January 23, 2017
Tax season is on the horizon and it's a time when many Wall Streeters moonlight in an effort to earn some extra money or to cultivate leads to new customers. Few relationships are more cozy than those between CPAs and stockbrokers/investment advisers. Unfortunately, few relationships have caused more problems than that between those doing tax returns and those recommending investments. When it comes to such outside business activity, stockbrokers often forget the regulatory requirement to provide prior written notice to their employer. Unfortunately for those brokers speeding through the rulebook, the industry's self-regulatory organization is parked off the road with its radar gun at the ready.
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, Victor Lee submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Victor Lee, Respondent (AWC 2015048359601, January 9, 2017).
Lee was first registered in 2008 and by 2012, he was registered with FINRA member firm UBS Financial Services. The AWC asserts that Lee had no prior disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA or any other self-regulatory organizations.
Referral Business from Tax Preparer
Starting as early as the Summer of 2012, the AWC asserts that Lee had begun working with a local tax preparer from whom he sought referral business. During the relevant period from September 2012 through December 2013, the AWC alleges that Lee:
- created partnership agreements for the tax preparer's clients, and
- held himself out to be a partner of the tax preparer.
The AWC asserts that Lee communicated with the tax preparer's clients through his UBS email address and used other firm resources, all of which created the false impression that UBS endorsed his work on behalf of the tax preparer. Further, the AWC alleges that Lee failed to provide UBS with prior notice of the above-cited outside business activity ("OBA"). FINRA deemed Lee's conduct to constitute violations of FINRA Rules 3270 and 2010.
The AWC further asserts that Lee had reason to believe that certain of the tax preparer's clients were under audit by the New York State Department of Tax and Finance Audit for tax deductions claimed on prior years' partnership tax returns. The AWC further alleges that Lee understood that the audited clients lacked documented partnership agreements. Although Lee had no prior experience creating partnership agreements or any tax expertise regarding partnerships, he purportedly created some 50 back-dated partnership agreements using information culled from prior returns in order to establish a start-date for the partnerships. The AWC alleges that Lee did not engage in adequate due diligence and did not ascertain whether the drafted agreements accurately depicted the state of the partnerships that had existed on the dates which he retroactively entered. As set forth in the AWC:
Lee failed to appreciate that people reading the newly created documents, such as state auditors, might be misled to believing that the written partnership agreements had been in existence years earlier. Lee, however, knew that at least 35 of the partnership agreements he created and dated were to be submitted to the New York State Department of Taxation and Finance in connection with pending partnership tax audits.
FINRA deemed Lee's conduct in back-dating the agreements as failing to observe high standards of commercial honor and just and equitable principles of trade in violation of FINRA Rule 2010.
Termination and Bar
According to online FINRA BrokerCheck records as of January 23, 2017, under the heading of "Employment Separation after Allegations," UBS Financial Services "Discharged" Lee on December 14, 2015, based upon allegations that:
Mr. Lee was terminated after concerns were raised that he failed to disclose an outside activity and acted beyond the scope of his role at the Firm.
In accordance with the terms of the AWC, FINRA imposed upon Lee a Bar from associating with any member firm in any capacity.
Bill Singer's Comment
Let me start off this round of head scratching by citing this quote from the AWC:
Lee failed to appreciate that people reading the newly created documents, such as state auditors, might be misled to believing that the written partnership agreements had been in existence years earlier.
Seriously? Lee "failed to appreciate" that a back-dated document might mislead someone? I've seen some fairly shocking -- and absurd -- things in FINRA AWCs but this one has to take the cake. If, in fact, FINRA's Staff sincerely came to the conclusion that Lee was truly baffled by the impact of his fabrication, then we sure as hell needed more facts and further explanation.
Another quibble with this AWC is in the assertion that:
In fact, the first and only reference in the AWC to Lee having "held himself out to be a partner of the tax preparer," is in the above conclusory statement. Accusing someone of misrepresenting himself as a Partner in a tax preparation business is a fairly serious charge -- and it is an allegation substantively different from FINRA's allegations that Lee had wrongly created and back-dated partnership agreement and failed to properly disclose his OBA to UBS. I would have expected some factual assertion in the AWC as to whom, how and when Lee falsely held himself out to be a Partner. In fact, beyond the mere allegation of said misrepresentation, no further facts are alleged in the AWC as to the circumstances of this purported misrepresentation.
As early as the Summer of 2012, Lee began working with the local tax preparer. During the Relevant Period, Lee created partnership agreements for the tax preparer's clients and held himself out to be a partner of the tax preparer. . .