April 3, 2014
According to the "Boiling Frog Theory," a frog placed immediately into a pot of boiling water will try to jump out. In contrast, if a frog is placed in room-temperature water, which is gradually heated to a boil, the relaxed frog will kick back, stretch out, and calmly allow itself to be boiled to death. In today's BrokeAndBroker.com Blog, we follow the story of a stockbroker who may have entered into tepid water only to find himself in a boiling compliance and regulatory mess.
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 2012 regulatory hearing, and without an adjudication of any issue, Jeffrey Carter Smith submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jeffrey Carter Smith, Respondent (AWC 2012033242001, March 27, 2014).
Smith entered the securities industry in 1991 with Kidder Peabody & Co. and by 1995 he was registered with UBS Financial Services, Inc., where he remained until July 7, 2012. The AWC asserts that he had not prior disciplinary history.
Since the 1990s, Smith had serviced the brokerage accounts of a family, and among the accounts were three separate Uniform Gifts to Minors Accounts (''UGMAs") that had been opened by the father. During the times relevant to the AWC, the daughter controlled the UGMAs for her children's benefit. When first established, the UGMAs held such blue chip stocks as General Electric, McDonalds Corp, and Microsoft.
Given the non-discretionary nature of the UGMAs, when Smith had investment recommendations, he initially contacted the customer and secured her prior approval for any ensuing trades. After 2009, however, the AWC asserts that Smith encountered difficulty reaching his customer with any regularity and purportedly began to execute unauthorized trades involving equities, bonds, mutual funds, and certificates of deposits in the three UGMAs.
Upon noticing that the UGMAs no longer held McDonald's or other blue chips, in early 2012 the customer complained about unauthorized transactions, which the AWC characterizes as "hundreds of securities transactions in the UGMA accounts between 2009 and 2012 . . ."
Paying The Price
Online FINRA records as of April 2, 2014, disclose that UBS "Discharged" Smith on June 14, 2012, based upon allegations that:
MR. SMITH'S EMPLOYMENT WAS TERMINATED AFTER THE FIRM LEARNED THAT HE HAD ENTERED MULTIPLE TRADES WITHOUT AUTHORIZATION IN AT LEAST THREE CLIENT ACCOUNTS
Online FINRA records as of April 2, 2014, disclose that on January 27, 2014, UBS was apparently served with a FINRA Arbitration Statement of Claim seeking $450,000 in damages based upon allegations that:
CLAIMANTS ALLEGE UNAUTHORIZED TRADING, UNSUITABILITY AND FAILURE TO SUPERVISE RELATING TO EQUITY POSITIONS IN THE ACCOUNTS BETWEEN JANUARY 2008 - FEBRUARY 2012.
In accordance with the terms of the AWC, FINRA imposed upon Smith a $10,000 fine and a 9-month suspension in all capacities from any FINRA registered firm.
Bill Singer's Comment
How and when a registered person recognizes the line between compliant and non-compliant behavior is often far easier to discern in hindsight than when one is rambling and ambling into familiar waters that eventually bubble to a gruesome boil. In Respondent Smith's case, he may have seen the father and daughter customers as two old friends -- perhaps more family-like than customers. Notwithstanding such nostalgia, the daughter was, first and foremost, a customer and not a pal; and, more importantly, she was empowered to make the investment decisions for the UGMAs.