SEC Cites Stockbroker Over Confidentiality of Inherited Accounts

March 2, 2016

What we know about today's Blog regulatory case comes from a published, public document that appears on the website of the Securities and Exchange Commission ("SEC"), one of Wall Street's regulators. The odd thing about the securities industry's cops (federal, state, and self-regulatory) is that they have this penchant for not always naming names. Read enough published regulatory records and you are bound to come across references to Informant X or Jane Doe or an unnamed entity referred to as the Broker Dealer or the Hedge Fund. Some say that this hide-and-seek approach to disclosure encourages tipsters and informants to come forward knowing that their identities will be hidden. In those cases, that's a sensible and appropriate policy. In other cases, however, queries as to why names aren't named elicits the standard rebuff of: It protects the innocent.

Those charged with writing the lexicon of regulation have a very generous nature when it comes to the term "innocent." One would think -- would hope -- that when there is tension between serving the interests of public investors versus those of, say, the securities industry or participants in the overall financial marketplace, that deference would be given to the needs of public investors. The troubling thing about that hope is we keep seeing evidence that the scales are not always balanced. Someone's fat thumb seems to find its way into the weighing. Consider today's case.

Case In Point

Rather than expose myself to criticism that I'm spinning the facts and twisting the details in order to make my points stronger than they should be, let me offer you a verbatim quote from the entire "Summary" section of In the Matter of Maximillian Santos, Respondent (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order; '34 Act Rel. No. 77253; Invest. Adv. Act Rel. No. 4346; Invest. Co. Act Rel. No. 32012; Admin. Proc. File No. 3-17139 / February 29, 2016). Note that in anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Maximillian Santos submitted an Offer of Settlement, which the federal regulator accepted.


From at least January 2005 through January 2012, Santos, who was employed as a
registered representative at a dually registered broker-dealer and investment adviser (the "Broker-Dealer") during the relevant time period, shared confidential information pertaining to at least 14 of his customers' accounts with an outside third party without his customers' knowledge or consent. The outside third party had previously been a registered representative at the Broker-Dealer; when the outside third party left the firm in 2005 after an adverse National Association of Securities Dealers disciplinary proceeding, Santos inherited many of his accounts and maintained a personal and professional relationship with him. Santos shared this information-which consisted of account holdings in particular stocks, cash balances, and certain trade activity, among other items- primarily through his personal email account. In addition, throughout 2012 and 2013, Santos used his personal email address to conduct official business and to service a customer's account, including sending wire instructions, stock research reports and stock positions to the customer.

The Broker-Dealer

What's the name of the "broker-dealer and investment adviser" at which Respondent Santos was employed? The OIP informs us that the only reference to that entity will be "(the "Broker-Dealer")". Is there a footnote naming that Broker-Dealer? No. Is there any reference to the name of that firm anywhere in the OIP? No.

The Outside Third Party

As is hinted at in the preamble "Summary," Respondent Santos was accused of misconduct involving an "outside third party." The OIP refers to that individual as the "outside third party" or the "unaffiliated third party." Is there a footnote naming this unnamed party? No. Is there any reference to the name of the Outside Third Party anywhere in the OIP? No.

The NASD "X" Proceeding

According to the OIP "Summary" the Outside Third Party left the Broker-Dealer following what is characterized as "an adverse National Association of Securities Dealers disciplinary proceeding." A simple enough assertion, right? Problem is, no sooner do we finish reading the "Summary" preamble paragraph then we come across Paragraph #2:

2. The outside third party with whom Santos shared his customers' confidential information had previously worked as a registered representative at the Broker-Dealer, and had left the firm in 2005 after an NASD arbitrator found that he had engaged in unauthorized trading in a customer's account. At that time, Santos took over most of the outside third party's accounts. After his departure from the Broker-Dealer, the outside third party pursued interests in private equity and, during the relevant period, requested periodically from Santos information about his former customers' accounts.

Did you note the inconsistency? If not let me spell it out for you.

The OIP "Summary" said that the Outside Third Party left the employ of the the Broker-Dealer after an adverse NASD disciplinary proceeding; however, OIP Paragraph 2 asserts, in contradistinction, that the Outside Third Party's departure was prompted by the finding of unauthorized trading by an NASD arbitrator in an NASD arbitration proceeding

You can't have it both ways. Either the Outside Third Party left as a result of an NASD disciplinary proceeding or as the result of some unspecified consequence from an NASD arbitration proceeding.  

The NASD, which existed from 1939 to 2007, had two separate arms: "Disciplinary Proceedings" were handled on the regulatory side of things but "Arbitration Proceedings" occurred at its civil, alternative-dispute-resolution facility. It is puzzling to read that Wall Street's federal regulator has conflated regulation with arbitration - and if that was not the intention, that is now the result.

The Inherited Accounts

On the heels of the Outside Third Party's departure from the Broker-Dealer after that NASD adverse disciplinary and/or arbitration ruling, Respondent Santos purportedly inherited many of the Outside Third Party's accounts and, thereafter, maintained a personal and professional relationship with him.  

Information Sharing

The OIP asserts that starting around January 2005 and lasting through January 2012, Respondent Santos shared with the Outside Third Party confidential information pertaining to at least 14 of his customers' accounts, which consisted of, in part, certain account holdings, cash balances, and some trade activity. This information sharing purportedly occurred largely through Respondent Santos's personal email account. The OIP alleges that the transmittal of the cited confidential information was done without any customers' knowledge or consent and without the required notice and opt-out opportunity set forth in Regulation S-P of the Securities Exchange Act of 1934.

As would prove an important distinction, the SEC concluded that Respondent Santos's use of his personal email to communicate with the Outside Third Party was not merely inadvertent or convenient but a deliberate effort to

avoid using the outside third party's name in emails sent using the Broker-Dealer's email system. Knowing that the Broker-Dealer blocked access via firm computers to personal email accounts, Santos accessed his personal email account from a personal mobile phone while in the office.

Not So Personal

In addition, to using his personal email to share confidential information with the Outside Third Party, the OIP alleges that on several occasions in 2012 and 2013, Respondent Santos also used his personal email address to conduct official business and to service a customer's account, including sending wire instructions, stock research reports and stock positions to the customer. In terms of one customer, it is further alleged that Respondent Santos used his personal email to respond to trading queries and to confirm his trading authorization.

Kicked to the Curb

The OIP asserts that the Broker-Dealer terminated Respondent Santos around June 25, 2014, for sharing confidential customer information with the Outside Third Party and for using his personal email to engage in business-related communications.

What He Did

The OIP asserts that as a result of Respondent Santos's:
  • disclosure of nonpublic personal customer information, the Broker-Dealer violated, and Respondent Santos willfully aided and abetted and caused violations of Regulation S-P Rules 7(a)(1) and 10(a)(1); and,
  • use of his personal email account to conduct business-related communications caused the Broker-Dealer to violate, and Santos willfully aided and abetted and caused violations of Section 17(a)(1) and Rule 17a-4(b)(4).
What It Cost Him

In accordance with the terms of the settlement, the SEC ordered that Santos:
  • cease and desist from committing or causing any violations and any future violations of Rules 7(a)(1) and 10(a)(1) of Regulation S-P and Exchange Act Section17(a)(1) and Rule 17a-4(b)(4) thereunder;
  • is suspended from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization for a period of 6 months;
  • is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter for a period of 6 months;
  • is suspended from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock, for a period of 6 months; and
  • shall, within 10 days of the entry of the order, pay a $75,000 civil money penalty.
Bill Singer's Comment

Teachable Moment

From a regulatory/compliance nuts-and-bolts perspective this is a teachable moment. Many registered reps will find themselves in Respondent Santos's shoes at some point in their careers. Another rep will quit, be fired, retire, or die and his or her book of business will be distributed -- or at least the employer will give it a shot. Out of a sense of collegiality, the brokers who inherit accounts may reach out to the former servicing broker (assuming that the brokerage firm has not pursued a scorch-the-earth policy of defaming the former broker to his clients in an effort to retain the production). What Santos warns you about is that you can only pursue that "collegiality" thing so far. The consequences may not take the form of a mere slap on the wrist from someone in Compliance but, as demonstrated today, you could wind up with the SEC breathing down your neck with devastating career consequences. Before you start calling the former broker and discussing the inherited accounts, consider your clients's confidentiality rights and expectations. As to the issue of using your personal email to engage in business-related communications, c'mon now, you know better than that!

Naming the Unnamed

According to FINRA's online BrokerCheck records as of March 2, 2016, Respondent Santos was first registered in 1998 and from March 2001 to July 2014 was registered with FINRA member firm Oppenheimer & Co. Inc. Respondent Santos's BrokerCheck record discloses under the heading "Employment Separation After Allegations" that Oppenheimer had "Discharged" him on June 25, 2014, based upon allegations that:


Under the "Firm Statement" portion of the above record, Oppenheimer asserts that:


Wow, that must have taken me a whole 60 seconds to log on to BrokerCheck, enter Santos's name, and pull the record of his industry employment. All of which makes you wonder just what the SEC accomplished by requiring me and other public investors to undertake the same exercise.

Finally, let me draw a comparison. In recent days, Major League Baseball announced the suspension of pitcher Aroldis Chapman: "Yankees pitcher Chapman disciplined" (Press Release, Major League Baseball, March 1, 2016). Note how the Press Release presents the matter:

Yankees pitcher Chapman disciplined

Press Release | March 1st, 2016

Commissioner Robert D. Manfred, Jr. announced today that New York Yankees pitcher Aroldis Chapman has accepted a 30-game suspension without pay for violating Major League Baseball's Joint Domestic Violence, Sexual Assault and Child Abuse Policy. The suspension of Chapman will be effective on Opening Day of the Yankees' 2016 regular season. Chapman has agreed not to appeal this discipline. Chapman will be permitted to continue to participate in all Spring Training and pre-season games and activities prior to the commencement of his suspension.

Commissioner Manfred issued the following statement regarding the discipline:
"I asked my staff to conduct a comprehensive investigation of the incident involving Aroldis Chapman on October 30, 2015. Much of the information regarding the incident has been made public through documents released by law enforcement. Mr. Chapman submitted to an in-person interview with counsel present. After reviewing the staff report, I found Mr. Chapman's acknowledged conduct on that day to be inappropriate under the negotiated Policy, particularly his use of a firearm and the impact of that behavior on his partner. I am gratified that Mr. Chapman has taken responsibility for his conduct, that he has agreed not to appeal the 30-game suspension, and that he has agreed to comply with the confidential directives of the Joint Policy Board established under the parties' Policy to ensure that a similar incident does not occur in the future."

The very first word of the MLB Press Release is "Yankees." Commissioner Manfred did not use "A Major League" or "American League" but, in fact, named Chapman's current team. The first sentence of the Press Release announces that Chapman is a player for the "New York Yankees." That team is not referenced as merely a "Baseball Team."

Odd how differently MLB reports about its suspension of one of its players and how the SEC reports about the suspension of a Wall Street stockbroker. To make matters even more complicated, Chapman was not even signed by the Yankees until December 28, 2015 and the underlying incident occurred in October, at a time when Chapman was still a Cincinnati Reds player.

ALSO READ: "Lord Voldemort, Merrill Lynch, Bank Of America, And FINRA "( Blog, December 30, 2015)