Tuesday, February 26, 2019

FINRA Continues To Investigate Expense Reports

          There are numerous examples of FINRA cracking down on expense report violations.  Following are a few of the reported cases.

In September, 2017, a former Morgan Stanley corporate stock manager accepted an industry bar over allegations that “event attendees on employee’s expense report incorrectly included one person who did not attend event.”  The employee     said she “couldn’t afford to fight her dismissal or to take the time to work with the regulator.”  “The direct cause of the bar was [her] refusal to appear for the hearing into the matter.”  (https://www.investmentnews.com/article/20170926/FREE/170929952/finra-bars-former-morgan-stanley-manager-over-expense-reports)

In late 2017, “a 21-year veteran Merrill Lynch broker managing director…accepted a one-year suspension from the securities industry and a $10,000 fine for ‘violating high standards of commercial honor by improperly using Merrill funds in connection with expense reports’”  (http://www.shufirm.com/brokerage-firms-and-finra-crack-down-on-broker-expense-account-violations)

In early 2018, a former Merrill Lynch broker was fined and suspended over a “$524 claim for mileage and dinner expenses that he said represented two meetings with prospective clients.  He subsequently admitted to the firm that he fabricated the events in order to use up, and be reimbursed for, the Business Development Account money that was deducted pretax from his compensation.”  https://advisorhub.com/finra-suspends-another-broker-over-expense-issue/

FINRA gets its authority to investigate expense report and other similar documents from Rule 8210, Provision of Information and Testimony and Inspection and Copying of Books.  “A failure to comply with an 8210 Request often results in an immediate enforcement proceeding and a permanent bar from the industry.”  (https://www.seclaw.com/finra-rule-8210-request-response/) Rule 8210 Investigations often spring from violations of Rule 2010, the catch-all, which states that “[a] member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” 

            Cosgrove Law Group, LLC has represented numerous individuals in their FINRA investigations.  If you are the subject of a FINRA investigation and need counsel, Cosgrove Law Group may be able to help.

Friday, February 8, 2019


           Last month a FINRA arbitration panel in Boston issued a reasoned award in an employment matter pitting a former employee against the bank.  Ironically, both the employee and the bank requested a reasoned award.  A reasoned award is pretty rare as the FINRA member almost never requests one and both sides must request the reasoned rather than typically scant and unjustified written award. 

            Beyond issuing an extremely incriminating award, the panel gave the Claimant every penny he requested - - over $1.3 million.  The Claimant was a former Senior Vice President in the bank’s regulated broker-dealer division.  The reasoned award set forth the facts that justified the award as follows:

            Claimant was responsible for the activities of approximately twenty-two sales representatives who, among other things, sold and recommended the sale of regulated securities products.  Within one month to six weeks after commencing his employment with Respondent Santander, Claimant became aware that one of the sales representatives reporting to him did not have the appropriate licensure to recommend and sell products in that the particular representative had repeatedly failed the Series 65/66 examination and had, in fact, ceased taking it.  That person is referred to as “employee”.  At the time Claimant discovered this, the employee had a book of business of approximately $50 million, approximately 35% of which was products requiring the Series 65/66 license. 

            Claimant reported this matter to the compensation staff at Santander inquiring as to why it was the employee was being paid commissions on the sale of products requiring the Series 65/55 license when he did not have one. 

            Claimant was told that the employee was one of the approximately nineteen individuals in Respondent Santander’s employment who were “grandfathered” under an unidentified loophole in Massachusetts law which allowed unlicensed individuals to sell managed products.  Respondent Santander’s compensation staff agreed the “loophole” was no longer applicable and that Respondent Santander had to do something about the issue. Respondent Santander never provided any documentation of the “loophole” or any indication as to what period of time that “loophole” would have provided authority for unlicensed individuals to sell managed products.  The employee was employed by Respondent Santander since 2012. 

            Respondent Santander had created and continued to maintain a series of internal “partnerships” where a licensed individual recorded transactions in products requiring the Series 65/66 license for the customers of unlicensed individuals in order to ensure that the transactions would occur and that any automated reporting system to prevent transactions in products requiring the Series 65/66 license by unlicensed individuals would not be triggered.  The employee’s “partner” was a regulated individual who is still employed by Respondent Santander. 

            The “partnerships” and the circumvention of automated exception monitoring in the regulated product trading software was augmented by Respondent Santander’s maintenance of a manual system of splitting commissions on regulated product sales where unlicensed individuals were involved in the transactions.  In the particular “partnership” between the employee his partner, commissions on managed product transactions were manually split 50/50 between the two of them by Respondent Santander. 

            Claimant followed up with Respondent Santander’s management and compliance staff and the employee was a subject of monthly conversations with the compliance department.  As a result, just before Christmas 2014 Respondent Santander ended the practice of manually splitting the commissions on managed product transactions the employee was involved in.

            Despite the termination of the payment of commissions to the employee on managed product transactions, his customers were never advised and he continued to counsel customers on transactions requiring the Series 65/66 license through the end of his association with Respondent Santander. 

            For several months beginning in November 2014 there was a series of meetings, telephone conference calls and electronic mail communications regarding the employee’s attitude and performance.  In spite of months of communications including learning that the employee had posted pictures on the Internet of him posing in aggressive stances with automated weapons, Respondent Santander did nothing but record copious notes of these issues to no avail.

            Finally, the Customer Complaint & Disciplinary Committee determined in an August 2015 meeting that for this and a series of other reasons, the employee’s employment be terminated. Meanwhile, Claimant continued to discuss the fact that the employee maintained a book of business including transactions in managed products and that his customers were unaware they were being counseled by an unlicensed person.

            On September 21, 2015, nearly 11 months after conversations about the employee’s performance issues commenced and after a meeting where the termination decision arrived at by the Customer Complaint & Disciplinary Committee in August was to be delivered to the employee, the meeting was cancelled by Respondent Santander.  The employee was instead sent a letter by Respondent Santander indicating that his failure to report to work since September 2, 2015 and his failure to log into his computer and any of the “securities systems” since July 9, 2015 was considered to be job abandonment and a voluntary resignation of employment.  This determination allowed Respondent Santander to report the employee’s separation from Respondent Santander on the U-5 as a resignation to FINRA and his customers thus avoiding any implication arising from his lack of licensure.[1]

            On September 23, 2015, Claimant was called in a meeting at which his employment was terminated without prior notice, warning or any explanation.  No letter stating the reasons for Claimant’s termination was provided.  And yet, Respondent Santander’s disciplinary policy contains five potential steps of warnings, notices and progressive discipline.  With regard to the employee all of these steps were followed, in many cases, repeatedly.  With regard to Claimant none of these steps were followed. 

            The Panel noted further that, at the time Claimant was hired by Respondent Santander, the sales group he was hired to manage had the third lowest performance level of Respondent Santander’s groups in the comparison.  At the time Claimant was terminated by Respondent Santander, the sales group he was hired to manage had the third highest performance level of the groups in comparison. 

            During Claimant’s employment, Respondent Santander faced a series of FINRA complaints and investigations for failure to supervise its sales staff in connection with Puerto Rico public debt.  Those matters ended with fines of several million dollars. 

            The fact that Respondent Santander’s records contain none of the documentation its disciplinary policy mandates be created and which its witnesses stated was normal business practice, creates an inference that Claimant’s employment was terminated for an illegal reason.  According to the Panel, this inference was bolstered by the lack of credibility of most of Respondent Santander’s witnesses and the amazing lack of candor of its witnesses. 

            The Panel determined that the termination of Claimant’s employment was principally motivated by retaliation for his reporting the violation of FINRA rules to Respondent Santander’s management and his pressing for their resolution in the face of Respondent Santander’s determination to avoid exposing the fact that it was managing a process of subverting its securities software package and allowing unlicensed individuals to effect transactions which required licensure. 

            Ouch!  And thus my dear Reader, you now know why FINRA members almost never ask for a reasoned Award, and why FINRA should change its rules to require one when requested by either party.  Food for thought.

[1] Several years ago I represented a financial advisor in a U-5 defamation case in Louisville that was in a situation similar to the employee’s, and he won millions for having been told about the same non-existent loophole.  He was terminated after the regulators challenged his lack of sufficient registration.  My client had taken but failed the 65 before he was terminated, but after the regulators made their challenge.