On July 7, 2022, FINRA’s Office of Hearing Officers issued its decision in Dep’t of Enforcement v. Burford, Discip. Proc. No. 2019064656601 (OHO July 7, 2022). Here, the Hearing Panel found that Burford caused no customer harm. There was no evidence that Burford gained monetarily from his actions. Burford was “polite, respectful, and cooperative” throughout the investigation and disciplinarily proceeding. Nonetheless, the Hearing Panel refused to deem these factors “mitigating” and whacked Burford with a 6-month suspension – double the suspension sought by Enforcement – and $10,000 fine. At its core, this is a case of registered representative alleged to have improperly taken instructions from a deceased customer’s widow. This case highlights the perils of efforts by a financial adviser to assist an individual when those efforts skirt the policies of a broker-dealer.

Background Facts

Burford was registered with Hilltop Securities Independent Network, Inc. In November 2019, Hilltop discharged Burford and filed a Form U5 alleging a “failure to follow firm policy regarding the death of a client.”

FINRA alleged that Burford failed to notify Hilltop that one of his customer’s (a first cousin of Burford’s wife) passed away in October 2016. The customer had a trading authorization agreement on file permitting Burford to accept trading instructions from the customer’s wife. After the customer’s death, Burford executed 9 trades at the instruction of the decedent’s widow and facilitated 8 ACH disbursements to the widow. The post-death trading activity and money movements came to light when the decedent’s daughter (the adult child from a prior marriage) challenged the customer’s will and petitioned the probate court to restrain the widow from any further disposition of the decedent’s property. Apparently, the widow did not file the will for probate until February 2019, more than 2 years after her husband’s passing. Under Texas law, the right to inherit under a will is not effective until the will is admitted to probate.

FINRA’s Enforcement Department filed a one-count Complaint in September 2021 alleging that Burford violated FINRA Rule 2010 (requiring registered representatives “to observe high standards of commercial honor and just and equitable principles of trade”) by engaging in unauthorized trading and withdrawals. Specifically, FINRA alleged that the trading authorization terminated upon the customer’s death and, in any event, the trading authorization never permitted money movements. According to FINRA, until the probate court admitted the will for probate and issued letters testamentary, no one had authority to direct transactions in the decedent’s brokerage account.

Burford defended the Complaint by alleging that (a) the widow was the named executor and primary beneficiary of the customer’s will; (b) the widow directed and authorized the transactions and money movements; and (c) the activity in question served the widow’s best interests.

The Hearing Panel’s Findings

The Hearing Panel found numerous “aggravating factors:”

• Burford effected the transactions over a lengthy period of time (3 years).
• The value of the transactions was “high” (more than $200,000).
• Burford “concealed” his actions from Hilltop by failing to timely submit the certificate of death and failing to inform Hilltop of the transactions effected after the customer’s death.

Importantly, the Hearing Panel rejected the “no harm, no foul” defense by finding that the harm was the “potential legal risk” to himself and Hilltop caused by the activity in question. Even though a “misguided attempt” to act in a customer’s best interest may be mitigating (Dep’t of Enforcement v. Noard, No. 2012034936101, 2017 FINRA Discip. LEXIS 15, at *29-30 (NAC May 12, 2017) (A respondent’s misguided attempt to act in a customer’s best interest may be mitigating)), the Hearing Panel found that the widow was not Burford’s customer and refused to treat any of Burford’s actions as mitigating. See Dep’t of Enforcement v. Correro, No. E102004083702, 2008 FINRA Discip. LEXIS 29, at *16 (NAC Aug. 12, 2008) (finding that a goal to benefit a customer is not a defense to a violation of NASD Rule 2110, the predecessor to FINRA Rule 2010); Dep’t of Enforcement v. Sears, No. C07050042, 2009 FINRA Discip. LEXIS 4, at *3-6, 11 (NAC July 23, 2009) (Rule 2010 violation found for unauthorized trading even though there was no evidence that respondent “acted in bad faith …. gained any commissions on the [ ] unauthorized trades, or was otherwise motivated by selfish interests.”).

This case serves as a stark reminder that efforts to appease a customer (or, here, a non-customer) may nonetheless be viewed by FINRA as a serious rule violation.

Herskovits PLLC has a nationwide practice representing individuals and broker-dealers in FINRA investigations and disciplinary proceedings. Feel free to call us for a consultation. (212) 897-5410.

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.

FINRA’s Investigation

According to the AWC, “on February 21, 2020, in connection with an investigation into potentially fraudulent and unauthorized transactions in several of Daughtry’s customers’ accounts, FINRA sent a request to Daughtry for an on-the-record interview pursuant to FINRA Rule 8210.” Apparently, Daughtry’s attorney informed FINRA of Daughtry’s refusal to appear for the OTR.

Herskovits PLLC Herskovits PLLC has decades of experience representing defrauded investors as well as securities industry participants. Our firm has handled hundreds of FINRA arbitration claims and our principal attorney is a FINRA arbitrator and former in-house counsel for an investment bank. Feel free to call us for a consultation at 212-897-5410.

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

FINRA appropriately demands that each member establish and maintain a system to supervise the activities of each associated person. Importantly, Rule 3110 requires that the supervisory system be “reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.” FINRA takes violations of Rule 3110 very seriously but rarely seeks a bar. According to FINRA’s Sanction Guidelines, violations of Rule 3110 would typically call for a monetary sanction of $5,000 to $77,000 and a suspension of up to 30 business days. Of course, in “egregious cases,” the Sanction Guidelines does call for suspensions of up to 2 years or even a bar.

Ok, so clearly FINRA thought Leahy’s conduct was “egregious.” The question is: why?

Underlying Facts

Interestingly, the underlying violations all occurred within a very short period of time: September 18, 2019 through October 9, 2019. During that period of time, according to FINRA, Leahy failed to reasonably supervisor an individual FINRA calls “PS.” According to FINRA, PS engaged in unauthorized trading, unauthorized use of margin, recommended excessive and unsuitable transactions, and charging excessive commissions.

According to FINRA, Leahy was aware of multiple “red flags” but failed to investigate those red flags or take action. The red flags highlighted by FINRA were:

• Leahy knew of PS from a prior firm and was aware of prior allegations of misconduct;
• Numerous customers complained to Leahy about PS’s supposed unauthorized trading;
• The broker-dealer’s clearing firm informed Leahy that it too received complaints of PS’s supposed unauthorized trading;
• A review of the trade blotter would have provided indicia of unauthorized trading;
• PS recommended inconsistent trading strategies. On the same day, PS would recommend that some customers buy “Security X” and other customers sell “Security X.”
• The firm’s trade blotter reflected a pattern of in-and-out trading by PS;
• PS was charging commissions that came near 5% or exceeded 5% (one time PS even charged a whopping commission of 11.8%).

Who is the Mysterious “PS”?

FINRA drops a hint by stating that the NJ Bureau of Securities issued a Summary Penalty and Revocation Order against PS. So, I did a little digging and here it is. Apparently, PS is Philip J. Sparacino, and Mr. Sparacino was apparently a very busy man at his old firm. According to the State of New Jersey, Sparacino engaged in a pattern of unauthorized and excessive trading starting in June 2019. And the numbers seem to support the Bureau’s allegation. From April 2019 through May 2019, Sparacino’s production totaled $24,258. However, once he inherited accounts in June 2019, his production skyrocketed to $1,452,514 from June 2019 through October 4, 2019. Incredibly, in the last 2 weeks of September 2019 alone, Sparacino generated production in excess of $450,000.

Not surprisingly, when FINRA reached out Sparacino he refused to respond to FINRA’s request for documents and information. As a result, Sparacino signed an AWC consenting to a bar.

Upshot

This case sends a warning to any supervisor who adopts the head-in-the-sand approach to supervisor. Clearly, FINRA will seek a bar when the facts warrant it.

Herskovits PLLC has a nationwide practice defending individuals and institutions with FINRA regulatory investigations. Feel free to call us for a consultation: 212-897-5410.