A Stockbroker, His Former Customer, A Restaurant, And The New Face of Wall Street Regulation

March 30, 2016

In today's BrokeAndBroker.com Blog, we are confronted with a matter of semantics: What does "former" mean? Words are important and, sometimes, the definition of a word is more important than the word itself. Reputations, lives, and careers often hang in the balance when it comes to such interpretations. As former President Clinton so famously explained "It depends upon what the definition of 'is' is.

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, Edwin Pereira de Andrade submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Edwin Pereira de Andrade, Respondent (AWC 2014040677401, March 14, 2016).

In 2003, Edwin Pereira de Andrade first became registered with FINRA member firm MetLife Securities Inc., where he remained until March 27, 2014.

The Restaurant Venture

The AWC asserts that in 2013:

[A]ndrade entered into an oral agreement with former customer DH whereby DH would invest money in a new business venture to start up and then operate a restaurant: Vasco International Hotels and Restaurants LLC d/b/a Fusion of Flavors Indian Restaurant ("Restaurant"). Andrade and DH agreed that, in exchange for her investment, DH would receive an ownership share in the Restaurant in six months, once the business was formed and operating.

Pursuant to their agreement, DH provided Andrade a total of $150,250 between July 2013 and September 2013, which represented approximately 40 percent of the capital needed to start the Restaurant. The Restaurant began operating in August 2013. In January 2014, after six months of operations, Andrade failed to comply with his agreement to provide DH with the documented ownership share of the Restaurant, despite being capable of doing so and in the absence of any justification or excuse for failing to so comply. Andrade also refused to return DH's investment despite a request by DH that he do so.

"Former" As Of When?

Right off the bat, I got problems with this AWC:

  • At the time of DH's discussions with de Andrade about investing in his new restaurant, was DH a "current" or "former" MetLife customer of de Andrade?
  • At the time of DH's payments into the business, was DH a "current" or "former" MetLife customer of de Andrade?

SIDE BAR: Although the AWC characterizes DH as a "former customer," the regulatory settlement document fails to provide the date as of which her customer status changed from "current" to "former." It is one thing to allege misconduct between a current customer and his or her registered representative, but quite another thing to allege misconduct involving a registered representative and a non-customer. Consequently, this AWC fails to cogently present the critical relationship at issue.

LLCs Formed

Separately, the AWC also asserts that between September 2012 and March 2014, de Andrade formed two Alabama limited liability companies: one that constituted the above-referenced restaurant and another for a grocery store. The AWC alleges that de Andrade was the sole member of both LLCs and that he had opened the entities' bank accounts. As to the creation of the two LLCs, the AWC asserts that:

FINRA Rule 3270 requires that registered individuals provide prior written notice to their firm before engaging in any outside business activity. By failing to disclose his involvement with both businesses to MetLife, Andrade violated FINRA Rules 3270 and 2010.

SIDE BAR: As set forth in the applicable FINRA rule:

FINRA Conduct Rule 3270. Outside Business Activities of Registered Persons

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.

*** Supplementary Material ***

.01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers or (2) be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member's review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).

Honor and Equity?

So . . . waddawegot here?

  • A registered person sets up two - count 'em - two LLCs for a restaurant and a grocery store.
  • The same registered person obtained funds from a "former" customer for the purpose of purportedly opening and operating a restaurant.
  • The restaurant opened in August 2013.
  • We got a dispute between an investor in the restaurant and its founder/operator over who owns what.

How do those events rise to the level of a FINRA regulatory violation?

According to the AWC:

FINRA Rule 2010 requires associated persons to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business. A bad faith breach of a contractual agreement may constitute a violation of FINRA Rule 2010. Here, by intentionally failing, without reasonable justification or excuse, to provide DH with her ownership interest in the Restaurant, Andrade violated FINRA Rule 2010.

Discharge

Online FINRA BrokerCheck records as of March 29, 2016, disclose that MetLife "Discharged" de Andrade on March 17, 2014, based upon allegations:

REGISTERED REPRESENTATIVE DID NOT FOLLOW FIRM POLICY WITH RESPECT TO OUTSIDE BUSINESS ACTIVITIES

MetLife's BrokerCheck disclosure does not assert that de Andrade engaged in any impropriety with any customer (current or otherwise). For example, there is no assertion that the registered representative had improperly borrowed money from a "current" customer in violation of the member firm's or FINRA's rules. The sole issue upon which MetLife reported that it had discharged de Andrade was about undisclosed outside business activities.

FINRA Sanctions

In accordance with the terms of the AWC, FINRA imposed upon de Andrade a $10,000 fine and an 8-month suspension in all capacities from association with any FINRA member. Further, de Andrade agreed to comply with the following undertaking:

a. Provision of Ownership Interest To DH.

i. Respondent agrees to provide to DH a legally binding document evidencing DH's 40% ownership interest in the Restaurant. In the alternative to the foregoing, Respondent may elect instead to refund to DH her original investment of $150,250, plus interest at the rate set forth in Section 6621(a)(2) of the Internal Revenue Code, 26 U.S.C.6621(a)(2), from January 2014 until the date payment is made.

ii. Promptly after complying with this undertaking (but in no event later than 45 days from the date of his reassociation with a member firm following the eight-month suspension noted above, or prior to any application or request for relief from any statutory disqualification resulting from this or any other event or proceeding, whichever is earlier), Respondent shall submit satisfactory proof to FINRA that he has complied with this undertaking. Such proof shall be submitted by letter addressed to Carolyn Craig, Esq., Director, FINRA Department of Enforcement, 15200 Omega Drive, 34e Floor, Rockville, MD  20850.

iii. Respondent's obligation to provide DH with the relief set forth in this undertaking is due immediately upon reassociation with a member firm following the eight-month suspension noted above, or prior to any application or request for relief from any statutory disqualification resulting from this or any other event or proceeding, whichever is earlier.

iv. If for any reason Respondent cannot locate DH after reasonable and documented efforts within such period, or such additional period agreed to by the staff, Respondent shall forward the documented ownership interest in the Restaurant (or at his election, the refund amount of $150,250 plus interest) to the appropriate escheat, unclaimed property, or abandoned property fund for the state in which DH is last known to have resided.

v. Nothing contained herein precludes DH from pursuing her own action to obtain restitution or other remedies.

vi. Upon written request showing good cause, FINRA staff may extend any of the procedural dates set forth above.

Bill Singer's Comment

What a lovely bit of conclusory, pseudo-legal, pseudo-regulatory garbage.

The AWC asserts that de Andrade's cited conduct in the restaurant investment was a "bad faith breach of a contractual agreement"? Not sayin' it wasn't . . . I am absolutely not saying that, and for all I know, shame on de Andrade. What I am saying is that the AWC only states that de Andrade had failed to provide to DH some documented proof of her ownership despite his purportedly having the ability to transfer the ownership proof but refusing to do so.  

At best, that all sounds like a dispute to be resolved by the courts: As in someone files a lawsuit against someone else and there is a pre-trial settlement or there is a verdict after trial. Odd, you know, that none of the pesky court stuff is alluded to in the AWC. Did DH ever file a lawsuit against de Andrade, and if not, why not?

In the AWC's undertaking provisions, we have this: "v. Nothing contained herein precludes DH from pursuing her own action to obtain restitution or other remedies." All of which prompts the question of why DH didn't pursue her legal remedies through the courts and why any of this is the proper subject for a self-regulatory organization regulatory proceeding. If DH wasn't a "current" customer of de Andrade during the times relevant to the solicitation of the investment and the actual payments, then what exactly gives FINRA jurisdiction over these events? The Outside Business Activity violation I get but that has nothing to do with DH -- it's is a disclosure obligation of a registered representative.

Is FINRA now allocating to itself some new power to review all the personal and business dealings of all the associated persons at all its member firms and, inherent in that new-found power, to arbitrarily adjudicate what is and what isn't good faith?

Is FINRA prepared to rule that a stockbroker acted in bad faith in disputing a credit card invoice and that such constituted a violation of Rule 2010?

Is FINRA prepared to rule that a compliance officer violated Rule 2010 when she  failed to make an HOA payment on her vacation condo (which she also rents out for income) and that she did so without what the self-regulator believed was a good reason?

Then there's that whole other issue as to whether the mere creation of an LLC necessarily constitutes the "engaging" in any business activity. What we are told in the AWC is that de Andrade began to "operate" the restaurant in August 2013, but that was a date about 11 months after he initially formed the restaurant LLC in September 2012. Although the restaurant was purportedly operating about 7 months before de Andrade formed the grocery store LLC in March 2014, there is no recitation in the AWC as to the date, if ever, when that grocery business became operational. That raises the question as to whether the activity prior to August 2013 was "preparation to engage in a business" or constituted actual "business activity."  

After August 2013, to the extent that the restaurant was open and serving customers, the existence of business activity seems a clearer proposition. It may also be that de Andrade's role as a member of two LLCs constituted disclosable outside business activities in FINRA's opinion. Perhaps the fact that de Andrade opened bank accounts provides a stronger footing of some "activity" towards engaging in business but, absent more facts in the AWC, it's still a somewhat iffy proposition. Notwithstanding that de Andrade appears to have engaged in outside business activity in August 2013 when the restaurant opened, the regulatory issue pertaining to the mere creation of an LLC is murky and should have been presented with more detail and explanation. See, for example,"Interpretive Letter to Sheryl Anne Zuckerman, Esq., Singer Frumento LLP" (FINRA Guidance, December 6, 2001).

I'm am compelled to give FINRA some benefit of the doubt here because Respondent de Andrade signed off on this abomination of an AWC lacking adequate content and context. De Andrade's signature on this AWC gives credibility to the regulator's statement of facts and findings. Credibility, however, only goes so far; and I would urge FINRA to insist upon more comprehensive explanations in its AWCs than we are offered in this one.