Today's BrokeAndBroker.com Blog features a peculiar case, or, perhaps, it would be better to characterize the circumstances as involving one registered representative and two cases. In the left ring of the Wall Street Circus, we have a FINRA arbitration. In the right ring, we have a FINRA regulatory settlement. In the center ring, we, have a FINRA BrokerCheck record. The problem is that the wild beasts and acrobats are not acting with the greatest of ease and we, the audience, are overwhelmed and confused.Case In Point (Ring #1)In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2014, former registered representative Claimant Freeze alleged that his former employer Respondent LPL Financial had terminated him after he had purportedly borrowed $20,000 from a client in violation of company policy. Claimant Freeze characterized the loan as being for "marketing purposes only" and asserted that he had fully repaid the loan with interest.In the Matter of the FINRA Arbitration Between Jonathan D. Freeze,Claimant, vs. LPL Financial LLC, Respondent(FINRA Arbitration 14-02396, February 16, 2016).
SIDE BAR: As has often been written about in the BrokeAndBroker.com Blog, you can't borrow money from a customer unless you dot the regulatory "i's" and cross the compliance "t's." From the regulatory perspective, it's pretty much set forth in FINRA Rule 3240: Borrowing From or Lending to Customers (read veteran regulatory lawyer Bill Singer's detailed analysis of the Borrowing Rule).Briefly, you can't engage in any borrowing unless the member firm has written procedures addressing such conduct. Pointedly in Freeze's favor, there is an provision under Rule 3240(a)(2)(D) that may permit borrowing:
based on a personal relationship with the customer, such that the loan would not have been solicited, offered, or given had the customer and the registered person not maintained a relationship outside of the broker-customer relationship.
Notwithstanding the "personal relationship" exception of (D), the registered rep must notify the employing member firm prior to engaging in the borrowing andreceive prior written approval from the firm. Whether the borrowed funds are for "marketing purposes only" is not that relevant and, further, the only exception to the prior-notice-and-approval scheme is in the limited situations of loans from immediate family members or financial institutions -- neither of which was the lending client in Freeze's matter.In his FINRA Arbitration Statement of Claim, Freeze alleges that following his termination, Respondent LPL
mailed letters to all of Claimant's accounts and past accounts, which contained scandalous and defamatory information. Claimant alleged that as a result of the tortious and intentional acts of Respondent, many of Claimant's customers have terminated their accounts with him.In furtherance of his claims, Claimant asserted causes of action for trade defamation, defamation, interference with prospective business advantage or prospective contractual relations, and tortious interference with contract. Following the hearing, Claimant sought $2,347,970 in compensatory damages (revised upwards from his initial claim for at least $1.5 million); punitive damages, interest, attorneys's fees, and costs. In the Matter of the FINRA Arbitration Between Jonathan D. Freeze, Claimant, vs. LPL Financial LLC, Respondent (FINRA Arbitration 14-02396, February 16, 2016). Respondent LPL generally denied the allegations and asserted various affirmative defenses. The FINRA Panel of Arbitrators found Respondent LPL Financial liable and ordered it to pay to Claimant Freeze:$630,000.00 in compensatory damages plus 6% per annum post-award interest starting 30 days from service of the Award until the award is paid in full.Bill Singer's First CommentA surprising decision by the Panel based upon the fact pattern, which would normally lead you to expect a victory for the member firm. Was this simply an in-house compliance issue for LPL that didn't involve a violation of FINRA Rule 3240? Was there any reason why the employer didn't just call Freeze on the carpet, give him a stiff warning, and send him back to work?
ACCEPTED LOAN FROM CUSTOMER IN VIOLATION OF FIRM POLICYThe online BrokerCheck records include this statement from Freeze in response to LPL's disclosure;
I HAVE A HIGH SCHOOL FRIEND THAT I HAVE KNOWN FOR 35 YEARS. WE HAVE BEEN FRIENDS WHEN I WAS AT PNC BANK AND AS A BROKER. WE HAVE ASSISTED EACH OTHER DURING OUR FRIENDSHIP. SOME OF THAT ASSISTANCE HAS BEEN IN THE FORM OF LOANS BACK AND FORTH WHEN NEEDED FRIEND TO FRIEND.MY FRIEND HAD MADE ME A LOAN THAT WAS FOR MARKETING PURPOSE FOR $20,000. I KEPT THE PROMISSORY NOTE IN THE FILE IN MY OFFICE. I WAS NOT HIDING ANYTHING SINCE IT WAS FROM A FRIEND.WHEN I WAS RECENTLY AUDITED BY LPL, I STATED I DID HAVE A LOAN WITH A FRIEND/CLIENT. I SHOWED THEM THE PROMISSORY NOTE. IT HAS BEEN SUBSEQUENTLY PAID OFF IN FULL.Bill Singer's Second CommentOkay, we at least have confirmation that LPL terminated Freeze for violating the firm's borrowing policy. Further, giving credence to Freeze's explanation, the circumstances of the loan are not horrific and many will deem the borrowing as more on the benign end of the scale. Guilty but with an explanation. The customer was a friend of some 35 years and Freeze and this friend had a history of lending money to each other; further, the $20,000 loan at issue was memorialized in a promissory note and eventually repaid in full.Many may view LPL's conduct here as simply throwing this rep under the bus. Solely based upon LPL's BrokerCheck explanation and Freeze's response, it's not clear that the underlying conduct warranted a discharge but there may have been other issues going on between the firm and its employee that we are unaware of and could alter our impression.I dunno about you but I'm still unhappy. It's as if we dumped the 100 pieces of the jigsaw puzzle on the table, spent countless days putting the thing together, and, damn, there's one piece missing but no more parts on the table. Did something fall off the table and bounce under some furniture? Did the manufacture ship the box with only 99 pieces? Sure, I see the final picture and all but that one missing piece is driving me nuts. Case In Point (Ring #3)Alas, I found that, in fact, FINRA did conduct a regulatory investigation of Freeze's borrowing. In October 2015, some three months before the arbitrators published their decision, FINRA published its regulatory settlement with Freeze. Why didn't the FINRA Arbitration Decision reference the prior FINRA regulatory matter? I have no idea. Let's see if this missing piece to the puzzle clears things up.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, Jonathan D. Freeze submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jonathan D. Freeze, Respondent (AWC 2013036251001, October 15, 2015).The AWC asserts that in 1995, Freeze was first registered and from March 2009 to July 2013, he was registered with FINRA member firm LPL Financial LLC, until his July 3, 2013 termination. The AWC alleges that Freeze violated FINRA Rules 3240 and 2010 by borrowing from a firm "customer with whom he had a personal relationship" $20,000 in April 2013. The AWC asserts that the loan occurred without prior notice to LPL Financial and in the absence of the firm's approval. The AWC acknowledges that Freeze fully repaid the customer with interest in August 2013.In accordance with the terms of the AWC, FINRA imposed upon Freeze a $5,000 fine and a 10-business-day suspension from association with any FINRA member in any capacity.Bill Singer's Final CommentPutting all the pieces to this puzzle together gives us a registered rep who seems to have engaged in impermissible borrowing from a customer (who was a long-time friend) under both his firm's and FINRA's rules. In mitigation of the rep's misconduct, the customer was fully repaid with interest. Ultimately, when we consider the AWC, the BrokerCheck records, and the Arbitration, it seems that the FINRA arbitrators were outraged by the alleged defamatory and tortious comments made by LPL to "all" of Freeze's customers. Notwithstanding the inappropriate nature of the borrowing at issue, that did not open the door for LPL to drag Freeze's name through the dirt. READ a detailed analysis of FINRA Rule 3240: Borrowing From or Lending to Customers by veteran regulatory lawyer Bill SingerREAD the BrokeAndBroker.com Blog "Borrowing Archives"