Today's BrokeAndBroker.com Blog offers a volatile mix of facts and purported compliance concerns. We have a 15-year Marine Corps veteran in the role of a respondent in a FINRA regulatory settlement. We have a book and film about the Vietnam War. We have a swirl of questions prompted by alleged disclosures and non-disclosures. In the end, we are left wondering less about the alleged misconduct and more about FINRA's sanctions. Yet again, we are confronted with what looks like cash-register regulation.
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, Richard S. Botkin submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Richard S. Botkin, Respondent (AWC 2015045890001, June 30, 2017).
The AWC asserts that in 1986, Botkin was first registered and by January 2008, he was registered with FINRA member firm Morgan Stanley. The AWC asserts:
RELEVANT DISCIPLINARY HISTORY
Botkin was previously disciplined by FINRA in April 2011 for violating NASD Rules 2330(f) and 2110 for improperly sharing in a customer's losses. For his misconduct, Botkin was censured and fined $5,000.
The AWC asserts that in September 2012, Botkin sought and received Morgan Stanley's approval to participate in a production company designed to create a documentary film. As such, Botkin's firm appears to have approved his engaging in an outside business activity ("OBA").
In January 2013, the AWC asserts that Botkin began selling shares in the production company. Among his share sales, which extended to August 2014, were $170,000 worth to four Morgan Stanley customers and another $75,000 worth of shares to two non-customers. Pointedly, the AWC asserts that:
Botkin participated in the customers' and non-customers' investments in the production company by advertising the production company to potential investors; communicating with investors about their investments; receiving investment checks from the investors and depositing them into the production company's bank account; sending subscription agreements and suitability questionnaires to each investor, who then mailed signed copies back to Botkin; and, as one of only two managing members, running the production company.
At some point, Morgan Stanley apparently deemed Botkin's sales to constitute his engaging in a private securities transaction ("PST"), which the firm prohibited absent the registered person providing prior written notice of the contemplated transactions and obtaining the firm's prior approval. The AWC asserts that Botkin did not follow his firm's PST protocol.
The AWC further asserts that in 2013 and 2014, Botkin provided false answers in response to the firm's annual compliance attestations regarding his PST activities.
FINRA deemed Botkin's conduct to constitute a violation of NASD Rule 3040 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Botkin a $15,000 fine and a four-month suspension.
Bill Singer's Comment
Online FINRA BrokerCheck records as of July 6, 2017, disclose that Morgan Stanley Smith Barney LLC "Discharged" Botkin on June 1, 2015, based upon allegations:
CONCERNS ABOUT THE REPRESENTATIVE'S CONDUCT IN CONNECTION WITH AN OUTSIDE MOVIE PROJECT, INCLUDING NOT ADHERING TO LIMITATIONS IMPOSED ON HIS PARTICIPATION BY THE FIRM, NOT FULLY DISCLOSING HIS ACTIVITY TO THE FIRM, AND RAISING FUNDS FROM CLIENTS AND OTHERS.
Do me a favor . . . stop here, for a moment . . . gather your thoughts. You ready to proceed? Okay, so, tell me, what's your impression about Botkin and FINRA's case against him? Do you feel the regulator has presented a valid case based upon the facts set forth in the AWC (for the record, I do). Also, how you feeling about the $15,000 fine and four-month suspension? Sort of feels that maybe FINRA did the right thing here, no?
Exactly what did Morgan Stanley know about Botkin and his movie activities before terminating him in 2015? It's nice that the AWC takes a swipe at Botkin with the reference to his providing "false answers" to his firm on its Annual Compliance Questionnaire ("ACQ") but just what exactly were those allegedly false answers? More to the point, how do we reconcile Botkin's allegedly "false answers" on the ACQ with the far more benign characterization on BrokerCheck by Morgan Stanley that he had not been "fully disclosing his activity"?
How much money did the investors lose? Yeah, that's not noted and for all we know, the investors may have made a bundle or just broke even. Did any investors complain to Morgan Stanley or to Botkin or to FINRA? That's not noted either. Such issues don't matter, you say? Okay, I respect your opinion. Let's move on.
What's this whole thing with the movie? Was it a porn film or an animation for kids? No, that's not stated in the AWC. The nature of the movie doesn't matter, you say? Okay, fair point but, you know what, stay with me here.
Botkin's BrokerCheck Disclosure
If you visit Botkin's BrokerCheck records you will note that he was first registered in 1986 with E.F. Hutton & Co. Under "Other Business Activities" are the following disclosures [Ed. Note: type formatting in original]:
ALLEGIANT GIVING: 4465 GRANITE DR ROCKLIN CA 95677; NON-PROFIT GEARED TOWARDS ASSISTING RETURNING MILITARY VETERANS; MEMBER OF THE BOARD OF DIRECTORS; ASSIST WITH THE FUNCTIONING OF THE ORGANIZATION; AFFILIATION STARTED 06/30/2013; 2 HOURS PER MONTH; NOT DURING SECURITIES TRADING HOURS; NOT INVESTMENT RELATED.
Ride the Thunder Productions; 4730 S Fort Apache Suite 300, Las Vegas NV 89147; An LLC formed to promote the movie they made about the Vietnam War based on his book; Managing member; operates the business and ultimately sells the film; affiliation started 11/10/2012; 1 hour per day; not during securities trading hours; not investment-related.
AUTHOR; 4465 GRANITE DR ROCKLIN CA 95677; NON-PROFIT GEARED TOWARDS ASSISTING RETURNING MILITARY VETERANS; MEMBER OF THE BOARD OF DIRECTORS; HE IS HOPING TO PRODUCE A BOOK ABOUT ENTREPRENERUSHIP [sic] AND PHILANTHROPY BASED ON THE LIFE OF THE FOUNDER; HE WILL CO-AUTHOR A BOOK ABOUT A FRIEND AND CLIENT THAT DETAILS HIS LIFE STORY; AFFILIATION STARTED 06/01/2010; 1 HOUR PER DAY; NOT DURING SECURITIES TRADING HOURS; NOT INVESTMENT-RELATED.
Remember when I sort of challenged you earlier to do a gut check about how you felt about FINRA's case against Botkin? Now how you feeling? You note the 2010, 2012, and 2013 dates referenced in Botkin's above BrokerCheck disclosures -- keep in mind that Morgan Stanely fired him in 2015.
As to the disclosure in #1 above, this is what we learn about Botkin from Allegiant Giving's website:
VETERAN MENTORING PROGRAM
A former Marine Corps infantry officer (active service with 2nd Battalion, 7th Marines and 1st Reconnaissance Battalion), Richard Botkin served 15 years of combined active and reserve duty.
Rich and his wife have been married for 32 years and they have two adult sons. He is also the author of the book "Ride the Thunder-A Vietnam War Story of Honor and Triumph." The book is currently on the Commandant's Reading List.
Since 1998 Rich has been involved in annually leading short-term dental / medical missions to Cambodia where they work with Agape International Missions-an organization dedicated to ending the sexual trafficking of young children-and other in-country Christian missionaries to provide basic relief for the poor and hurting of that country.
In addition to the notion of aiding those who have selflessly served our nation, Botkin subscribes completely to the Allegiant Battle-concept of not just giving assistance to our veterans, but helping them to become the successful, productive members-and business LEADERS-of society they were created to be. He refers to the old proverb: "Give a man a fish and you feed him for a day. TEACH a man to fish and you feed him for life." This idea and model-combining entrepreneurial opportunities with strategic mentoring-brought to the table by Mark Haney, is something which will not only resonate with the veterans we intend to serve, but also the larger American public which will support and bless these efforts.
Did anyone in the broker-dealer's compliance department pick up on that disclosure in #2 about "ultimately sells the film?" Would have been a nice bit of pre-emptive compliance to ask Botkin if he was raising funding for the approved OBA and alert him that he may have inadvertently crossed over into PST activity that required further approval. Maybe that happened. Maybe not.
Everything Americans know about the end of the Vietnam War is wrong, contends Richard Botkin, former Marine infantry officer and author of the groundbreaking book Ride the Thunder: A Vietnam War Story of Honor and Triumph.
Now the inspiration for a major motion picture of the same name Ride the Thunder reveals the heroic, untold story of how Vietnamese Marines and their US advisers fought valiantly, turning the tide of an unpopular war and actually winning while Americans 8,000 miles away were being fed only one version of the story.
Focusing on three Marine heroes Colonel John W. Ripley, USMC, Lieutenant Colonel Gerald Turley, USMC and Vietnamese Lieutenant Colonel Le Ba Binh Botkin tells the real history of the Vietnam War with the grainiest of detail he captured through scores of interviews and thousands of hours of tireless research in Vietnam, Cambodia and the US. Highly readable and thoroughly researched, Ride the Thunder profiles numerous American and Vietnamese warriors who sacrificed themselves and their families in the pursuit of freedom. Many paid the ultimate price in the effort to keep their country free of communism.
Reporters would fly into the combat base just long enough to film Marines being shelled and ducking for cover before flying out again to safe areas. Focusing only on dying US soldiers, the American media refused to cover the atrocities committed by the Communists against their own people. Despite these horrors and the fact that the South Vietnamese were fighting desperately for their fledgling democracy the 93rd Congress pulled the plug on all US support and funding.
Even though the American troops were winning on the ground, it was the media and politicians, not warriors, who decided the outcome of the war.
By the way, the film production company that Morgan Stanley and FINRA are so exorcised about actually produced a movie that was released in 2015. Watch this interview with Botkin:
Now, how you feeling now about the Botkin AWC and the fine and the suspension?
Look, let me be clear, very clear, I am not advocating any version of the history of the Vietnam War and nowhere in this article do I indicate whether I agree or disagree with any of Botkin's points as set forth in his book or the movie. That's a personal issue for each BrokeAndBroker.com Blog reader.
Similarly, the fact that Botkin made a film about the Vietnam War (he was not a Vietnam War veteran but he was a 15-year Marine Corps veteran on active and reserve duty) does not entitle him to a free pass should he violate a compliance or regulatory rule. On the other hand, I find it hard to imagine that given Botkin's publication of his book in 2009, his promotion of the book and film, and his ardent support for veterans' causes that he endeavored to hide his film production company's activities from Morgan Stanley. There is no assertion that his misconduct was "willful."
All of which forces us to ask a few unsettling questions. Did Botkin engage in conduct that warranted a $15,000 fine and/or a four-month suspension? Mindful of Botkin's prior AWC and FINRA's version of events, normally I would say that since he signed off on the settlement, it's not my place to second-guess his motives or FINRA's sanctions. Further, he was represented by legal counsel as indicated by a lawyer's attestation on the AWC. After my research, however, I'm not so sure that FINRA is on the moral high ground here. To be more specific, given the full presentation of all attendant facts, I find FINRA's fine to be grotesquely excessive and the length of the suspension unwarranted. If there are additional undisclosed facts that would prompt me to alter that view, I will change my criticism but I can only offer my opinion based upon what I know.
Recently, I announced my support for the candidacy of Stephen Kohn for the 2017 FINRA Small Firm Governor seat on the regulator's Board. I am going to ask Stephen to personally look into this case. Maybe FINRA will waive the fine or donate the proceeds to a veterans group. If you feel strongly about this issue, contact: