Broker Barred Over Trades For Client With Dementia

November 7, 2014

When it comes to FINRA, I think it fair to say that I am a critic. I like to think that much of my commentary is fair and based upon a somewhat objective analysis of facts and sanctions. I appreciate that FINRA may not always feel that I am objective and, frankly, probably takes a dim view of my repeat critiques.  The self-regulatory organization and I have been somewhat adverse for over 25 years, and my sense of things is that there is little likelihood that they will win me over to their view, or vice versa. In that spirit, let me praise FINRA for barring someone from the industry who truly appears to have needed to be stopped; however, let me also criticize FINRA for placing this respondent in a somewhat more flattering light than I think he deserved.  Today's kerfuffle between FINRA and me focuses on sins of omission and commission in the AWC. This time, however, I can refer you to the coverage of the same case by a state regulator and give you an opportunity to compare what was and what wasn't said. 

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, Robert Head submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Robert Head, Respondent (AWC #20130389574, October 21, 2014).

The AWC asserts that Head entered the securities industry in 1992.

SIDE BAR: According to online FINRA records, it appears that Head was first registered with Dean Witter & Co. in 1968 and, as such, his industry experience seems older than the AWC's asserted 1992 start date. See BrokerCheck record.

From August 2008 until January 2014, Head was registered with Stifel, Nicolaus & Company, Inc., as a General Securities Representative. The AWC asserts that he had no prior relevant disciplinary history.

Retiree ML

The AWC asserts that from August 2008 until October 2013, Head managed a Stifel Nicolaus trust account for customer "ML," who was a retiree who was born in 1936. Her original account application listed investment objectives of "Growth and Income" and "Speculation / Active Trading / Complex Strategies." In November 2009, the account's investment objective was changed to identify only ''Speculation / Active Trading / Complex Strategies."

Routine Discretion

ML never gave Head written authorization to exercise his own discretion as to what securities to trade in her account. Without written authorization, Head was prohibited from placing any trade that ML had not explicitly and specifically approved. Nonetheless, the AWC alleges that Head routinely placed trades in ML's account without first consulting with ML about the details of individual trades.

Happiness Letter 1

The AWC alleges that Head traded ML's account actively, often choosing high-risk investment products. In 2009 and the early part of 2010, the AWC characterizes the account activity as "particularly high." In March 2010, Stifel Nicolaus sent to ML a letter indicating that during the previous 12 months, there had been 385 trades in her account; and that her account currently had 25 open positions in uncovered short call contracts. Notably, ML signed and returned the letter, indicating understanding and acceptance of the risks of the cited investments.

SIDE BAR: In industry parlance, these letters are often characterized as "Activity Letters" or "Happiness Letters."

For 2010, Head placed 155 transactions in ML's account, which had a value of approximately $250,000. Those transactions purportedly generated over $15,000 in commissions and some $20,000 in realized losses.

Dementia Diagnosis

In June 2011, when she was 75 years old, ML was diagnosed with dementia. The AWC clarifies that Head was not notified of the diagnosis.

In 2011, trading in ML's account rose to some 310 transactions, among which were short option positions and other allegedly high-risk investments. The transactions generated over $41,000 in commissions and resulted and about $13,500 in realized losses.

Happiness Letter 2

In June 2012, Stifel Nicolaus sent another Happiness Letter to ML that characterized the prior 12 months' account activity as consisting of 275 trades; $29,979 in commissions; 195 short option positions open; and some $70,000 in unrealized losses. In response to Stifel Nicolaus's request that she sign and return the letter, ML complied with her purported ratification of the investment strategy and associated risks.

Failing Mental Condition

During the periods of 2012 and the first 10 months of 2013, the AWC asserts that Head placed a total of 140 and 123 transactions respectively in ML's account.

The AWC asserts that as of August 26, 2013, ML's physician determined that ML had become incapable of providing informed consent on financial matters. Again, the AWC is meticulous in pointing out that Head did not learn of that determination until October 2013, when ML's niece acting on ML's behalf pursuant to a power of attorney filed a complaint with Stifel Nicolaus.

Unauthorized Discretion

Acccording to online FINRA records as of November 2, 2014, Stifel Nicolaus & Company, Inc. "Discharged" Head on December 20 2013, based upon allegations:

VIOLATION OF FIRM POLICY REGARDING EXERCISING DISCRETION WITHOUT WRITTEN AUTHORIZATION IN A CLIENT'S ACCOUNT.

Discretion And Suitability

FINRA alleged that Head had improperly exercised discretion in ML's account and had recommended unsuitable transactions. In accordance with the terms of the AWC, FINRA imposed upon Head a Bar from associating with any FINRA broker-dealer in any capacity.

Bill Singer's Comment

If you just read the AWC, it clearly raises questions about the levels of account activity and the nature of the communications between Head and ML, particularly those seeking prior authorization for entering trades. On the other hand, given the allowances in the AWC that Head apparently did not know of his client's failing health, the onset of her dementia, and her inability to give informed consent by August 2013, FINRA presents some mitigation on Head's behalf. In the end, however, FINRA did Bar Head, and that sanction largely overrides any ambivalence that the various allowances and concessions may have engendered.

Not disclosed in the AWC was the following information set forth in online FINRA records as of November 7, 2014:
  • On April 2, 2002, Head's then employer, FINRA member firm Robert W. Baird & Co. Incorporated received a customer complaint alleging "unsuitable investment and concentration in Enron Bonds." The Firm denied the complaint and there is no indication of any further action by the customer.
  • On June 14, 2006,  Baird purportedly settled a May 18, 2005, customer complaint alleging $625,000 in damages arising from alleged unsuitable trades, churning, excessive trading, fraud, breach of fiduciary duty, breach of contract, and negligence. The complaint progressed to an NASD Arbitration claim and was settled by the firm for $57,500, with an alleged $28,750 contribution from Head. In response to the customer's allegations, the online FINRA record offers Head's statement:
CUSTOMER, A FORMER CUSTOMER WHO TRANSFERRED HER ACCOUNTS IN 2002, FILED A COMPLAINT IN ARBITRATION ALLEGING PRINCIPALLY THAT I CAUSED HER TO PURCHASE UNSUITABLE INVESTMENTS AND CHURNED HER ACCOUNTS. I DENY ALL HER ALLEGATIONS OF MISCONDUCT BY ME, PARTICULARLY AS TO THE UNSUITABILITY AND CHURNING. SHE KNOWINGLY APPROVED THE INVESTMENT DECISIONS WE MADE AND THE STRATEGIES WHEREBY SPECIFIC SECURITIES WERE TRADED. RESULTING IN LONG TERM NET PROFITS TO HER.
  • On October 11, 2007, Head's then employer, FINRA member firm Wells Fargo Investments, LLC settled an October 3, 2007 customer complaint alleging that a customer had told Head to sell on September 20, 2007, BIDU at a specified price and that the stockbroker "SOLD THE STOCK AT A HIGHER PRICE." There are no alleged damages set forth but there appears to have been a $13,545 settlement paid by Wells Fargo without contribution by Head.
  • ML's October 23, 2013, customer complaint alleged $85,000 in damages as a result of allegations by a successor trustee that Head had recommended unsuitable, high risk investments and strategies, and executed same at Stifel Nicolaus through unauthorized trades from September 15, 2008, through September 23, 2013. The firm appears to have settled the complaint on September 9, 2014, in the amount of $80,000 without contribution from Head.
  • Pursuant to an investigation  In the Matter of Robert Head apparently initiated on October 28, 2013, the State of Nebraska, Department of Banking and Finance, appears to have Permanently Barred Head in all capacities on July 22, 2014. The Bar, which appears to have been entered with Head's consent, alleged that he had executed transactions without ML's approval, and had executed excessive and unsuitable transactions. I would urge you to read the Nebraska Consent Order and note the differences between the State's and FINRA's presentation of the ML matter. Also note that the State settled the matter in July 2014 but FINRA's AWC required three additional months to finalize and publish. Consider, for example, these assertions as set forth in the Nebraska Consent Order:
    7. The complaint informed STIFEL that ML had been declared incompetent and provided a copy of the physician's statements and the Power of Attorney appointing TP as attorney in fact for ML. The complaint alleged that HEAD had made unsuitable trade recommendations in the account, engaged in excessive trading in the account, and made unauthorized trades in the account. According to the complaint, the account lost a least eighty-five thousand dollars ($85,000.00) as a result of the trading engaged in by HEAD.

    8. Following the filing of the complaint, HEAD contacted ML by telephone asking about her dementia and encouraging ML to have TP withdraw the complaint filed with STIFEL. HEAD called ML three times on October 24 and twice on October 25, 2014. The calls ceased after a representative of TP contacted the DEPARTMENT, and the DEPARTMENT contacted STIFEL on October 25, 2013. HEAD has claimed that his contacts with ML were undertaken because of his surprise at the complaint filed by TP and the assertion of her lack of mental capacity.

    . . .

    10. HEAD claimed he had contacted ML concerning every trade. TP provided the DEPARTMENT with records of incoming telephone calls for ML from August through October of 2013. The records show no telephone calls from HEAD to ML's telephone on some days when trades occurred. After reviewing telephone records, HEAD admitted to STIFEL representatives that he did not consult with ML on all trades which occurred in her account and claimed that he made trades based on an informal agreement with ML to exercise discretion in the account.