A frog on a tree branch -- not a stockbroker at a branch office
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Richard Wayne Preston submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.In the Matter of Richard Wayne Preston, Respondent (AWC 2011028817701, June 1, 2012).
In 1993, Preston first became registered as a General Securities Representative; and during the relevant time of 1998 through August 4, 2011, he was registered in that capacity through Commonwealth Financial Network. The AWC asserts that Preston had no prior FINRA disciplinary history.
The Boiling Frog Story
In 2010, an acquaintance introduced Preston to the CEO of a new start-up company that was planning to raise capital. In January 2011, Preston was invited to visit the issuer's facilities in order to attend an informational session - and Preston invited two of his friends (both were Commonwealth customers at the time). At the conclusion of this meeting, the issuer's CEO made an investment offer to the attendees.
The AWC asserts that Preston borrowed $20,000 from one of his two friends/Commonwealth customers so that he could personally invest in the private offering. The customer mailed a check in the total amount of $120,000 to the issuer to pay for his own $100,000 investment and Preston's $20,000 investment. Preston repaid the $20,000 two days later after liquidating other investments, and the loan was never reduced to writing and had no repayment terms. In total, Preston and the two clients/friends invested $300,000 in promissory notes and common stock in this offering. Preston did not receive any commissions..
FINRA asserts that the promissory notes and common stock were securities and, as such, Preston had participated in private securities transactions without providing prior written notice to, and obtaining prior written approval from, Commonwealth in violation of NASD Conduct Rule 3040 and FINRA Rule 2010.
Additionally, the AWC asserts that Preston did not disclose the $20,000 loan to Commonwealth, which prohibited loans from customers without prior approval and this type of loan was purportedly not permitted. FINRA deemed such borrowing in violation of its Rules 3240 and 2010.
Pursuant to the terms of the AWC, FINRA imposed upon Preston a $7,500 fine and a 3-month and 10-day suspension from association with any FINRA member in any capacity.
Bill Singer's Comment
As the "Boiling Frog" theory goes, a frog placed immediately into a pot of boiling water will try to jump out. In contrast, if a frog is placed in room-temperature water, which is gradually heated to a boil, the relaxed frog will kick back, stretch out, and calmly allow itself to be boiled to death.
Preston's situation seems to support that the Boiling Frog Theory has some validity when it comes to the gradual increase in the degrees of compliance problems for stockbrokers. In fairness to the respondent in this case, a lot of brokers likely would not have sensed that their actions were improper.
What and when a registered person recognizes that he or she is crossing the line of compliant behavior is often far easier to discern in hindsight than when one is rambling and ambling into danger. Nor is this a problem only found at indie and regional firms - of which Commonwealth is a major presence. To the contrary, it's a challenge faced by brokers at Merrill Lynch, Morgan Stanley, Wells Fargo, JP Morgan, as well as Commonwealth, LPL Financial or even smaller firms. Not realizing that the room-temperature water is beginning to dangerously bubble around you is a common danger for many registered persons.
In Preston's case, he may have seen the two customers as two friends, and, failing to mentally process the dual nature of the relationships, he never quite recognized that taking his pals along to the presentation was a FINRA violation - because those buddies were also customers and the presentation involved a securities offering.
On top of that, borrowing money for two days and fully repaying the loan, may not have tripped the compliance wires in Preston's brain - after all, he may have reasoned, it's not really a loan. It's a thing between two friends and we don't even have any formal paperwork because I'm going to sell some stock to raise the cash to repay the loan within a couple of days. Naaaah, that's not the loan loan that the rules are talking about - it's more like borrowing a few bucks to buy a cheeseburger and giving back the money the next weekend.
We don't have enough information about Preston's specific case to know what, if any, of the above conjecture is correct; however, based upon the few facts presented by FINRA, we clearly have one cooked frog of a broker. Still - I'm not quite sure why Preston was forced to take a 3-month and 10-day suspension (and who the hell came up with such an oddball time? You couldn't just take three months and be done with it?). I won't quibble too much with the fine and I recognize that this was a settlement, but, notwithstanding, I'm not sure why a suspension of a week, a few weeks, or one month, maximum, wouldn't have been sufficient here.