Chad A. McCartney entered the securities industry in September 2000 as an investment company products/variable contracts representative associated with Hartford Life Distributors, LLC, formerly Planco Financial Services, LLC ("Hartford Life"), from which he voluntarily resigned in December 2009. The events at issue in this column occurred in April 2006 during McCartney's tenure as an unsalaried, commission-compensated independent contractor "wholesaler" of variable annuity ("VA") products with Hartford Life.
In his role as a wholesaler seeking to encourage sales of Hartford Life VAs, McCartney conducted seminars for registered representatives at unaffiliated broker-dealers. McCartney earned commissions on any sales derived from his presentations but was not provided with an expense account to cover the costs of the seminars, which came out of his pocket subject to Hartford's potential reimbursement for up to $500 per seminar in documented expenses submitted per actual receipts and with "verification letters" attesting to the attendees.
Embassy Suites Template
Hartford Life's reimbursement policy had been criticized at the wholesalers' 2006 division meeting. One wholesaler, apparently angered by the firm's perceived cheapness, told McCartney and others that he had been submitting false expense reports in the form of an invoice template bearing the logo for Embassy Suites Hotels, which he electronically submitted for payment. Apparently, this unhappy camper provided some of his fellow wholesalers, of which McCartney was one such recipient, with an electronic copy of the template.
During 2006, one of McCartney's top clients asked for a donation of money to his son's private school. On April 4, 2006, McCartney wrote a check drawn on his personal account to the school for $500. Following that payment, McCartney used the Embassy Suites template to fabricate an invoice to the client. The submitted bill listed an April 3, 2006 room rental, food, and tax charge totaling $725.87. As part of the fraudulent request for reimbursement, McCartney created a letter from the client (replete with forged signature) verifying that he had conducted an April 3rd seminar for 27 people at a cost to McCartney of $500. Initially, McCartney submitted just the falsified hotel invoice and verification letter but the reimbursement request was rejected for insufficient documentation. In response, McCartney submitted an altered copy of the check and other bogus documentation for which he ultimately was paid $500 by Hartford Life.
Untangling The Web
In the course of an investigation subsequent to McCartney's 2009 departure from Hartford Life, the Financial Industry Regulatory Authority ("FINRA") was looking into fabricated reimbursement requests at Hartford Life. See, for example, "Padded Expense Accounts Ends Hartford Broker's Career." Apparently, FINRA discovered McCartney's bogus reimbursement request and in December 2010, the FINRA Department of Enforcement ("Enforcement") filed a two cause Complaint alleging that McCartney had violated NASD Rule 2110 by:
When confronted with FINRA's findings of the fraudulent reimbursement, McCartney apparently did not dispute the underlying facts and admitted the allegations in the Complaint. McCartney explained that he did not feel that he could have refused the client's school donation request given that individual's stature as a good customer. McCartney expressed remorse for what he characterized as a "stupid" mistake and asserted that he had not and would not repeat such an error in judgment.
Getting the NAC Of It
In September 2011, FINRA's Office of Hearing Officers ("OHO") found that McCartney violated NASD Rule 2110 as alleged and barred him from associating with any member firm in any capacity and imposed $1,599.65 in costs. McCartney appealed that decision to FINRA's National Adjudicatory Council ("NAC"). Department of Enforcement, Complainant, vs. Chad A. McCartney, Respondent (Complaint 2010023719601; OHO Decision, September 15, 2011 / NAC Decision, December 10, 2012).
In considering the appeal, the NAC quickly noted that it affirmed the findings of liability and found that "McCartney acted unethically and his conduct reflects negatively on his ability to comply with regulatory requirements. . ." Turning to the issue of sanctions, however, the NAC did "not concur with the Hearing Panel's conclusion that several aggravating and no mitigating factors exist and, for the reasons outlined below, we find that McCartney's violation of Rule 2110 was serious, but not egregious." Accordingly, the NAC eliminated the Bar imposed by the OHO and reduced that sanction to a six-month suspension, a $5,000 fine, and retained the $1,599.65 in assessed costs.
In justifying the reduction of the sanction, the NAC noted that FINRA'sSanctions Guidelines for forgery and falsification of records provide two considerations:
The NAC made it quite clear that it found nothing mitigating in terms of McCartney's unethical and fraudulent misconduct because of his use of a bogus invoice and letter, an altered check, and his unethical scheme to defraud his firm - notwithstanding, the NAC still took notice of McCartney's remorse:
We also note that McCartney admitted his misconduct from the outset. McCartney left Hartford Life before the firm discovered his actions. When confronted by FINRA four years after the misconduct occurred, McCartney did not deny his actions and offered an explanation to the best of his memory as to what occurred. McCartney did not attempt to conceal his misconduct or cast blame on others. . .
A Single Indiscretion?
The NAC noted that "the Hearing Panel flatly rejected McCartney's contention that his violative conduct should be viewed as a single moment of very poor judgment." To the contrary, the Hearing Panel found evidence of an "ongoing deceit" supported by McCartney's possession of the Embassy Suites templates for weeks before using them and the ensuing multi-step fabrication of supporting documentation.
Although aware of the Hearing Panel's findings, the NAC offset much of the negative weight by giving consideration to the fact that for over a decade, McCartney had an incident-free industry career; and the NAC did not see numerous acts of misconduct over an extensive period of time but, rather, what "appears to be a one-time, isolated incident."
A Lawyer's Daring Ploy
At some point in the proceedings, McCartney's lawyer, Richard A. Levan, Esq., advanced an edgy but likely indispensable effort toward minimizing the nature of the alleged misconduct by putting it in proper perspective and context. That's always a dangerous tack because it runs the risk of alienating adjudicators by seemingly making light of serious allegations. In this case, the risk paid off because it seems to have struck a positive chord with the NAC when McCartney's lawyer:
noted that the amount at issue ($500) was relatively minor for a company as large as Hartford Life, that McCartney did not act out of a desire for personal gain, but rather to be made whole for a donation that he made in furtherance of an important business relationship, and that there was no customer loss or harm sustained due to McCartney's misconduct. The Hearing Panel viewed these arguments as McCartney's effort to trivialize the significance of his misconduct. We disagree. We view these arguments as McCartney's efforts to place his misconduct into context for purposes of sanctions . . .
In deeming the reduced sanctions as appropriately tailored to address McCartney's misconduct, the NAC noted that:
FINRA sanctions may be remedial, but must not be punitive. McCarthy v. SEC, 406 F.3d 179,188-89 (2d Cir. 2005); Guidelines, at 2. A remedial sanction is designed to correct the harm done by respondent's wrongdoing and to protect the trading public from any future wrongdoing the respondent is likely to commit. McCarthy, 406 F.3d at 188. In addition to remediation, deterrence may also be relied upon as an additional rationale for the imposition of sanctions. Id.
My compliments to FINRA on a very thorough presentation of the facts and the rationale. Potential respondents should recognize that there is often value in expressing remorse for alleged misconduct - but don't get cute with the faux sincerity. Going through the motions is often easily seen through and likely to antagonize those sitting in judgement of you.
Also, kudos to the NAC for getting a critical aspect of regulation correct:Effective regulation is not about punishment - that is typically best left for criminal courts. Here the goal is to adequately deter McCartney from a recurrence of the cited misconduct and to ensure that the investing public is properly protected. The bespoke sanctions fashioned by this NAC panel bring credit to the panel and to FINRA.
Over the years, I have frequently written about business expense cases. They hit at every level of Wall Street - at Goldman Sachs, Merrill Lynch, UBS, Morgan Stanley, JP Morgan, Wells Fargo. Sometimes it's a shlub who tried to get away with buying some Christmas presents while pretending they were business expenses. Sometimes it's a misguided hot-shot broker or trader who takes a few pals and clients to a strip joint. Sometimes it's a member of the C-suite who pays hundreds of thousands of dollars to decorate the office. And, yeah, sometimes it's a $500 donation to the private school of an important client's kid.