The Financial Industry Regulatory Authority's ("FINRA's") Department of Enforcement filed an initial disciplinary Complaint on May 27, 2011 (amended on September 1, 2011), and without admitting or denying the allegations in the Complaint, Respondent David A Schams submitted an Offer of Settlement on September 28, 2011, that the self-regulatory organization accepted. FINRA Department of Enforcement, Complainant, v. David A. Schams, Respondent (Order Accepting Offer of Settlement, October 17, 2011).Background
According to online FINRA records as of November 1, 2011, Schams was first registered in the securities industry in 1987, and during the relvant period of 2006 through May 2009 was registered in Series 6, 7, 63, and 66 capacities with OneAmerica Securities, Inc. On May 30, 2009 and June 2, 2009, FINRA received two Forms U-5 from OneAmerica Securities that reported that Schams' employment had been terminated.Among Schams' customers were a married couple who resided in Wisconsin: the husband was a retired business owner and the wife, a retired housekeeper. Having first met Schams in the mid-80s, the couple became customers of his in December 2006.
On June 6, 2007, the couple executed separate wills leaving their estates to one another and, upon the death of the survivor, Schams was to receive approximately $90,000 from their estate. Also, the couple executed powers of attorney ("POA") appointing each other primary agent attorney-in-fact for their respective financial matters; also, they appointed Schams as their alternative agent attorney-in-fact if either one of them could not serve in this capacity. Schams did not notify OneAmerica about his being named a beneficiary under the will or about the POA appointment, and he did not receive his firm's approval.
SIDE BAR: According to the Complaint, during the relevant period, OneAmerica's policies included prohibitions against registered representatives exercising or maintaining discretionary authority or POA over customer accounts. Also, the firm's policies prohibited its registered representatives from borrowing money from clients, issuing promissory notes, loans or other similar forms of debt for customers without the express written consent of the Compliance Department.Cancer and Alzheimer's
On or about November 2007, the wife died of cancer, and by June 2008, the husband, then 86, had been diagnosed with Alzheimer's disease.
On or about September 8, 2008, the Office of the Commissioner of Insurance for the State of Wisconsin ("OCI") received a complaint from the husband's cousin, alleging that Schrams may have been taking advantage of the husband. OCI's inquiry alerted OneAmerica to the POA issue.Borrowing
On June 10, 2008, Schams drafted a note which the husband signed that stated that the customer had agreed to:
[M]ake loans to David A. Schams up to approximately one half the value of his anticipated inheritance under my Will. These loans, if any, shall be paid back to my estate at the time of my death or deducted from the value of David's share of the inheritance. These loans shall be interest free in exchange for Dave helping with my care.
On August 5, 2008, and again on December 24, 2008, Schams took a $20,000 interest-free loan from the husband without signing a promissory evidencing the loan. These $40,000 in aggregate loans were made to Schams through a check made out to the husband from his OneAmerica brokerage account. Schams deposited the checks into his own accounts.
Schams did not inform OneAmerica about the loans or receive written approval from the firm to accept the loans from the husband.Annual Questionnaire
During the relevant period, OneAmerica registered representatives were required to complete annual compliance questionnaires certifying, among other issues, that they understood the prohibitions against borrowing money or accepting loans from clients, or depositing client funds into a registered representatives' personal/business accounts. Schams denied such conduct on the 2008 questionnaire that he submitted to the firm on December 27, 2008. Similarly, he denied holding customer securities, stock powers, money, or property - and also denied having accepted customer checks made out or endorsed over to himself. Notwithstanding his exercise of the POA, Schams denied on the questionnaire that he had managed/handled the affairs of any customer on a discretionary basis.OCI Revocation
On August 6, 2010, OCI revoked Schams' permanent intermediary's license and ordered that he pay a forfeiture of $20,000 to the State of Wisconsin for, among other things, engaging in self dealing as an attorney in fact for the husband in violation of Wisconsin law. In part, OCI cited Schams for knowingly becoming a beneficiary of the annuities issued to his customer. Also, OCI was troubled about the lending between the customer and the broker because the transactions were not deemed a "bona fide arm's length business transaction where a customer is either qualified to understand and assess the transaction or has been advised or represented in the transaction by a qualified individual who is not the agent or affiliate."
SIDE BAR: Although FINRA does not prohibit borrowing money from a customer and sets forth criteria for which such a practice might be arranged, certain states do not view the practice so benignly. Under Wisconsin law, the borrowing of money from a customer is "a dishonest or unethical business practice or taking advantage of a customer by an agent."FINRA Violations
As a result of the foregoing, the Complaint charged Schams with violations of:
As a consequence of the above allegations, FINRA accepted Schams' Offer of Settlement and imposed a Bar from association with any member of FINRA in any capacity.