August 2, 2016
Like Santa Claus, it appears that some Wall Street brokerage firms make lists of customers who are naught and nice, and check them twice. If you find your name on one of these lists, there's a good chance that you may get a lump of coal from the brokerage firm in the form of being barred as a customer. Today's BrokeAndBroker.com Blog examines what happened to one customer who was placed upon such a list but perhaps with a little assist from his sister-in-law and perhaps with a little assist from his stockbroker may have circumvented the brokerage firm's blacklist.
Funny thing, isn't it, that we have brokerage firms barring naughty customers but I can't recall a single list compiled by the SEC or any other regulator that barred any too-big-to-fail brokerage firm/bank after all the nasty acts leading up to the Great Recession. Then again, when it comes to Santa, elves, and lists of good little boys and girls, it's all sort of like fair and effective Wall Street regulation -- another fairy tale.
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, James B. Felton submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of James B. Felton, Respondent (AWC 2014043075802, July 18, 2016).
In 1992, Felton entered the securities industry and by 2002 he was associated with
Citigroup Global Markets, Inc. ("CGMI"), which by June 2009 had become Morgan Stanley Smith Barney ("MSSB") per the merger of CGMI's and Morgan Stanley's Global Wealth Management Group. The AWC asserts that Felton had not prior disciplinary history.
Today's BrokeAndBroker.com Blog begins with a bit of cloak-and-dagger secrecy. The AWC asserts that starting in 2008, Felton serviced the accounts of an individual referred to in the AWC only as Customer A. Ah yes . . . the ever-mysterious Customer A! As set forth in the AWC:
Sometime prior to October 2009, MSSB allegedly received information that Customer A was opening accounts on behalf of an undisclosed entity in order to obtain initial public offering shares. In response to this information, MSSB put Customer A on a list of individuals and entities that were potentially connected to illicit activity and were prohibited from doing business with the firm. All new accounts, outgoing wires, and third-party checks were screened against this list, and all registered representatives and managers were informed about the list and the screening requirements. The firm told Felton that Customer A's account was being closed.
Customer A's Sister-In-Law
In any event, notwithstanding MSSB's lists and Customer A's inclusion, the AWC asserts that between November 2010 and October 2013:
Felton opened six accounts in the name of an entity, SCI, which was owned by Customer A's sister-in-law. Felton knew that these accounts were being opened in response to the firm's refusal to do business with Customer A. Felton allowed Customer A to place orders in the SCI accounts, and communicated almost entirely with Customer A about the accounts, after Customer A's sister-in-law gave Felton verbal authorization to allow Customer A to act on her behalf. Contrary to MSSB policies and procedures, Felton failed to obtain or file any written documentation for Customer A's trading authority in the SCI accounts.
Circumventing the Ban
In furtherance of the alleged opening of the SCI accounts, the AWC alleges that Felton's actions allowed Customer A to resume trading despite MSSG having "banned" him as a customer. In an apparent effort to help the banned customer circumvent his firm's restrictions, the AWC asserts that Felton submitted to his employer misleading Enhanced Due Diligence Questionnaires ("EDD"), which were required documentation for entity-owned accounts such as those for customer SCI. As detailed in the AWC:
[I]nstead of accurately identifying Customer A on the EDD questionnaires as the referral source for the SCI accounts, Felton caused the new account documents to identify another registered representative as the source of the referral. In addition, Felton improperly certified on the EDD questionnaire that no one other than the named owner of SCI had authority to trade the accounts. Felton also failed to comply with MSSB's requirement that third-party trading authorizations be in writing.
The AWC alleges that from November 2010 until May 2014, the cited SCI accounts purchased approximately $98 million in securities and generated approximately $440,000 in commissions for Felton.
We Gotta Question For You
For reasons not provided in the AWC, in September 2014, Felton was questioned by MSSB's investigations unit about the SCI accounts. In response to that inquiry, the AWC alleges that Felton misled his firm about Customer A's involvement by, among other things, falsely explaining that the customer's sister-in-law made the trading decisions and that the bulk of his communications about the account occurred with the sister-in-law. The AWC further asserts that Felton "encouraged Customer A's sister-in-law to support this by telling her what he had told the firm."
FINRA Steps In
FINRA deemed Felton's above conduct as "unethical behavior" and the self-regulatory organization further determined that his misrepresentations had caused MSSB's books and record to be inaccurate. As a consequence, FINRA deemed Felton's actions to have constituted violation of FINRA Rules 2010 and 4512(a) and NASD Rule 3110 (c).
In accordance with the terms of the AWC, FINRA fined Felton $20,000 and suspended him to two years from from association with any FINRA member firm in all capacities.
Bill Singer's Comment
Assuming that the allegations and assertions in the AWC are correct, I'm sort of puzzled. Someone, anyone -- you perhaps? -- explain to me just what the hell a registered rep has to do these days in order to get barred by FINRA? I mean, okay, the $20,000 fine seems fair. On the other hand, just what constitutes the nuance between a whopping two-year suspension (as imposed in this settlement) and the ultimate sanction of a Bar?
Seems to me that the AWC makes out a compelling case for a Bar; and if the alleged facts don't rise to the level compelling such a sanction, what else could Felton have done to tip the balance? Perhaps FINRA gilded the lily here and the real facts reflect far more sympathy for Felton but for the fact that this is all the somewhat dirty byproduct of regulatory negotiations leading to a settlement. On the other hand, maybe it's all as it appears. I dunno which is which but I sure as hell don't understand how a registered rep in these circumstances was suspended but not barred.
According to online FINRA BrokerCheck records as of August 2, 2016, MSSB "Discharged" Felton on September 24, 2014 based upon:
ALLEGATIONS INVOLVING ACCEPTING ORDERS IN A CORPORATE CLIENT'S ACCOUNTS FROM A THIRD-PARTY WHO DID NOT HAVE WRITTEN AUTHORIZATION AND SUBSEQUENT COMMUNICATIONS WITH CLIENT REGARDING THAT THIRD-PARTY. THE THIRD-PARTY IS THE BROTHER-IN-LAW OF THE PRINCIPAL OF THE CORPORATE CLIENT
In response to the above discharge explanation, Felton offered this comment:
MY "CORPORATE CLIENT" IS A SMALL HEDGE FUND WHO VERBALLY GRANTED AUTHORIZATION FOR THE SAID "THIRD PARTY" TO TRANSACT BUSINESS ON HER BEHALF. WITH THE STANDING PERMISSION AND APPOINTMENT FROM THE CLIENT, I ACCEPTED UNSOLICITED SYNDICATE ORDERS FROM THE THIRD PARTY. THE CLIENT WAS AWARE OF ALL ACTIVITY IN HER ACCOUNT, SHE CONSENTED TO THE ACTIVITY IN HER ACCOUNT, AND SHE PARTICIPATED IN THE FINANCIAL SUCCESS OF THE ACCOUNT WITH THE THIRD PARTY. AT NO POINT DURING THIS RELATIONSHIP DID THE CLIENT REVOKE HER AUTHORITY.
HIS ACCOUNT BECAME DORMANT IN FEBRUARY 2014 WITH NO FURTHER ACTIVITY. IN JULY 2014, THE "THIRD PARTY" (THE CLIENT'S BROTHER-IN-LAW WHOM SHE APPOINTED TO ACT ON HER BEHALF), BECAME AN ANCILLARY SUBJECT OF AN SEC INVESTIGATION AND SUBSEQUENT SETTLEMENT (FOR A SEC RULES VIOLATION PERTAINING TO WHEN A CLIENT RECEIVES SYNDICATE SHARES FROM A BROKERAGE FIRM AND SELLS SHORT THE SAME SECURITY (AT ANOTHER BROKERAGE FIRM) DURING THE RESTRICTED PERIOD). IN SEPTEMBER 2014, MY FIRM ASKED ME QUESTIONS REGARDING THIS ACCOUNT. WHILE IT WAS CLEAR I HAD NO INVOLVEMENT OR KNOWLEDGE OF THE CLIENT'S VIOLATION, MORGAN STANLEY TERMINATED MY EMPLOYMENT FOR FAILURE TO OBTAIN WRITTEN AUTHORIZATION FROM THE CLIENT (VERBAL AUTHORIZATION WAS GRANTED) AND FOR COMMUNICATING WITH THE CLIENT ONCE THE FIRM BEGAN ASKING ME QUESTIONS REGARDING THIS RELATIONSHIP.