FINRA Alarm Bells Awaken Sleepwalking Supervisors

October 20, 2014

Once upon a time, Wall Street's regulators seemed to view so-called "Failure To Supervise" matters as a last resort -- the final arrow in a quiver.  Whether benign neglect or a considered policy, those supervising the industry's stockbrokers and traders often erred on the side of caution when it came to reprimanding a top producer. As a result, a lot of what passed for supervision was fairly reminiscent of somnambulism. In the past few years, however, those folks who persist in sleepwalking through their compliance obligations have had a rude awakening before a host of unhappy regulators all too ready to fine and suspend them. Frankly, it's an overdue change in priorities and one that is necessary. Consider this recent case.

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, Roger S. Rathmell submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Roger S. Rathmell, Respondent (AWC 2013037137601, October 2, 2014).

In 1971, Rathmell entered the securities industry and first became registered in 1980 with Merrill Lynch, Pierce, Fenner & Smith Inc. The AWC asserts that he had no prior disciplinary history.

The Telephone Call

On October 26, 2011, at a time when Rathmell was an Administrative Manager of several Merrill Lynch branch offices, he received a telephone call from a customer, who complained that registered representative Greg Campbell had engaged in unauthorized activity in the customer's IRA and personal brokerage accounts. On that same day and after the call, the customer sent an email to Rathmell describing the unauthorized activity - and asserting that loans had been taken in his name using his securities as collateral; and that his address of record was changed.

Merrill Lynch's policies and procedures required that Rathmell, who supervised Campbell, report this customer's complaint via the firm's computerized system within three days of receipt. The AWC alleges that Rathmell failed to timely file the required report.

In Case You Were Wondering

Following Campbell's October 29, 2011, departure, Merrill Lynch filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") that stated the termination was "Voluntary," and did not reference any customer complaints.

A Tick-Tock SIDE BAR: In case you didn't catch the operative dates, the customer complaint came in on October 26th and Campbell headed for the door on October 29th. The lag-time between those two events was three days -- the exact time span in which Rathmell was supposed to enter into Merrill Lynch's computer system his report of the customer's complaint.  Whether Campbell gamed the clock or whether Rathmell believed that the registered rep's resignation pre-empted the need to file the report is not discussed in the AWC.

Second Complaint (After Campbell Left)

About seven months after Campbell's departure from Merrill Lynch, Rathmell received a written complaint on May 25, 2012, from another of Campbell's customers alleging unauthorized withdrawals and loans.  Additionally, this customer alleged that he had not been receiving account statements. The AWC asserts that again failed to timely report this second customer complaint.

The AWC asserts that as a result of Rathmell's untimely disclosures of the customer complaints, his employer Merrill Lynch did not report the allegations to FINRA until October 26, 2012, in violation of FINRA Rule 4530(a)'s requirement of timely reporting within 30 calendar days of notice.

A Costly Failure

Online FINRA records as of October 9, 2014, assert that Merrill Lynch "Discharged" Rathmell on October 17, 2012 based upon allegations of:

FAILURE TO TIMELY ELEVATE A COMPLIANCE MATTER AND TO REPORT CLIENT COMPLAINTS

By failing to promptly report the two written customer complaints to appropriate Firm personnel, Rathmell violated FINRA Rules 4530(c) and 2010. In accordance with the terms of the AWC, FINRA imposed upon Rathmell a $10,000 fine and a six-month suspension in any capacity from association with any FINRA member firm.

Bill Singer's Comment

No big deal, you may say. Rathmell maybe didn't recognize the need to file an in-house notice about two customer complaints, you might add. Anyway, Campbell left three days after the first complaint and was gone for some seven months by the time the second customer complained -- geez, Bill, cut Rathmell some slack. Two isolated customer complaints and one didn't even involve a current employee under Rathmell's supervision.

Now, do me a favor, consider these additional facts:

From May 2008 to October 2011, Merrill Lynch Registered Representative Greg Campbell misappropriated over $1.7 million in customers' funds; and, after leaving the Merrill Lynch, he tacked on another $500,000 in misappropriations at his new firm.  Although not identified in the Rathmell AWC, online FINRA records disclose that Campbell was registered with LPL Financial LLC from October 28, 2011, until his termination on October 31, 2012, when LPL discovered he had been misappropriating customers' funds. Those FINRA records disclose that:

From May 2008 through October 2012, Campbell misappropriated over $2 million in funds from customers at Merrill Lynch and LPL, including elderly customers and members of Campbell's family. Most of the misappropriated funds were converted by Campbell for his personal use; some of the misappropriated funds were transferred between customers' accounts to replace converted funds. Campbell's conduct violated FINRA Rules 2150 and 2010 and NASD Rules 2330 and 2110.

FINRA imposed upon Campbell an industry Bar. In the Matter of Greg J. Campbell, Respondent (AWC 2012034193201, March 15, 2013).

Although the Rathmel AWC  may get lost in the shuffle as a somewhat mundane failure-to-supervise case, in fact, in-house supervision (so-called "Compliance") is an important component of Wall Street's self-policing. The consequences of sleepwalking through your duties or not timely reporting problems can have devastating consequences. If -- and I grant you that it's a big if --- Rathmell had timely submitted his in-house report about the October 26, 2011, customer complaint, that complaint may have -- and, yeah, that "may" is another big may -- been included on Campbell's FormU5. If the October 26, 2011, customer complaint was disclosed on Campbell's Form U5, then LPL may have -- and, here we go again with a second "may" that proved to be another big "may" --  investigated Campbell's background and been more attentive to his conduct during his post-October 29, 2011, tenure with LPL.  

Why do I make such a big deal about those ifs and mays? FINRA asserted that Campbell ripped off his LPL customers to the tune of  $500,000 (which was in addition to the $1.2 million he had previously misappropriated from Merrill Lynch customers. Making the consequences even worse, consider the circumstances of one of the customers defrauded by Campbell (as set forth in the Campbell AWC):

Customer HK is 85 years old and currently suffers from dementia. He opened a brokerage account with Campbell in July 2006. Campbell opened an LMA for HK in March 2009 without HK's knowledge or consent. From August 2009 through October 2011, Campbell converted over $930,000 from HK's LMA to an account at JPMorgan Chase Bank servicing a home-equity line of credit maintained by Campbell. In addition, Campbell effectuated unauthorized transfers totaling over $112,000 from HK's LMA to the LMA of Customer PC.  To conceal his activities, Campbell had HK's account statements delivered "care of Customer PC, who is of no relation to HK.