September 5, 2013
This article was originally published as "FINRA Says Stockbroker Was His Brother's Keeper" (BrokeAndBroker.com, September 26, 2012). Following the first iteration of this story is an UPDATE reflecting recent regulatory action against the member firm for failing to supervise.
In response to the filing of a Complaint on September 8, 2011, by the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA"), Respondent David E. Haeffele submitted an Offer of Settlement dated September 5, 2012, which the regulator accepted. Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Haeffele consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs David E. Haeffele, Respondent (Offer of Settlement, 2009019590502, September 24, 2012).
Respondent Haeffele was registered since 1986, and from 1992 he was registered with cfd Investments, Inc. ("CII") until September 10, 2009, when that firm terminated him.
Brothers David And John
During the relevant period of June 1998 through September 2009, Respondent Haeffele owned the Peoria, IL financial and estate planning firm of Haeffele & Associates, which offered retail brokerage services through CII. Respondent's brother, John Haeffele, worked as a registered representative in the Peoria office as a CII registered representative selling selling securities and insurance.
A Matter of Trust
The Offer of Settlement alleges that during the relevant period, Respondent Haeffele knew that John Haeffele and John's wife were co-trustees of a trust created by a customer for the benefit of that customer's disabled daughter. Moreover, the customer maintained a CII brokerage account for the Trust that John Haeffele serviced as the broker (in addition to his capacity as a trustee).
The Phone Call
On or about July 21, 2009, the Offer of Settlement alleges that the customer telephoned Respondent Haeffele and stated that John Haeffele had converted Trust funds; also, the customer read to Respondent a letter of admission by John Haeffele to the conversion. Thereafter, the customer demanded that the brothers Haeffele make the Trust whole.
Later that same day, Respondent Haeffele allegedly met with his brother to discuss the situation and John admitted to converting a substantial amount of money from the Trust. Further, John told his brother that he was trying to resolve the matter with the customer and the customer's attorney but had intentionally not alerted or involved CII.
CII's annual questionnaire asked, in relevant part:
"Have you received any written or verbal customer complaint? If Yes - Did you promptly notify the cfd compliance department of the complaint?"
In the last version of the annual questionnaire which Respondent Haeffele signed and dated September 19, 2008, the Offer of Settlement asserts that he answered "No."
CII's written supervisory procedures provided in relevant part that
"any RR who receives an oral statement of a grievance from a client or prospective client should notify the [Compliance Director] of the same."
The Offer of Settlement asserts that the annual questionnaire and the written supervisory procedures put Respondent Haeffele on notice that he was required to report to CII the customer complaint about his brother's conversion. In contradistinction to that asserted duty, the Offer of Settlement alleges that Respondent Haeffele failed to report the customer's phone call and the fact that his brother was improperly attempting to settle the matter away from the firm.
Into The Light
Around August 12, 2009, the customer's attorney contacted CII's Chief Compliance Officer and related the conversion scenario, prompting a firm investigation into the Haeffele brothers' conduct. As a consequence of the allegations and investigation, the firm terminated John Haeffele and permitted Respondent Haeffele to resign. During both the firm's and FINRA's investigation, Respondent Haeffele admitted to:
- receiving the customer's complaint,
- knowing of his brother's conversion,
- knowing of his brother's improper settlement efforts, and
- failing to timely notify CII of the matters.
FINRA charged Respondent Haeffele with failing to report his brother's conversion, the customer's telephone complaint, and his brother's efforts to settle the dispute away from the firm, in violation of FINRA Rule 2012. In accordance with the terms of the Offer of Settlement, FINRA imposed upon Respondent a $10,000 fine and a 20 business day suspension from association with any member of FINRA in all capacities.
SIDE BAR: In November 2010, John Haeffele pled guilty in federal court to one count of mail fraud and admitted to converting approximately $375,000 from the Trust and a second trust created by the same customer. John Haeffele was sentenced to 33 months in prison and ordered to pay $409,000 in restitution.
According to online FINRA records as of September 26, 2012, the customer sought in excess $1 million in damages as of August 25, 2009, and CII settled the matter on May 10, 2012, for $445,000. On July 18, 2011, pursuant to an Acceptance, Waiver and Consent settlement, FINRA barred John Haeffele. In the Matter of John R. Haeffele, Respondent (AWC 2009019590501, July 18, 2011).
Bill Singer's Comment
Truly a case of biblical proportions - indeed, FINRA says that stockbrokers are their brother's keeper.
As to the sanctions imposed upon Respondent Haeffele, given the facts and circumstances, FINRA seems to have shown remarkable restraint, particularly in regard to the length of the suspension. My guess is that some of that charity was engendered by Respondent Haeffele's cooperation with his firm's and FINRA's investigation and his apparent willingness to fully disclose the situation once confronted. Similarly, while the non-disclosure aspects of Respondent's conduct posed considerable impediments to the prompt detection of his brother's misconduct, there is no suggestion that the Respondent was involved in the conversion or benefited from the crime.
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. A perceived nuisance is a nuisance no matter how large or small the member firm. And 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 engaging in a violation 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 John Haeffele, however, the sum in dispute was far from piddling and he failed to pay even an improper "away settlement." As such, his role in talking to the customer and the customer's attorney smacks more of delaying the inevitable than a bona fide attempt to settle.
Finally, if FINRA is going to go after one brother for failing to turn in another when the former is on notice of fraud, I can only await with bated breath and gleeful anticipation the day when FINRA will go after a whole host of C-suite executives at major brokerage firm for similarly being on notice of their organization's fraud on the markets and the public. And then, if only I live this long, perhaps there will be a host of cases in which regulators are charged with having been on notice of the misconduct of the likes of Madoff, Stanford, and others and having failed to timely taken action.
Hey, a guy can dream, can't he?
For additional cases discussing "away settlements," READ:
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, cfd Investments, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of cfd Investments, Inc., Respondent (AWC 2009019590503, August 22, 2013) (the "CII AWC").
Cfd Investments, Inc. ("CII") presently has about 150 branches and 190 registered representative, and has been a registered FINRA broker-dealer engaged in a general securities business since 1990. The CII AWC asserts that the firm had no prior disciplinary history.
The CII AWC asserts that between the relevant period of January 2001 and August 2009, the member firm failed to adequately supervise former registered representative John Haeffele, who stole approximately $409,000 from a customer's accounts that held direct application mutual funds purchased through CII. The CII AWC alleges that John Haeffele converted the Trust's funds by redeeming the mutual fund shares owned by the Trust and transferring the proceeds to accounts he controlled away from CII.
In setting forth its case, FINRA offers a number of missed red flags, which I note in an effort to alert other firms as to warning signs that they should be attentive to (and which the self-regulatory organization is pointedly raising). The CII AWC alleges that John Haeffele:
- served both as trustee and as broker to the Trust, a dual role that posed a potential conflict of interest;
- had identified himself as client and representative, resulting in his receipt of account statements, which could facilitate efforts to hid activity from the beneficiary and others associated with the Trust (as was alleged to have happened);
- began liquidating mutual funds held by the Trust in 2001 as soon as six months after purchase and continued this practice for five years until the accounts were essentially worthless - such liquidations raised suitability concerns and incurred contingent deferred sales charges;
- allegedly repeatedly violated CII procedures such as failing to submit transaction and correspondence blotters to CII, a practice that furthers efforts to avoid detection of misconduct; and
- was producing at levels that indicated he was earning very little (about $5,600 in 2002, for example) from CII during the time when he was, in fact, engaging in conversion of the Trust assets.
The CII AWC pointedly chastises the member firm for not subjecting the Trust to additional scrutiny or placing John Haeffele under heightened supervision, in alleged violation of NASD Rules 3010(a) and 2110, and FINRA Rule 2010.
Further, the AWC alleges that between the relevant time of January 2001 and June 2009, CII lacked adequate systems and procedures to monitor direct application mutual and redemptions: The AWC alleges that during the relevant period, CII:
- received statements from investment companies listing all mutual fund redemptions; however, the firm failed to properly assign responsibility for review of these statements, resulting in the absence of a regular review of such redemptions;
- required that mutual fund redemptions be listed by registered representatives on transaction blotters for review, but many of its representatives consistently failed to submit those documents; and
- failed to maintain adequate written procedures for the review of direct application mutual fund redemptions. Among such shortcomings, the AWC alleges that CII's procedures did not require review of statements provided by direct application mutual fund issuers, which listed redemptions.
The AWC deemed the supervisory failures noted above to constitute violations of NASD Rules 3010(a) and (b) and 2110, and FINRA Rule 2010.
Finally, between the relevant period of June 2005 and June 2009 the AWC alleges that numerous CII reps failed to provide the firm with the requisite blotters they had created and maintained listing each purchase and sales transaction, including direct application mutual fund transactions. Pointedly, John Haeffele did not create or maintain any transaction blotters during this relevant period.
The AWC deemed this conduct as a violation of Section 17(a) of the Exchange Act, Exchange Act Rule 17a-3 and 17a-4 thereunder, NASD Rules 3110 and 2110, and FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon CII a Censure and $100,000 fine.
Statement of Corrective Action
As permitted under FINRA's rules, AWC respondents may submit a statement indicating what, if any, corrective action they have taken in response to the underlying issues. Respondent CII submitted the following:
STATEMENT OF CORRECTIVE ACTION SUBMITTED BY CFD INVESTMENTS, INC. IN CONNECTION WITH THE FINANCIAL INDUSTRY REGULATORY AUTHORITY LETTER OF ACCEPTANCE. WAIVER AND CONSENT NO. 20091950503
When cfd Investments, Inc. learned in 2009 of John Haeffele's theft of trust funds, it immediately instituted a change in its policy relating to financial advisers serving in the capacity of a trustee. The new policy requires that a financial adviser not serve in the capacity of a trustee for any trust account unless the grantor of the account is an immediate family member (spouse, child, parent or sibling). Furthermore, even under these circumstances, the grantor and all beneficiaries of the trust are required to sign a statement acknowledging that the financial adviser is serving in the role of a trustee, and that cfd Investments, Inc. is not responsible for the actions of the financial adviser when serving in the role of a trustee for the trust.
Additionally, in June of 2009, prior to any FINRA investigation, the firm adopted procedures for a direct to issuer order ticket, which is designed to record and track orders that a financial adviser places with a fund company directly. This applies to all financial advisers regardless of whether the financial adviser is also acting as a trustee. This procedure was designed to evidence the approval of transactions conducted directly with fund companies, and to provide for more effective oversight of direct way business.
This Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.
Bill Singer's Comment
Compliments to FINRA on posting a comprehensive AWC. Compliance staffs should note the warning signs cited by FINRA in this case and confirm that their own policies and procedures are up to snuff.
READ these articles involving trusts: