December 2, 2013
Oh my, another third-party check snafu -- which likely explains why so many brokerage firms simply don't want to see, accept, handle, or process them. Seems that if something can go wrong with a check made out to one party and endorsed by another, it does. In today's BrokeAndBroker blog we have the oddball situation of just such a check becoming an aged item but we're not exactly sure who was at fault for the clock ticking down.
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, Jeffery Bruce Scharingson submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jeffery Bruce Scharingson, Respondent (AWC 2012033287201, November 19, 2013).
Scharingson entered the industry in 1993 and during the times relevant to this matter, he was associated from 2008 to July 12, 2012, with FINRA member firm Broker Dealer Financial Services Corp. The AWC asserts that Scharingson had no prior disciplinary history.
In The Drawer
The AWC alleges that in February 2011, in order to open college savings plan accounts for her children, a customer (identified in the AWC as "BC") endorsed a $16,306.78 third-party check and gave it to Scharingson, who placed the check in his desk drawer pending the completion of paperwork. At this point, unfortunately, the AWC sort of loses me. Rather than mischaracterize FINRA's commentary, let me offer you the verbatim statement of facts from the AWC:
[F]ive months later, in July 2011, the check issuer notified BC that the check was aged and void and provided her with a replacement check. Once again, the check was endorsed by BC and given to Respondent.
Respondent, however, failed to ever use the funds to make the requested investment; rather, fearing that the check would be voided again, he deposited the check into a business account he controlled. In or about April 2012, BC inquired after the investments. At first, Respondent claimed that they had been made, but shortly thereafter advised BC of his failure to make the requested investments. In May 2012, Respondent paid BC $17,306.78, which represented the original amount of the investment plus interest and other damages. Respondent failed to give notice to his Firm of the complaint or his settlement thereof.
In accordance with the terms of the AWC, FINRA imposed upon Scharingson a $5,000 fine and a 1 year suspension from association with any FINRA member in any capacity.
Bill Singer's Comment
Could this AWC be any more obtuse? I mean, seriously, how difficult is it to simply explain the circumstances of the mangled transaction?
The Aging Check
A threshold issue as to the age of the check is absolutely unclear from the fact pattern in the AWC. What was the date on the first third-party check endorsed by the customer? Seems to me, we got one of two possibilities:
If during its investigation, FINRA had resolved the issue of who was at fault for the staleness of the third-party check, the self-regulatory organization fails to relay such findings through the AWC.
- the check was already stale when the customer first endorsed it in February 2011;
- the check was close to becoming stale when the customer first endorsed it in February 2011; or
- the check became stale largely because it sat in Scharingson's desk drawer from February 2011 until it was presented for payment in July 2011.
Why The Delay?
Another puzzling issue that remains in the air is whether Scharingson was solely or largely at fault for keeping the customer's check in his desk for five months; or whether the delay was solely or largely engendered by the customer. About all that we know is a customer endorsed a third-party check, handed it over to her broker, the broker left it in his desk pending paperwork and . . . alas, there is no explanation for what transpired beyond that point. Did the customer go into the hospital or take a cruise around the world? Was there some problem completing the paperwork? Was there an issue as to how best or when to invest the funds? Did Scharingson drop the ball and simply forget about the check in his drawer?
A Second Third-Party Check
The AWC fact pattern takes another bizarre turn. Scharingson apparently feared that the replacement "check would be voided againÖ" Ummm, you think you might explain to us why he had that fear and if it were reasonable? Is the AWC implying that Scharingson did something wrong when he deposited the replacement check into his business account - was that done to ensure the timely collection of the funds with no intent to convert same? Many brokerage firms have policies limiting or prohibiting the acceptance of third-party checks. What were those policies at Scharingson's firm?
As to the whole mess undisclosed settlement by Scharingson, that aspect of the AWC is easier to comprehend. As BrokeAndBroker has often noted in the past, there are sound regulatory and compliance reasons for requiring customer settlements to be disclosed to and approved by an employer firm. Similarly, the whole issue of Scharingson depositing the second check into a business account under his control and then lying to the client about having invested the funds is textbook misconduct and properly sanctioned by FINRA.
Lack Of Regulatory Clarity
These days, many firms don't accept third-party checks and for good reason. As Scharingson warns, such checks often lead to processing nightmares. Unfortunately, the fact pattern in the AWC does little to clarify what exactly went wrong. The undisclosed settlement aspect of this case, however, is on firmer footing. In the end, a little more quality control over FINRA's published content seems necessary.