is, why did FINRA go after the supervisor with guns blazing?

The Applicable Rule:  FINRA Rule 3110

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On January 3, 2020, FINRA released an AWC for Robert James D’Andria, Case No. 2017056579502.  At first blush the AWC seems rather plain vanilla.  The FA recommended high-risk products, in this case leveraged and inverse exchange-traded notes and funds, to retail investors and FINRA deemed those recommendations to be unsuitable.  FINRA suspended the FA for 2 months and fined him $5,000.

In a typical suitability case, FINRA would claim that the account was over-concentrated in a given sector, or the position was too large relative to the portfolio as a whole, or the account was over-traded, or the investment was inconsistent with the investor’s stated investment objectives.  And, in a typical case, FINRA would claim that the customer suffered meaningful losses.

In this AWC, however, FINRA does not claim that the investments were inconsistent with the customers’ investment objectives.  Nor does FINRA claim that the investors were unsophisticated or otherwise lacked the ability to assess the merits of these investments.  So, this begs the question:  where’s the violation?

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On December 20, 2019, FINRA announced a settlement with John Carneglia.  According to the AWC, Carneglia violated FINRA Rule 3210 for failing to notify his member firm of a brokerage account and violated FINRA Rule 3270 for failing to timely disclose an outside business activity.

Underlying Facts

Carenglia was registered with BNP Paribas from June 2006 through July 2017.  According to FINRA, Carneglia didn’t inform BNP of his wife’s brokerage account and likewise failed to inform the firm that maintained his wife’s account of his association with BNP.  Further, FINRA alleges that Carneglia was a member of an LLC that owned an income-generating rental property (ski-resort condominium), yet failed to timely notify BNP of that outside business activity.

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On December 16, 2019, FINRA released the AWC in Matter No. 2018060843801 (In re Molteni) [click here to read the AWC].  At first blush, the AWC seems to concern a garden variety violation in which the FA failed to amend his Form U4 to disclose two federal tax liens.  This doesn’t seem to be the violation of the century, right?  Even FINRA’s Sanction Guidelines suggest a regulatory slap on the wrist of a modest fine and 10 day suspension.

So here is where things get interesting.  FINRA more or less sanctioned Molteni in accordance with the Sanction Guidelines.  They hit him with a $5,000 fine and a 3 month suspension.  However, FINRA also found that he “willfully” failed to disclose the federal tax liens.  In the world of FINRA regulation, the word “willful” carries an awful lot of weight.

What does it mean to act “willfully”?

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FINRA wants a member firm to enforce its written supervisory procedures.  And FINRA wants a member firm to recommend securities that fit within the customer’s investment objectives.  And certainly FINRA wants a member firm to avoid falsification of business records.  So what happens when a member firm doesn’t quite live up to FINRA’s expectations?  Let’s play the over / under game and try to guess the size of the FINRA sanction when a member engages in the following misconduct:

  • Failure to enforce WSPs governing the sale of high-risk mutual funds subject to significant volatility
  • Failure to reallocate portfolios to reduce risk or otherwise update investment objectives to correspond with the assumption of additional risk

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FINRA is on the look-out for violations of Rule 3280, which prohibits an FA from participating in a private securities transactions without giving written notice to the broker-dealer and receiving written approval.  A “private securities transaction” is any securities transaction outside the scope of the FA’s employment with the broker-dealer.  Private securities transactions remain a regulatory focus for FINRA.  As noted by FINRAs CEO, Robert Cook, in the 2019 Risk Monitoring and Examination Priorities Letter:  “we are particularly concerned about fundraising activities for entities that the associated persons control or in which they have an interest…”

Case In Point

In the Matter of Michael Jason Collins, FINRA Matter No. 2017056104801 (see the AWC itself)

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FINRA has fined Aegis Capital Corp. $550,000 for failing to implement required anti-money laundering (AML) and supervisory programs designed to prevent fraudulent activity.

The violations specifically affected low-priced securities transactions involving DVP (delivery versus payment) accounts. According to the outcome of FINRA’s investigation, the supervisory system Aegis used “was not reasonably designed to satisfy its obligation to monitor and investigate trading.”

There are certain aspects of DVP accounts that make them vulnerable to money laundering schemes if they are not appropriately supervised.

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FINRA recently announced monetary sanctions against Wedbush Securities in the amount of. $1.5 million for SEC rule violations and associated compliance failures.

According to FINRA, Wedbush violated the SEC Customer Protection Rule, which requires broker-dealers to maintain a certain degree of physical possession and control over customer securities.

The object of the rule is to facilitate recovery of customer assets if the broker-dealer becomes insolvent. Firms are also required to keep these securities in what is called a control location, free of any liens.

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