NSF Check Kiter Snagged In FINRA Regulatory Tree

January 18, 2017

It's not exactly a scene from Mary Poppins when the Financial Industry Regulatory Authority sings about kites. The grumpy self-regulatory organization warns registered reps that they may get snagged in the old regulatory tree if they try to fly too many NSF checks.

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, Jon DeBow submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jon DeBow, Respondent (AWC 2015045674901, December 27, 2016).

In pertinent part, the AWC asserts that:

DeBow entered the securities industry in December 2004 when he became registered with FINRA as a General Securities Representative ("GSR") through an association with J.P. Morgan Institutional Investments, Inc. . ." 

SIDE BAR: Online FINRA BrokerCheck records as of January 18, 2017, dispute the AWC's assertion that DeBow was first registered in 2004.  BrokerCheck states that DeBow was first registered in April 2005 with J.P. Morgan Institutional Investments Inc. and that he had passed his Series 7 on April 15, 2005 and his Series 63 on August 18, 2005. BrokerCheck discloses that DeBow was first "employed" (in contradistinction to "registered") with J.P. Morgan Investment Management in October 2002.

The AWC asserts that DeBow does not have any prior disciplinary history with FINRA, any state securities agency, the Securities and Exchange Commission, or any other self-regulatory organization.

Check Kiting Scheme

The AWC asserts that from December 11, 2012, to November 4, 2014, DeBow wrote 38 checks totaling $46,280 from two of his personal JP Morgan bank accounts. At the times when DeBow wrote the 38 checks, the AWC alleges that he knew that he had insufficient funds in his accounts. 

The AWC characterizes DeBow's conduct as a "check kiting scheme," and further asserts that after writing the cited checks, DeBow deposited the checks into a second personal bank account from which he immediately withdrew a portion or the entire amount of the deposit.

Shortly After

Of the 38 purported check-kiting episodes, the AWC asserts that in 34 instances, the personal account against which DeBow wrote checks had a negative balance  and in 4 instances, the account had a positive balance but one that was less than the amount for which the checks were written.  The AWC concedes that

Shortly after the checks were returned, DeBow deposited sufficient funds into his bank accounts to cover the deficit created by his check kiting scheme.


Discharge

Online FINRA BrokerCheck records as of January 18, 2017, disclose under the heading "Employment Separation After Allegations," that JP Morgan Investment Management "discharged" DeBow on April 16, 2015 based upon allegations that:

INVESTIGATED FOR INAPPROPRIATE HANDLING OF PERSONAL FINANCES IN VIOLATION OF PARENT COMPANY'S CODE OF CONDUCT

Sanctions

FINRA deemed DeBow's alleged check-kiting scheme to constitute a violation of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon DeBow a $10,000 fine and an 18-month suspension from association with any FINRA regulated firm in all capacities.

Bill Singer's Comment

Somewhat lost in the mess of 38 returned checks is the fact the DeBow covered the $46,200 short-fall "shortly" after the checks were returned. As such, no bank ate a penny of loss. Moreover, we should note that the misconduct extended over nearly two years, which means that we're considering, on average, about $2,000 a month in dubious checking deposits. Not one iota of the aforementioned factors should be considered mitigating. The inescapable fact is that DeBow wrote 38 bounced checks over two years notwithstanding that he promptly covered the debits.

There is no allegation in the AWC that any criminal charges were filed, that any civil litigation ensued, or that DeBow pled guilty to any criminal charges or settled any civil litigation. Further, there is no allegation of any securities, customer, or customer account being involved during the 23 months of purported check kiting. Do any of those factors excuse DeBow's NSF check writing? In my opinion, no. There is, however, a larger issue and one that does merit some serious consideration: Do 38 NSF checks that were "shortly" covered over some 23 months rise to the level of FINRA Rule 2010's concerns with commercial dishonor and just and equitable principles of trade? 

If you believe that NSF checks are proper concerns for FINRA (and to be clear, under some, if not many circumstances, I do so believe), then also consider what you would believe if DeBow was driving to meet with a JP Morgan customer and charged with wrongfully parking in a handicap-only parking spot or driving under the influence.  

As recent headlines disclose, Too-Big-To-Fail financial institutions have been charged with and pleaded guilty to all sorts of financial shenanigans involving fraudulent mortgages and bogus account openings. Do you recall anyone from any C-Suite being suspended by FINRA for such conduct? Do you recall any bank or brokerage firm being suspended from accepting new customers or required to cease trading on a specific desk as a result of any marketplace misconduct? We got a lot of small-fry getting cooked but the big-fish are left to frolic in the ocean.

Finally, let me pose these questions:

If DeBow's alleged check-kiting scheme did not involve a FINRA member firm's affiliated bank's checking account, do you think the self-regulatory organization would have proposed charges?  

If FINRA initiates regulatory action only when an associated person engages in NSF activity in a member firm's affiliated bank, does that transform FINRA from a regulator into a questionable collection agency (or the threat of one) for its member firms?

Does FINRA routinely and regularly review the checking activity of its own employees and, if so, does the self-regulatory organization fine and suspend its employees when they engage in check kiting?