June 20, 2016
BrokeAndBroker.com Blog publisher Bill Singer frequently calls out Wall Street's regulators for their inconsistent approach to sanctioning the industry's big fish versus the small fry. Each time Bill points a wagging finger of disapproval, he is meticulous to note that he is not excusing or defending the cited misconduct but merely highlighting the disparate treatment. In choosing among lesser evils, we always need to keep in mind that either choice selects an evil. In today's blog, we consider FINRA's settlement with a lowly registered rep who wrongly inflated her customer sales in a misguided effort to qualify for sales incentives. By way of spoiler alert, she got fined and suspended. The question arises, however, as to why FINRA's larger member firms only seem to get fined for similar transgressions.
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, Vivian Kwok submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Vivian Kwok, Respondent (AWC 2015045250501, June 2, 2016).
In 1997, Kwok enetered the securities industry and by March 2003, she was registered with FINRA member firm State Farm VP Management Corp.
Goosing the Commissions
The AWC asserts that between August 2014 and January 2015, Kwok personally purchased 24 CDs on a weekly basis in increments of $5,000 each. When submitting the record of those CD purchases on her commission sheet to State Farm, Kwok did not indicate that she had personally purchased the products but provided "fake customer names and dollar amounts of the CD purchases."
FINRA appears to have concluded that Kwok's purported subterfuge was designed to give the false appearance of sales of the CDs to customers. By artificially inflating her level of customer production, Kwok qualified for for increased commissions and other incentives.
The AWC asserts that on "April 6, 2015, Kwok was discharged by State Farm for failing to follow company procedures related to offering of bank products."
Censure and Fine
FINRA deemed Kwok's submission of false commissions sheets to her employer to have resulted in State Farm maintaining inaccurate books and records, and, according, the self-regulatory organization, Kwok violated FINRA Rule 2010. In accordance with the terms of the AWC , FINRA imposed upon Kwok a $10,000 fine and an 18-month suspension from association with any FINRA member firm in all capacities.
Bill Singer's Comment
The FINRA 19
Washington, D.C. - The Financial Industry Regulatory Authority (FINRA) announced today that it has fined 19 broker-dealers a total of $2.8 million for substantially overstating their advertised trade volume to three private service providers.
FINRA compared the firms' advertised trade volume in selected securities with the firms' executed trade volume for the same securities in August 2006 and found substantial overstatements for each firm in one or more of the securities reviewed. FINRA also found that, prior to September 2006, all of the firms lacked an adequate supervisory system and procedures for communicating trade volume to such services.
The firms' overstated trade volumes were made available to market participants by the service providers. The service providers also used the firms' inaccurate advertised trade volumes to compile rankings and reports, including reports that rank the most active broker-dealers by security.
"Consistent with the obligation to report accurate trades to FINRA, when firms provide their trade volume to third party vendors for dissemination to market participants, it is critically important that firms take appropriate steps to ensure that their advertised trade volume is accurate" said Thomas Gira, FINRA Executive Vice President and Head of the Department of Market Regulation. In September 2006, FINRA published Notice to Members 06-50 to remind broker-dealers of that obligation.
In the actions announced today, eight firms were fined $200,000 each (Broadpoint Capital, Inc., CIBC World Markets Corp., Lehman Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Needham & Company, LLC, Robert W. Baird & Co., Inc., Thomas Weisel Partners, LLC and UBS Securities, LLC). Six firms were fined $150,000 each (Bear, Stearns & Co., Inc., BMO Capital Markets Corp., Cowen and Company, LLC, Deutsche Bank Securities, Inc., Leerink Swann & Company, Inc. and RBC Capital Markets Corp.). Four firms were fined $50,000 each (Friedman, Billings, Ramsey & Co., Inc., Jefferies & Company, Inc., JMP Securities, LLC and Pacific Crest Securities, Inc.).
The fine for one firm, Piper Jaffray & Co., was reduced to $100,000 because the firm conducted its own extensive internal investigation and then voluntarily provided the results to FINRA.
In concluding these settlements, the 19 firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings. . . .
How exactly did FINRA sum up the transgressions of those 19 member firms? The self-regulatory organization concluded that in providing knowingly "overstated trade volumes." The 19 respondent firms gamed the manner in which their "inaccurate advertised trade volumes" would be used to "compile rankings and reports, including reports that rank the most active broker-dealers by security."
Lemme ponder this a bit.
The way I see it, Kwok wrongfully gamed the State Farm system by knowingly submitting inaccurate commission sheets for 25 CDs in order to increase her sales production. Similarly -- and yes, I would say similarly --19 large FINRA member firms submitted inaccurate numbers for their trade volume in order to falsely increase their market rankings, which would attract more business and generate higher revenues. The odd thing, though, is that the 19 firms were fined; on the other hand, Jensen was fined and suspended for 18 months.
You got an explanation for that discrepancy?
Why did FINRA opt for a year-and-a-half suspension from Kwok but not any of the 19 FINRA member firms?
Also, how is it that the fines imposed upon the 19 firms are relatively modest multiples (from 5 to 20 times) of the $10,000 fine imposed upon Kwok? Would someone like to calculate how those various member firm fines compared to their respective incomes versus the income of registered representative Kwok?
Deutsche Bank Securities 2012 AWC
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, Deutsche Bank Securities Inc. Submitted a letter of Acceptance, Waiver And Consent ("AWC"), which FINRA accepted. In The Matter Of Deutsche Bank Securities Inc., Respondent (AWC #20080136798-01, December 14, 2012). As set forth under the heading of "Relevant Disciplinary History" in the 2012 Deutsche Bank AWC:
On December 18, 2007, an AWC became final in which the firm was censured and fined $150,000 for violating NASD Rules 2110, 3010 and 3310 as a result of overstating its trade volume in one particular equity security that was advertised to three private service providers - Thomson AutEx BlockDATA ("AutEx"), Bloomberg and Reuters - in August 2006, and for related supervisory deficiencies.
That's nice! In its 2012 Deutsche Bank AWC, FINRA actually recalled its 2007 Deutsche Bank AWC in which the regulator cited the firm's prior, overstated trade reporting. In the 2012 Deutsche Bank AWC, FINRA found that Deutsche Bank Securities again engaged in a "recurrence of overstating of advertised trade volume during the period January 1, 2008 through June 15, 2012 (the "review period")." Given the purported start date of the review period, it appears that no sooner had Deutsche Bank signed off on the 2007 AWC then it sort of picked up where it left off.
As more fully set forth in the 2012 Deutsche Bank AWC, FINRA alleged 98 instances during the review period in which the firm's published aggregate trade volume substantially exceeded the firm's executed trade volume for that security. Upon receipt of FINRA's inquiry for this second round of overstated trade volumes, the 2012 AWC asserts that:
[t]he firm conducted an internal investigation; provided a written summation of the results of that investigation; and imposed disciplinary actions against some of the traders responsible for a portion of the inflated advertisements. In addition, the firm self-reported the remainder of the violations to the staff prior to FINRA becoming aware of the issues involved. . .
Isn't that just the nicest bit of sympathy and empathy afforded this huge FINRA member firm by its loving and caring self-regulator? Deutsche Bank Securities performed an internal investigation of its own wrongdoing and then self reported its misconduct. That self investigatin' and self reportin' earned brownie points with FINRA because the 2012 AWC notes that "the mitigated monetary sanction in this matter reflects the actions undertaken by the firm . . ."
Seems like the 2007 AWC, which imposed a $150,000 fine upon Deutsche Bank just wasn't getting that whole regulatory warning thing done. The big FINRA member firm apparently didn't quite get FINRA's message about not inflating its trade volume in order to manipulate its trade rankings. Possibly overwhelmed with compassion, the dejected FINRA still wasn't quite prepared to go whole hog as noted in its hand-wringing over the self reporting and self investigating. Consequently, the 2012 Deutsche Bank AWC imposed a Censure, $1,250,000 fine, and an undertaking to revise the firm's supervisory procedures.
Y'all see any mention of any kind of suspension imposed against Deutsche Bank as was entered against Kwok? You know, something like a five-day suspension from accepting new orders or opening a new branch or hiring new registered reps or anything?
Jefferies 2012 AWC
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, Jefferies & Company, Inc. Submitted a letter of Acceptance, Waiver And Consent ("AWC"), which FINRA accepted. In The Matter Of Jefferies & Company, Inc., Respondent (AWC #20080136794-01, February 15, 2012).
In the 2012 Jefferies AWC, again FINRA notes that this was a firm that had been censured and fined in the December 2007 AWC for overstating its trade volume and that the self-regulatory organization had discovered a recurrence of the overstating for the period January 1, 2008 through August 31, 2008. Specifically, the 2012 Jefferies AWC noted that:
[i]n 248 separate instances involving 135 individual securities, the firm's aggregate trade volume advertised in Autex, Bloomberg and/or Reuters substantially exceeded the firm's executed trade volume. . .
And just as consistently, FINRA makes allowances for the recurrence of misconduct by noting that Jefferies had conducted an internal investigation; provided a written summation of the results of that investigation; allowed the staff access to related documentation; and imposed significant disciplinary actions against three traders responsible for the inflated advertisements and their designated supervisor. In accordance with the terms of the 2012 Jefferies AWC, FINRA imposed upon Jefferies a Censure and $550,000 fine. Once again, you see anything at all about a suspension of the type imposed upon Kwok?
Capture And Release
In 2007, FINRA snared 19 of its largest member firms in a regulatory sweep involving inflated trade volume designed to goose each member's trade rankings. To my eye, that's about the same thing as a registered rep, like Kwok, goosing her customer sales in an effort to qualify for higher payouts. Note that I am not defending or justifying either practice. Both are wrong. It's just that similar misconduct doesn't get quite the same treatment from FINRA. Even after some of the 19 firms caught in the 2007 trade reporting sweep got caught pulling the same crapola only a few years later, FINRA gently extracted its hooks and returned the fishes to swim in the Wall Street ocean. That capture-and-release is justified by FINRA under the consideration of "extraordinary cooperation." The big fish pay an affordable fine for a repeat offense and swim away. How come Kwok wound up in the frying pan garnished with a slice of lemon and some parsley?