Elephants from the Ringling Bros. and Barnum & Bailey Circus stop for a photo-op near the U.S. Capitol on the National Mall as they parade through town (Image credit: Getty Images North America via @daylife)
In response to the filing of aComplaint on April 24, 2012, by the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA"), Respondent David R. Newsom submitted an Offer of Settlement dated June 14, 2012, which the regulator accepted. Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent David R. Newsom consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement,Complainant, vs David R. Newsom, Respondent (Offer of Settlement, 2011029091701, June 21, 2012).
Newsom was registered with FINRA through Chase Investment Services Corp. ("CISC") as an Investment Company Products/Variable Contracts Representative (Series 6) and General Securities Representative (Series 7) from July 6, 2005 until his registration was terminated in Septembers 2011.
Between January 6, 2009, and July 18, 2011, while working out of a JP Morgan Chase Bank Branch Office in Beaumont, Texas (but not employed by JPM Chase Bank), Newsom converted more than $400,000 from five customers' JPM Chase Bank accounts by having cashier's checks drawn on their accounts and made payable to his personal accounts at other financial institutions.
During April and May 2011, Newsom signed and issued without authorization at least five letters, on JPM Chase Bank letterhead, to various entities including National Petroleum, B+B Petroleum, Purchasing Incentives, LLC, and BGIC, Inc. Each letter "confirmed" that Rife Industrial Services had a purported $586 million line of credit at the Bank for the purchase of petroleum products. Rife Industrial Services did not have a $586 million line of credit (or any line of credit) at JPM Chase Bank. Newsom signed each letter as "David Newsom" or "David Newsom/Vice President of Investments."
Newson's employer CISC had procedures that required the prior review and approval of outgoing correspondence by a registered representative's Designated Supervisory Principal; and, such correspondence was required to be fair and balanced and not contain any false or misleading statements. The Offer of Settlement alleges that Newsom neither sought nor obtained approval to issue the correspondence, and the letters were materially false.
Sounds of Silence
On September 12, 2011, FINRA received a Form U5 reporting that Newsom was terminated admitting to:
- the misappropriation of funds from multiple bank customer accounts; and
- authoring and transmitting correspondence on company stationery, without his supervisor's prior knowledge or approval.
In response to the U5 disclosures, FINRA initiated an investigation, which included sending numerous FINRA Rule 8210 requests for information and attendance at an on-the-record interview to Newson, but he failed to comply.
Based on the assertions noted above, FINRA alleged that Newsom violated:
- FINRA Rule 2010 by converting more than $400,000 from five customers' JPM Chase Bank accounts;
- FINRA Rule 2010 by issuing unauthorized and materially false correspondence; and
- FINRA Rules 8210 and 2010 by failing to respond to multiple Rule 8210 Requests for Information.
In accordance with the terms of the Offer of Settlement, FINRA imposed upon Newson a bar from association with any FINRA member in any capacity.
When folks ask me why I'm so cynical about the purported effectiveness ofWall Street's compliance and regulatory functions, I typically reference situations such as the one presented in Newsom. Although this case involves both CISC and JPM Chase Bank, it could just as easily involveCitigroup, Wells Fargo, Bank of America or Merrill Lynch - and frequently these allegations involve such organizations.
Let's assume that most in-house industry compliance departments are relatively diligent and staffed by competent men and women - which is what I generally find to be the case. To some extent, it just doesn't matter. InNewsom, all the in-house diligence and competency didn't prevent the multiple account thefts from 2009 through 2011 and didn't prevent to falsification of the line of credit attestations. Moreover, both the thefts and the false communications were accomplished in multiple forays and were not isolated, nor did they occur within a matter of a few days. Further, FINRA, a Wall Street regulator, was unable to obtain a single word of response from the alleged perpetrator until such time as it issued a Complaint, to which the response was an offer of settlement.
The warning is stark and simple. Fire alarms do not stop fires, they warn us of their existence. Burglar alarms do not stop robberies, they warn us of one going on.
There is a false assumption that Wall Street's compliance departments prevent fraud, when, in reality, it's typically more like putting together a posse to track down the bad guys after they robbed the bank and shot the sheriff. As to our expectation of the role of Wall Street's regulators, they seem sadly reduced to a largely after-the-fact role of wielding a broom behind the circus elephants.