December 17, 2014
The road to Hell is paved with good intentions and a recent FINRA regulatory settlement involving a customer's email request for a wire transfer certainly proves that point. Presented for your consideration is a stockbroker who appears to have tried to deliver the best in customer service; unfortunately, in going the extra mile, she took some detours and short-cuts around a couple of rules. In the end, FINRA takes an intelligent and somewhat compassionate posture.
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, Susan L. Ellerbrook submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Susan L. Ellerbrook, Respondent (AWC # 20130396126,December 10, 2014).
In 1995 Ellerbrook first became registered and by 2002 she was associated with City Securities Corporation, where she remained until January 2014. The AWC asserts that she had no prior disciplinary history.
November 25th Email
The AWC alleges that in April 2013 Ellerbrook became involved in an "email string" with a particular City Securities customer, and, thereafter, on November 25, 2013, she received another email in apparent continuation of the April online exchange. In the November 25th email, the customer requested a $28,000 wire transfer from his City Securities account to a third party.
I'll Take $22,000
In reply to the customer, Ellerbrook emailed that she needed to speak with him and that the initial wire could not be satisfied because only $22,423 was in the account at the time. In response to Ellerbrook's advisory, the customer emailed that he had sent to the stockbroker a fax authorizing the transfer of $22,000.
The AWC concedes that Ellerbrook again attempted to comply with City Securities' policies, which required her to reach the customer by phone and verbally confirm the instructions. Notwithstanding her attempt, she was only able to leave the customer a voicemail message; however, Ellerbrook then submitted an internal electronic form requesting the wire on which she falsely indicated that she had verbally verified the requestor's identity and confirmed his instructions. As a result, the $22,000 wire was processed to the third party.
An interesting nuance in this matter was that the customer apparently had a standing order to distribute from the account $7,000 per month. Following the November 25th wire, there was an insufficient cash balance in the account and the monthly distribution could not go forward.
From Bad To Worse
In order to satisfy the $7,000 monthly distribution, Ellerbrook telephoned the customer on November 25th to get authority to sell 1,000 shares of HSBC Preferred but was, again, unable to directly reach the customer and left another voicemail message. Not having heard back from the customer and apparently deeming the monthly distribution as a mandatory directive, Ellerbrook sold the HSBC shares without prior authorization from the customer.
On November 26, 2013, City Securities learned that customer's email account had been hacked and the relevant emails were fraudulent. On November 27, 2013, City Securities credited the account in full.
Permitted To Resign
Online FINRA BrokeCheck records as of December 15, 2014, indicate that City Securities permitted her to resign on December 13, 2013 pursuant to allegations that:
MS. ELLERBROOK FAILED TO COMPLY WITH COMPANY POLICY WITH RESPECT TO A THIRD PARTY DISTRIBUTION FROM A CLIENT'S ACCOUNT AND EXECUTED A TRANSACTION IN SUCH CLIENT'S ACCOUNT WITHOUT THE CLIENT'S VERBAL AUTHORIZATION.
In a further "Firm Statement," City Securities noted that:
MS. ELLERBROOK TOOK THE ABOVE ACTIONS BELIEVING SHE WAS ACTING IN THE CLIENT'S BEST INTEREST. MS. ELLERBROOK RETIRED EFFECTIVE DECEMBER 31, 2013.
FINRA deemed Ellerbrook's conduct to constitute violations of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Ellerbrook a $10,000 fine and a two-month suspension from association in all capacities with any FINRA registered firm.
Bill Singer's Comment
As this case amply demonstrates, few regulatory matters start and end in simple fashion -- one seemingly harmless violation cascades into others and, when all is said and done, a well-intentioned registered rep sits amid the rubble of a career.
I mean, sure, as far as it goes Ellerbrook was victimized by a hacker. Let's at least agree on that predicate circumstance. On the other hand, the reason for all the verification and confirmation policies is to specifically prevent this type of fraud on a stockbroker and a brokerage firm. I have written about these email hackings for years in the vain hope that enough folks will read my commentary and learn the lessons. Alas, Ellerbrook appears not to have been one of my loyal readers.
In keeping with my distaste for hypocrisy, let me applaud FINRA in this settlement. The underlying misconduct in this AWC occurred a little over one year ago and the self-regulatory organization managed to tie up its case within a year from the date of Ellerbrook's termination. Those are commendable timeframes.
Further, rather than unload upon this individual with a massive suspension, FINRA imposed a $10,000 fine and only a two-month suspension, which I believe are both measured responses and appropriate for the circumstances. Ultimately, for those who support self regulation, this is a classic case that shows how that oversight works best.