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, William E. Hesse submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of William E. Hesse,Respondent (AWC 2010024116901, October 5, 2012).
Having first become registered in 1984, Hesse was registered during the relevant time of January 2, 2008, through September 17, 2009, with Meeting Street Brokerage, LLC, where from about March 2008 through September 2009, he was the firm's Chief Compliance Officer. While serving as Meeting Street's CCO, Hesse had supervisory responsibility over the firm's President and owner, and also was responsible for reviewing transactions at the firm, including trades and wire transmissions, for potentially suspicious activity and other irregularities.
SIDE BAR: Certain key individuals in this AWC are only referenced by initials or title. In an effort to dig deep for our readers, "Street Sweeper," researched some of the undisclosed AWC aspects of this case. According to FINRA's February 2010 Disciplinary and Other FINRA Matters:
FINRA Expels Meeting Street Brokerage, Bars Broker, Sanctions Firm's Owner for Market Manipulation, Other Violations / All Three Schemed to Create Artificial Price and Trading Volume for Relay Capital Corporation
The Financial Industry Regulatory Authority (FINRA) has expelled Meeting Street Brokerage, LLC of Palm City, FL, from the securities industry for market manipulation of Relay Capital Corporation stock-as well as for violations of Regulation T, Anti-Money Laundering (AML) rules, instant message retention requirements, registration requirements and net capital requirements.
FINRA barred Meeting Street broker Lisa A. Esposito for participating in the manipulation and for violating Regulation T. FINRA sanctioned her husband, Vincent A. Esposito, the firm's owner, principal and AML Compliance Officer, for those same violations and for violations of his AML obligations. Vincent Esposito was suspended from associating with a securities firm in any capacity for 90 days, suspended from associating with a securities firm in a principal capacity for two years and fined $15,000. . .
In concluding this settlement, Meeting Street and the Espositos neither admitted nor denied the charges, but consented to the entry of FINRA's findings. . .
The AWC alleges that between July 2008 and April 2009, a client of Vincent Esposito's (the "Client") controlled three accounts at Meeting Street:
The AWC alleges that during the relevant time, the Client had been provided with a trading system that allowed him to place trades directly with Meeting Street's clearing firm and also to reallocate executed trades among his controlled accounts. Moreover, the AWC alleged that through misuse of that system, the Client was able to engage in a "cherrypicking scheme," whereby he reallocated profitable trades from the hedge funds' accounts to the Wife's account, and unprofitable trades from the Wife's account to the hedge funds' accounts.
Cherry Red Flags
Between July 2008 and April 2009, FINRA believed that Hesse was on notice of the existence of several red flags in connection with the Client's cherrypicking activity:
Despite these red flags, the AWC alleged that Hesse did not identify any of the activity in the accounts controlled by Client to be suspicious or irregular. Ultimately, the AWC alleged that Hesse had failed to reasonably supervise President Esposito and also failed to reasonably review the trades and wire transmissions directed by the Client for potentially suspicious activity and other irregularities, in violation of NASD Conduct Rules 3010 and 2110 and FINRA Rule 2010.
According to the terms of the AWC, FINRA imposed upon Hesse a suspension from association with any FINRA member in all capacities for three months. Hesse submitted a sworn financial statement and demonstrated an inability to pay; and in light of his financial status, no monetary sanctions were imposed by FINRA.
In recent years, FINRA has markedly turned up the heat on compliance officers, managers and supervisors - whereas in prior years, many of these folks might have gotten a rap on the knuckles or a pass. Those days are long gone. All over the industry, at Merrill Lynch, JP Morgan, Goldman Sachs,UBS, Morgan Stanley, Wells Fargo - and even at smaller indies/regionals, supervisors and managers should be on edge.
If there is a registered person designated for "heightened supervision," the regulators are going to scrutinize the supervisory conduct in the event things go awry. There is virtually no room for error if you're on notice that you've been assigned to monitor one of Wall Street's walking wounded and you sort of ramble and amble your way through that exercise. Sure, if the individual that you're overseeing doesn't slip, that's fine - on the other hand, you know how these things always seem to work out: The guy swears on a stack of bibles and his daughter's eyes that he's following procedure, and then you learn that he's been entering unauthorized trade . . . and that he has no daughter.
The odd thing about the Husband in Hesse is that the AWC sort of glosses over the fact that this individual is not an employee of the firm or even someone over whom Hesse had supervisory control. The Client is simply another customer; and, moreover, for all of FINRA's bluster about how Hesse should have been more careful when dealing with someone who had previously been barred by NASD, the fact is that there was no disclosed regulatory prohibition on the Client's ability to open a brokerage account and exercise discretion over accounts of others. In essence, regardless of what the Client had done to get himself barred by NASD, there didn't appear to be any legal impediment to his opening a brokerage account in his wife's or any other individual's or entity's name.
SIDE BAR: Be careful to discern between the husband CEO Esposito and the husband Client (who also traded his wife's account).
Red flags aside, if Wall Street's regulators are going to point fingers about the trading activity of the industry's former registered persons following their having been barred, then perhaps "public customer" limits should be implemented on those bad boys and girls' activities. None of which excuses Hesse or any supervisor from not taking such history into account when reviewing branch activity - particularly dubious reallocation of profits and losses - but let's at least keep things in perspective.
READ these compliance officer / supervisors columns: