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 Luther Crull, IV submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of William Luther Crull, IV, Respondent (AWC 2010025740701, November 2, 2012).
Crull entered the securities industry in November 1989 and was employed by FSC Securities Corporation from 2008 until December 2010.
On March 18, 2009, an FSC customer purchased 13,400 shares of the closed-end fund Morgan Stanley High Yield Fund ("MSHY") for $50,999.42. Crull placed a stop-loss order on the MSHY position at 10% below the purchase price; and, thereafter, the MSHY fund immediately traded down, triggering the stop-loss order. The position was sold for $47,629.21, resulting in a loss.
Oh well, ya win some, ya lose some; except, you know, that wouldn't make for all that interesting a "Street Sweeper" column. There had to have been something quirky that happened here. And it did.
On that same trade date as the stop-loss sale, the market was volatile. What do volatile markets do? Why, they go up and down and up and down. Apparently, no sooner had MSHY dropped and triggered the stop-loss then the shares reversed direction that same day and moved higher. The AWC asserts that the reversal back up prompted the customer to purchase 13,400 shares of MSHY.
Following the trade date at issue, Crull met with the customer and the customer's wife to explain the reason for the position's sale, which the AWC says he attributed to "market volatility." The AWC asserts that the customer and his wife were not satisfied with Crull's explanation and wanted to be compensated for the loss.
In March 2009, without FSC's knowledge, authorization, or approval, Crull allegedly personally paid the customer $4,600, which included commissions and the loss on the MSHY trade. Further, Crull did not advise FSC of the customer's complaint or the settlement until December 2010, in apparent violation of FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Crull a $5,000 fine and A one-month suspension from association with any FINRA member firm in all capacities.
I'm sorry but I'm disappointed with the presentation of facts in this FINRA AWC. For starters, much was made about the stop-loss order - all of which raises something of an implication that the order was unauthorized, but there is no such charge. Stripped down to its essence, the customer seems to have been upset that the stop-loss was triggered - and angry enough to go back in and try to ride the shares higher. Ah yes, the graveyard of many an investor: The Old Whipsaw. As to whether the client sustained another loss or a profit or a push on that second MSHY position, the AWC is silent. As to why the customer rejected the stockbroker's explanation that the stop-loss was triggered by market volatility is not explained either. One would think that the day's stock chart would confirm such a basic explanation.
Ultimately, for all the misdirection in the AWC, this case seems little more than a $4,600 unauthorized settlement and the failure to timely disclose same to a member firm. Why Crull even felt compelled to pay for the losses sustained on an authorized stop-loss is not explained.
As a former Series 7/63 myself, I understand any number of likely explanations: keeping a good customer happy, feeling guilty for possibly suggesting the stop-loss, feeling guilty for possibly suggesting the trigger price, etc. In order to make some meaningful regulatory and compliance sense out of this mess, I would have appreciated some explanation as to what prompted the undisclosed settlement and its ongoing cover-up.
The theory behind undisclosed settlements - which detractors correctly characterize as "hush money" - is that it may be sound business to reimburse the losses of a good (but presently unhappy) customer. Quietly forking over a few hundred or thousand dollars as the cost of retaining thousands of dollars in annual commissions or fees often seems a no-brainer to many stockbrokers. Of course the same set of facts seems a violation to many in-house compliance officers and industry regulators because it subverts, compromises, and circumvents perhaps the most critical of all first lines of defense: knowledge of a customer complaint.
Without question, this is as pandemic a problem as Wall Street has. Producers at Merrill Lynch, Morgan Stanley, JP Morgan, Wells Fargo, or UBS are just as likely as a counterpart at a smaller local/regional firm to go the route of handing over a relatively piddling sum to assuage an unhappy customer. Who the hell needs to or wants to answer all those idiotic questions from those morons in compliance? I'll take care of this on my own and make it up with some house product or cross-selling some higher compensated crap.
While, in some instances, the customer-service goal may be commendable, unfortunately, the execution of this scenario often runs afoul of as basic a building block, a keystone as it were, of compliance and regulation as exists. Whatever the motivation behind the undisclosed payments, they tend to come off looking more like hush money than honorable reimbursement. Of course, let's be honest here: Stockbrokers often figures it's easier and cheaper to shut up a client before the firm finds out and before a regulator starts poking around.
In the case of William Crull IV, he paid $4,600 to settle a dispute that truly seems caused by market action rather than negligence or fraud by him. Perhaps this would have been better handled by the stockbroker if he spoke to his firm's management and tried to arrange for some reduced commissions or a partial settlement as against his commissions. Regardless of where you come down on that ultimate issue, not only is Crull $4,600 out of pocket for the settlement but he got hit with a $5,000 fine and a month long suspension.
For additional cases discussing undisclosed settlements, READ: