Stockbroker Whiffs On Three Email Strikes

July 18, 2014

How nice. How convenient. Customers can actually send emails to their brokerage firms and ask for all sorts of things. Gone are the days of voicemail or recorded music while you wait endlessly on hold.  Now you just fire off your message through the vast expanse of the Internet. Of course, all is not well in email-land.  You got lots of bad guys trying to find ways into places where they do not belong. Today's BrokeAndBroker.com Blog discusses one such foray.

Case In Point

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, Camille Smith submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Camille Smith, Respondent (AWC 20120339682, July 14, 2014). 

Smith was first registered in 2007 with Securian Financial Services, Inc. and CRI Securities, LLC. The AWC asserts that she had no prior formal disciplinary history in the securities industry.

Upon entering the industry in 2008, Smith became the registered representative for a client indentified in the AWC as "MK." The client and stockbroker met once a year but Smith maintained quarterly or semi-annual email correspondence.  

July Annual Review

During a July 2012 meeting to conduct an annual review, MK informed Smith that he had been helping his family with certain expenses; and, thereafter, Smith sent in late July, various confirmatory emails to the client, including an updated statement and a blank investment management agreement requiring signature and return. 

August 6th Wire Transfer

On August 6, 2012 Smith received an email purportedly from MK seeking a wire transfer from MK's account for the purchase of a condominium. Approximately a half-hour later, following additional correspondence, Smith received via email a signed wire transfer form and instructions to transfer $40,000 from MK's account to a third-party account in Singapore. 

Smith verified via email that MK wanted a same-day liquidation of mutual funds in order to fund the wire request and, upon receiving a "yes" email reply, the stockbroker filled out the wire request form per the email instructions. The AWC alleges that notwithstanding the back-and-forth via the emails, Smith did not verbally discuss or verbally confirm with MK the proposed mutual fund sales. In furtherance of the email instructions, Smith:
  • represented that the wire was for the "purchase of a condo;" 
  • verified the signed wire transfer form with documents in MK's client file; 
  • instructed the trader in the branch office to sell $40,000 worth of mutual funds shares in order to fund the wire request; and
  • gave the third party wire request form to the sales assistant DM. 
DM "signature guaranteed" the wire request form and faxed it to the Firm's Home Office, whereupon a wire in the amount of $40,267.53 was processed and sent from MK's account. 

August 13th Wire Transfer

On August 13, 2012, Smith received another email purportedly from MK requesting the available account balance and a second wire transfer. Following additional correspondence during the course of the ensuing hour, Smith received via email a signed wire transfer form and instructions to transfer $30,000 from MK's account to a third-party account in Singapore. 

Smith filled out the wire request form per the emailed instructions, falsely recording in the transfer form that MK needed the wire because he was ''helping [a] family member in Singapore." The AWC implies that no such helping-out-the-family explanation was given to the stockbroker by the customer. Smith  instructed the trader to sell $30,000 worth of mutual fund shares from the customer's account and gave the third-party wire request form to DM, who signature guaranteed the request and faxed it to the Home Office, whereupon a wire in the amount of $30,000 was sent from MK's account on August 14, 2012. 

August 20th Wire Transfer

On August 20, 2012, Smith received another email purportedly from MK again requesting the available account balance. Following additional correspondence, Smith received a $22,000 wire transfer request and  a copy of the previously used wire transfer request for the second transaction. Smith filled out the form per the emailed instructions, again falsely noting the reason as "sending funds to a family member in Singapore", she instructed the branch trader to sell funds to free up cash for the wire,  and she gave the third party wire request form to DM. Consistent with the AWC's prior allegations, these trades were not verbally discussed or verbally confirmed with the client. Finally, the wire transfer form was signature guaranteed by DM. 

Danger Will Robinson! Danger!!

Upon receipt of the August 20th wire form, the firm's Home Office became suspicious of the request given the prior two-weeks' of activity. The Home Office telephoned MK, who asserted that he never made any of the three wire transfer requests. Accordingly, the third wire was immediately rejected and a block was placed on the account. The August 8 and August 14 wires were recalled and MK's account statement was reimbursed such that there was no loss to the customer. As it would be discovered, in August 2012, MK's personal email address had been hacked.  None of the emails seeking wired funds had actually come from Mk but, to the contrary, from the hacker.

What Should Have Happened

Consistent with its written supervisory procedures ("WSPs") that prohibited registered representatives from maintaining discretionary brokerage accounts or exercising unauthorized discretion, the firm  required verbal confirmation with customers of all written orders received from clients before the transactions are processed. When the client was not reachable, a message should be left advising that the requested order would not be place prior to confirmation. Putting that in plain language: We ain't doing jack with any written order until such time as you personally speak to the customer and confirm!

What Did You Not Get About This?

Also, the firm had previously issued an advisory memo in response to incidents of hacked customer email accounts. That memo warned about the need to contact clients from whom email wire instructions were received before taking any action on such an email request. 

In-House

On September 7, 2012, the firm reported that Smith had been suspended for three weeks and fined $5,000 for failing to follow the policies with respect to written orders and discretionary trading.

Outside (As In FINRA)

The AWC asserted that Smith violated FINRA Rule 2010 when she:
  • directed the office trader to liquidate mutual fund positions in the customer's account without having received prior written approval or authorization from the client; and
  • provided false information about the second and third wire transfer requests
Additionally, the AWC asserted that Smith violated FINRA Rules 4511 and 2010 by causing her broker-dealer to maintain false books and records concerning the wire transfer requests. 

In accordance with the terms of the AWC, FINRA imposed upon Smith a $10,000 fine and a two-month suspension from associating in any capacity with any FINRA-regulated broker dealer.