If you don't watch where you're sailing, you could find yourself aground on a sandbar. It's much the same for Wall Street's stockbrokers, as demonstrated in a recent Financial Industry Regulatory Authority settlement where a broker had endeavored out onto the stormy day-trading seas and beached his career on a regulatory bar.
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 L. Fonseca submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of James L. Fonseca, Respondent (AWC 2015048041101, November 28, 2016).
The AWC asserts Fonseca entered the securities industry in 1994, was first registered in 1999, and by 2014 was registered with FINRA member firm Rothschild Lieberman, LLC. The AWC asserts that Fonseca had no prior formal disciplinary history.
Permission to Endeavor
The AWC alleges that:
In August 2015. Fonseca received permission from the Firm to engage in a day trading endeavor with his colleague, NE. As a first step, Fonseca received permission from the Firm for NE to attend a day trading training course for a fee of $25,000.
SIDE BAR: What, may I ask, is a "day trading endeavor?"
I am a three-decade industry lawyer who has served as a lawyer with two self-regulators, in-house with industry firms, and in private practice. Notwithstanding that background, I have no idea what a day trading "endeavor" means. And if I can't fathom the depths of that allegation, I don't think most folks can.
With respect to the writer of this AWC, I sincerely doubt that a FINRA member firm approved Fonseca to engage in a "day trading endeavor," as asserted in the published settlement document. I can only imagine FINRA's reaction to learning that a member firm had given a registered rep "permission to endeavor." All of which conjures up questions such as these about the purported endeavor:
Were Fonseca and NE going to open up a day trading firm?
Were they going to trade for their own accounts at Rothschild Lieberman, LLC or away at another brokerage firm?
Were they going to approach customers and propose to trade for them at their brokerage firm or on an away basis?
FINRA should at least let us know if it's talking about James Cook's HMS Endeavour or the Pirates of the Caribbean HMS Endeavour or NASA Space Shuttle Endeavour or Starfleet Starship Endeavour
Funding the Endeavor
Having been given permission by Rothschild Lieberman, LLC to endeavor, Fonseca then engaged in the following conduct:
Fonseca obtained $25,000 from AR, an individual Fonseca was soliciting to be a Firm customer,
with AR understanding that the funds would be used to pay for Fonseca's day trading endeavor.
Fonseca had AR wire $25,000 on August 28,2015, to a savings account held by Fonseca's wife.
On August 31,2015, that money was transferred to a checking account held by Fonseca's wife
and wired to the day trading course provider.
SIDE BAR: Note that at the time of the $25,000 payment by AR, that individual was NOT a firm customer and, further, that AR understood that the funds were earmarked for "Fonseca's day trading endeavor" (whatever the hell that means). What we do know from the AWC, however, is that "Fonseca received permission from the Firm for NE to attend a day trading training course for a fee of $25,000." To that extent, everything seems shipshape -- at least so far.
AR The Customer
Sometime around September 17, 2015, AR purportedly became a customer of Fonseca's and, at that time, NE was still hammering away at his day trading course, but the AWC warns us that NE was "not successfully" accomplishing that task. Apparently in light of NE's unsuccessful course taking, the AWC asserts that:
[T]he course provider therefore refunded the remaining funds to Fonseca, who planned to return those funds to AR. On October 6, 2015, the course provider wired $19,702.17 into Fonseca's wife's savings account and it was then transferred to Fonseca's wife's checking account. At the time of the transfer, Fonseca's wife's checking account was overdrawn. Thus, only $19,476.72 of the $19,702.17 was wired back to AR. As a result, Fonseca converted $225.45 of AR's funds. By comingling [sic] AR's funds, Fonseca violated FINRA Rule 2010. By converting AR's funds, Fonseca violated FINRA Rules 2150 and 2010.
SIDE BAR: $225.45? That's what this is about? Really??
FINRA's Endeavor To Interview Fonseca
On September 12, 2016, FINRA served on Fonseca a FINRA Rule 8210 demand that he complete a FINRA Background Questionnaire by October 5, 2016; and that he also appear for testimony on October 6, 2016. After the testimony was rescheduled to October 19, 2016, FINRA's Staff appeared at the designated time and place but not Fonseca, who telephoned that day and advised he would not appear and would not cooperate in the regulator's investigation. FINRA deemed Fonseca's failures to appear and to provide requested information as constituting violations of FINRA Rules 8210 and 2010.
Shipwrecked on a Bar
In accordance with the terms of the AWC, FINRA imposed upon Fonseca aBarfrom association with any FINRA member firm in any capacity.
Bill Singer's Comment
According to online FINRA BrokerCheck records as of December 2, 2016,under the heading of "Registration History," Fonseca is shown as having been registered from April 1999 to August 2016 with 20 firms. FINRA asserts that of those 20 firms, two were expelled from FINRA membership in October 2004; two in November 2009; and one in January 2009. and 2009. Seems that Fonseca has sort of been around the block a few times.
According to online FINRA BrokerCheck records as of December 2, 2016, Rothschild Lieberman "Discharged" Fonseca on November 23, 2015, based upon allegations that:
Representative took client funds into personal family account, the [sic] forwarded funds into a day trading account.
According to Fonseca's "Broker Statement" in response to the allegations, he stated:
I vehemently deny this allegation. I diligently complied with the firm's investigation. I was told by Rothschild Lieberman's CCO, that if I provided detailed documentation and statements, he would amend my U-4 and accept my resignation dated 11/16/2015
First off, what's missing in the AWC is some assertion that AR's payment was a loan or an investment -- and what the terms of said loan or investment were. Absent that information, we're sort of left to flounder.
What prompted the AWC to conclude that the $25,000 payment from AR to Fonseca that was deposited into Fonseca's wife's accounts and then used to pay for NE's day trading training was commingled and converted? After AR paid the $25,000 to Fonseca, I don't see any assertion in the AWC that AR was defrauded or that he expected the funds to go other than to the day trading provider used by NE. Consequently, regardless of the path that said $25,000 took from Fonseca to his wife's accounts and then to the day trading provider, what's the problem up to that point? Further, is the AWC asserting that the entire $25,000 was converted and commingled or only the $225.45 shortfall?
Secondly, what if NE took the entire day trading course and simply proved to be incapable of day trading? With that outcome, it's likely that no portion of the $25,000 tuition would have been refunded by the day trading provider. Again, missing from the AWC is some explanation as to whether AR expected to be repaid all/some/none of the $25,000 and the basis for any such repayment. Further, we are not informed as to whether AR complained to anyone about any aspect of the day trading endeavor . . . sorry . . . of the day trading transaction?
The presented facts do not lead to the AWC's assertion that Fonseca "commingled and converted" AR's funds. What this case appears to be about is Fonseca's failure to cooperate in FINRA's investigation. To that extent, and only to that extent, I take no issue. In the end, it really doesn't matter, however, because Fonseca settled the case and was apparently satisfied with FINRA's recitation of the facts and sanctions.