December 9, 2016
A 28-year industry veteran stockbroker borrows money from a client. There are two sets of considerations that should have come into play: One, what is required under FINRA's Borrowing Rule; and, two, what is required according to his firm's in-house policies. In today's BrokeAndBroker.com Blog analysis, we may find ourselves pondering whether that industry veteran was unaware of the regulatory and compliance issues or if he simply chose to ignore them. Whatever the explanation, it doesn't end particularly well.
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, Larry Allen Stapp submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Larry Allen Stapp, Respondent (AWC 2016049399401, December 7, 2016).
In 1988, Stapp entered the securities industry and first became registered in 1989. By March 1996, Stapp was registered with LPL Financial LLC. The AWC asserts that Stapp had no prior disciplinary history in the securities industry.
Loan from 81-Year-Old Customer
In April 2012, Stapp borrowed $200,000 from an 81-year-old customer identified in the AWC only as "BM." Pursuant to the loan, Stapp executed an April 19, 2012, promissory note, which memorialized the loan and provided for a 4.2% annual interest rate with repayment required in full in April 2015. The AWC asserts that Stapp did not repay the loan until September 2015.
SIDE BAR: There is no assertion in the AWC that BM did or did not consent to the belated payment, and there is no assertion in the AWC that BM did or did not take any legal action concerning the belated payment.
The AWC asserts that in November 2012, July 2013, and July 2014, Stapp submitted an LPL "Branch Manager/Financial Advisor Questionnaire" in which he affirmed his ongoing compliance with policies and procedures and specifically answered "NO" to a question about whether he had borrowed or loaned money or securities to another individual or entity.
Not A Customer
For reasons not set forth in the AWC, LPL purportedly discovered the loan from BM to Stapp in January 2016, at which time an individual described in the AWC as a "Firm representative," engaged in discussions with Stapp about BM's loan. The AWC asserts that "Stapp told the Firm representative that BM was not a Firm customer, which was false."
According to online FINRA BrokerCheck records as of December 9, 2016, LPL "Discharged" Stapp on March 4, 2016, based upon allegations that he had:
Accepted loan from client, in violation of Firm policy.
FINRA deemed that by:
- borrowing from BM and not timely repaying, Stapp violated FINRA Rules 3240 and 2010;
- submitting false compliance questionnaires to LPL, Stapp violated FINRA Rule 2010; and
- falsely stating to LPL that the loan was not from an LPL customer, Stapp violated FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Stapp a $10,000 fine and a six-month suspension from association with any FINRA member in any capacity.
Bill Singer's Comment
We got a stockbroker borrowing $200,000 from an 81-year-old client. Frankly, I don't have that much of an issue solely related to the fact that an octogenarian has lent money to a stockbroker -- there are some pretty sharp 80-year-olds out there, and, in this case, there was a written promissory note calling for interest and a payment-due date. Clearly, Stapp repaid BM in full in September 2015, which, admittedly, was five months beyond the promissory note due date of April 2015. BM could have sued for performance or breach but there is no indication in the AWC that BM took any action to compel timely payment or that he had any issue with the terms of the loan. It may well be that Stapp asked BM for an extension of time and the lender/client agreed -- but that is mere speculation.
For those of you who still don't appreciate my penchant for nuance and provocation, please note that NOTHING in this case excuses the very clear-cut and simple fact that Stapp's borrowing from any client was not done in accordance with FINRA's rules or LPL's in-house policies. Also, there is no question that Stapp lied about the existence of the loan over the course of three years on LPL's compliance questionnaires and also lied about the loan being sourced from a firm client. Finally, I don't have any issue whatsoever with rules that prohibit borrowing from customers, particularly those who are vulnerable given factors of age, disability, or inexperience.
If BM were not an LPL client, there would likely be nothing wrong with the loan in terms of FINRA's rules or LPL's in-house policies. But BM was a client and there were rules and policies that were not followed by Stapp. If that's all this case was about, fine -- but's it's not simply about borrowing from a client. Pointedly, this case is about Stapp's deceit and his non-disclosure. Those facets of Stapp's conduct trouble me. And to the extent that I am troubled, I am prompted to ask why FINRA thought it acceptable to resolve this case with what comes off as a very generous $10,000 fine and a six-month suspension when confronted with findings that a stockbroker lied for three years on three separate compliance questionnaires and also lied to his firm's investigative staff. If, on the other hand, there were facts of mitigation, then FINRA had an obligation to Stapp, a 28-year-industry-veteran with an otherwise clean industry record, to disclose those facts in the AWC.