January 10, 2012
The stockbroker named in the Financial Industry Regulatory Authority's ("FINRA's") nine-count disciplinary complaint, probably figured that she was in a lot of trouble, particularly after reading this opening paragraph:
Respondent and former Morgan Stanley Smith Barney (the Firm) representative, Jo Ann Marie Head engaged in an extensive course of misconduct from at least early 2005 through mid-2009. Thereafter, Head provided false written information to the staff and failed to appear for on-the-record testimony.
That's three whiffs at the plate when it comes to FINRA.
First strike: an extensive course of misconduct.
Second strike: you lie to the FINRA regulators.
Third strike: you don't show up to give testimony.
Yer outta there - not much that I or any regulatory lawyer can do for you with that track record. Of course, the more interesting part of this mess is how Head got into this regulatory predicament. Now, that's quite a tale.
In 1999, stockbroker Head first met with Customer A, a former director and producer for a large Hollywood studio. Sadly, the customer had health issues and planned to retire in about five years. In 2000, Head opened a new account for Customer A, and over the years, the two women became good friends - well, supposedly.
Million Dollar Hole
By February 2005, Head told Customer A that her nine brokerage accounts were worth some $2.7 million. The customer was likely happy to learn that; however, FINRA's Complaint alleged that Head overstated the value of the nine accounts by nearly $1 million. Worse, by January 31, 2009, Customer A's accounts' valuation had dwindled to $367,565.10.
In retrospect, something was amiss in Head's life because in December 2005, she had asked Customer A for and received a $20,000 loan. On January 10, 2006, Head repaid $1,000 of the loan but that would be the last such installment.
In mid-2006, Customer A decided to relocate and sought out a mortgage. Ever the doting friend and supportive stockbroker, Head wrote to a potential lender bank that Customer A's accounts were worth over $4 million - but, in reality, the correct amount was about $1.6 million. Apparently relying upon Head's June 22, 2006, multi-million dollar misrepresentation, the bank went ahead and issued the mortgage.
If Head's dealings with Customer A were isolated, I'd pretty much consider this case as a somewhat garden-variety Wall Street fraud: Broker needs money; Customer has money; Broker gets money; and Customer has less money. Unfortunately, the situation with Customer A wasn't a one-of-a-kind.
Diamonds and Rust
In April 2007, after prior discussions with Head, Customer B opened an IRA, a Roth IRA, and a joint spousal account, all of which he understood would be invested in deep-discount bonds offering about a 22% annual return.
In June 2008, after selling his home, Customer B deposited over $500,000 in his joint account for the purported purchase of 30-day certificates of deposit. That's not exactly what happened because Head bought 55 different securities, including stocks, municipal and corporate bonds - don't ask, but she even purchased an Ecuadorean bond. Unbeknown to the customer, from June through October 2008, Head had executed 99 unauthorized trades in his accounts,
Overall, Customer B funded his accounts to the tune of about $638,000. In mid-September 2008, Head told Customer B that his accounts were worth over $827,000; however, they were only worth about $689,000. In November 2008, Customer B decided to buy a new home and told Head that he would need to wire out of his accounts about $400,000 for escrow.
Here we go again: another of Head's customers needing immediate cash towards a home purchase.
As you likely guessed, Head wasn't able to send the requested funds to Customer B. As of December 22, 2008, Customer B's accounts were worth slightly over $100,000.
Unaware of the insufficient balance of his account, the customer pressed Head for the $400,000 wire; she deflected; the customer insisted; Head promised; the customer persisted. Eventually Customer B lost patience and contacted Head's branch manager - which elicited a complaint from Head to the customer about his going behind her back.
On January 21, 2009, Head and Customer B met in a restaurant, where Head gave the customer some jewelry and what she claimed were her father's Korean War medals as collateral to assure her promised repayment of $494,986 in losses. Afterwards, Head never returned to work and was terminated.
Enter FINRA. Exit Head.
Head failed to appear for her scheduled On-The-Record interviews at FINRA, didn't answer the regulator's Complaint, and never showed up for her disciplinary hearing. Accordingly, FINRA imposed five separate bars and ordered Head to pay restitution to Customer A in the amount of the $19,000 loan balance plus interest.
FINRA Department of Enforcement, Complainant, v. Jo Ann Marie Head, Respondent (Complaint#2009017530101, February 23, 2011; Default Decision, July 7, 2011).
Bill Singer's Comment
This isn't just a story about the downward spiral of one Morgan Stanley Smith Barney stockbroker - rather, it is a cautionary tale that is sadly typical of many brokers, be they at small firms, regionals, or powerhouses such as Merrill Lynch, Wells Fargo, or JP Morgan. As with many Americans, Wall Street professionals make atrocious personal choices. The effect of such mistakes can compromise a broker's integrity. Customer money is stolen. Promises are made that can't be kept. Eventually a web of lies is so widely woven that not even the spider can escape.
With the onset of the Great Recession, many Wall Street brokers found their six-figure incomes had evaporated. What had not abated were the debts incurred when living that six-figure lifestyle. The monthly income was either gone (particularly if the brokerage firm went under) or had dwindled to nothing. The mortgage, the credit card debt, the tuition - all of that remained. Some folks opted for bankruptcy. Some folks opted for theft. Some folks did whatever they could to make ends meet - extra jobs, cut backs in expenses - and even that may not have forestalled the cataclysm.
As such, Head is not reported to you as a stunning example of an outrageous breach of a broker's duty to her customers. It is reported as a warning to the unwary and the overly trusting. Lots of folks out there are still hurting. Some of those folks are stockbrokers.
To best protect yourself, always independently confirm the assets in your brokerage accounts. Read your daily trade confirmations and monthly statements - if something is amiss, report it and demand prompt answers.
Don't just rely upon your broker's say-so. Go online to the brokerage firm's official website and see what's what. Telephone or email the customer service numbers of the firm and ask for confirmation of your balances or copies of various documents. Never be afraid to go over your broker's head or behind her back: after all, it's your money and you have the right demand direct answers.