Under consideration in today's BrokeAndBroker.com Blog is a compliance officer with a prior history of regulatory sanctions and a deceased client and a purported signature signed after the client's death and a servicing stockbroker who is accused of a six-figure fraud. With that fact pattern, how can you not read this column?
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, Michael A. Lovett submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Michael A. Lovett, Respondent (AWC #2013035211001, May 5, 2015) at http://disciplinaryactions.finra.org/Search/ViewDocument/48011
The AWC asserts that Lovett entered the securities industry in 1991, and by 2011 he was associated with FINRA member firm Cape Securities, Inc. Lovett was initially hired by Cape Securities as a Compliance Officer and in January 2012, he became the firm's Chief Compliance Officer ("CCO").
The AWC asserts that Lovett had the following prior disciplinary history:
ln Matter Number E06010134 (January 16, 2003), Lovett consented to findings that he violated Article V, Section 2 and 3 of the NASD By-Laws and NASD Rules 2110, 3070(b), and 3070(c) as the result of failing to timely report to NASD and failing to keep current the applications for registered persons of the firm for whom customer complaints had been filed. Lovett was fined $15,000 and suspended from association with any NASD member in any principal capacity for 10 business days.
In Matter Number E0605000301 (October 25,2007), Lovett consented to findings that he violated NASD Rules 2110, 2711(i) and 3010 as the result of failing to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations and NASD rules regarding research reports. Lovett was fined $10,000 and suspended from association with any FINRA member in a principal or supervisory capacity for 10 business days.
In September 2013, Lovett was fined $4,000 by the Securities Commissioner of South Carolina for failure to provide a timely response to a request for information.
By way of recap, Lovett had entered into FINRA AWC settlements in 2003 and 2007, in which he was fined and suspended; and he was fined by South Carolina in 2013. The FINRA settlements occurred prior to Lovett's 2011 employment by Cape Securities but the state settlement was entered into about two years after he was hired as a Compliance Officer and one year after he was elevated to the firm's CCO.
PE and CG
On July 23, 2012, Cape Securities registered representative "PE" submitted a wire transfer request for Cape Securities customer "CG." In and of itself, no big deal; except . . . ah yes, there's that word, which makes all the difference in the world . . . except that CG had died on May 15, 2012.
An Accommodation Forgery
The 2015 Lovett AWC asserts that Cape Securities' Operations Department flagged CG's wire transfer request because the customer's purported signature on the request did not look like his purported signature on a margin form submitted the same day. Apparently, the Operations Department's concerns made their way to Lovett in his compliance capacity and he reviewed the transaction and contacted PE to inquire as to the signature variations. At this point, the AWC asserts that Lovett learned of the customer's death and, even more strikingly, the AWC asserts that:
[PE] informed Lovett that the signature on the wire transfer request was forged. Lovett was told by PE that the forgery was an "accommodation forgery' made as a result of CG's death in order to assist the family in handling the account.
The 2015 Lovett AWC notes in Footnote 2 that:
In January 2013, PE was barred from association with any FINRA member firm in all capacities and ordered to pay restitution in the amount of $620,177.90 in FINRA Matter No. 2012034412101.
made no additional inquiries into other wire transfer requests from PE's office, did not place any restrictions on PE's ability to submit additional wire transfer requests, and did not institute any additional supervision of PE.
No Harm, No Foul?
At this point, some industry compliance professionals may see the above fact pattern involving Lovett's supervision of PE as constituting a case of "no real harm, no foul." After all, the wire transfer and signature stuff is taking place in 2012 and FINRA didn't settle with "PE" until 2013 -- so it's not even an issue of hindsight giving 20/20 vision; Lovett supposedly had no inkling of the allegations in FINRA's yet-to-be-created 2013 Elvidge AWC.
That's one way of looking at Lovett's conduct. Let's consider a few more facts before we rush to a prematurely, favorable judgment.
Apparently, PE submitted four more unauthorized wire transfers after CG's, which allowed him to misappropriate $107,000.
Okay, sure, you might be willing to give Lovett some benefit of the doubt for the subsequent wires submitted by PE; after all, the CCO had no indication of any prior misconduct. On the other hand, there are two good reasons that a supervisor would not be on alert. The way I see it, you can be in the dark because the fuse blew out or because you don't turn on the lights -- FINRA seems to be arguing that the latter was the case with Lovett, and the regulator makes a strong argument.
Instead of looking forward from the CG wire, let's look backwards. Unfortunately, there appears to have been some significant misappropriation of a few hundred thousand dollars that occurred prior to the CG incident and which was undetected by Lovett. That got FINRA to thinking about Lovett's supervision and compliance practices, and the regulator was not impressed with Lovett's alleged failure to make more of an effort to look into PE's history of conduct. Pointedly, the regulator cited Lovett's failure to review earlier wire transfers in other accounts serviced by PE and to diligently review wire requests after the CG event. How bad was the underlying but largely hidden mess? Consider this allegation in the 2015 Lovett AWC:
During the period from February 2012 to September 2012, PE, a registered representative with Cape, converted funds for his own use and benefit from the Cape brokerage accounts of seven customers: PE submitted 21 separate wire transfer requests totaling $690,152.90 to Cape, ostensibly on behalf of the customers; however, none of the seven customers authorized the transfers. The funds were actually wired into the operating account for PE's office.
In 2012, Cape had no supervisory system or written supervisory procedures pertaining to NASD Rule 3012(a)(2)(B), which requires reviewing and monitoring the transmittal of funds from customer accounts to third-party accounts. Additionally, the Firm had no supervisory system or written supervisory procedures to assist in the detection and prevention of acts of conversion by its registered representatives through the use of fraudulent wire instructions. As Cape's Chief Compliance Officer, Lovett was responsible for establishing the Firm's supervisory system and written supervisory procedures, which he failed to do.
FACTS AND VIOLATIVE CONDUCTBetween February 2012 and September 2012, Elvidge misappropriated funds from seven customer accounts at Cape Securities by submitting 21 separate wire transfer requests on which he had forged the customers' signatures, in violation of FINRA Rules 2150(a) and 2010.. . .During the period from February 2012 to September 2012, Elvidge wrongfully and without authorization converted funds for his own use and benefit from the Cape Securities brokerage accounts of seven customers. Elvidge submitted 21 separate wire transfer requests totaling $690,152.90 to Cape Securities, ostensibly on behalf of the customers; however, the funds were wired into the operating account for Elvidge's office. Elvidge admits that he forged the customers' signatures on the wire transfer requests; none of the seven customers were aware of or authorized the transfers. Once the funds were in Elvidge's operating account, the majority were transferred to a futures trading account owned and controlled by Elvidge, where the funds were lost due to trading activity. One customer, M. T., was repaid by Elvidge. .
In accordance with the terms of the AWC, FINRA imposed upon Respondent Cape Securities a Censure and $125,000 fine. FINRA explained that it had "imposed a lower fine in this case after it considered, among other things, the Firm's revenues and financial resources."During the period from February 2012 through September 2012, Cape failed to establish, maintain and enforce supervisory systems and procedures reasonably designed to detect and prevent fraudulent wire activity conducted by the Firm's registered representatives. Specifically, Cape's supervisory system and written supervisory procedures failed to address reviewing and monitoring transmittal of funds from multiple customer accounts to a common outside bank account, in violation of NASD Rules 3010(a), 3010(b) and 3012(a)(2)(B)1 and FINRA Rule 2010.Additionally, Cape's Anti-Money Laundering ("AML") systems and procedures were not reasonably designed to detect, investigate, or ensure appropriate reporting of potentially suspicious money movements, in violation of FINRA Rules 3310(a) and 2010.Finally, during the period from October 2011 through February 2013, Cape failed to establish, maintain and implement a reasonable supervisory system and written supervisory procedures designed to identify and prevent unsuitable excessive trading and churning in customer accounts, in violation of NASD Rules 3010(a), (b) and (d) and FINRA Rule 2010.