Another day and another violation of the Financial Industry Regulatory Authority's Private Securities Transactions Rule. In today's BrokeAndBroker.com Blog, we consider the missteps of a registered rep who raised $50,000 for a weight-loss biz, and, as a result, this stockbroker literally took a pounding. Also worthy of notice is FINRA's bespoke sanction of restitution to the investor, who apparently wasn't all that happy with her investment.
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, Fan Kam Yip submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Fan Kam Yip, Respondent (AWC 2016051683901, August 25, 2017)
Yip entered the securities industry in April 2004 and by 2008 he was registered with FINRA member firm Raymond James Financial Services Inc. The AWC asserts that "Yip has no previous disciplinary history with the Securities and Exchange Commission, any state securities agency, FINRA or any other self-regulatory organization."
The AWC alleges that on June 12, 2013, Yip solicited a Raymond James customer (who is identified in the AWC only as "T.C.") to invest in a weight management start-up company. T.C. invested $50,000 in a subordinated convertible promissory note with a two-year maturity date. The issuer purportedly paid to Yip a $3,000 finder's fee for his efforts.
Allegedly, Yip failed to disclose to Raymond James his solicitation of the investment, which the AWC characterizes as a private securities transaction ("PST").
SIDE BAR: Pursuant to FINRA Rule 3280 (and former NASD Rule 3040), it is incumbent upon associated persons to provide to their FINRA member firm prior written notice describing in detail a proposed PST:
FINRA Rule 3280: Private Securities Transactions of an Associated Person states:
No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.
(b) Written Notice
Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role . . .
The AWC alleges that Yip had "facilitated" T.C's investment by:
conducting site visits of potential storefront locations, and
helping to complete the required paperwork for the investment
Additionally, the AWC asserts that in responding to Raymond James' 2014 and 2015 annual compliance questionnaires ("ACQs"), Yip affirmed his understanding that without its prior approval, Raymond James' policies prohibited PSTs away from the firm. The AWC further alleges that on his 2015 ACQ, Yip wrongly affirmed that he had transacted all of his securities business through Raymond James.
The AWC asserts that Yip was terminated by Raymond James on September 14, 2016:
[A]s a result of Yip's actions, the Firm terminated Yip's employment and partially reimbursed the customer for her losses. Yip agreed to indemnify his former co-branch manager for the Firm's payment to the customer.
FINRA deemed Yip's conduct to constitute violations of NASD Rule 3040 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Yip a three-month-suspension from association with any FlNRA member firm in any capacity. Additionally, Yip was ordered to pay to T.C. $5,000 in restitution plus interest. In furtherance of Yip's restitution obligation, the AWC notes that:
Respondent has submitted a sworn financial statement and demonstrated an inability to pay full restitution immediately upon issuance of the AWC. In light of the financial status of respondent, restltution of $5,000 to customer T.C. shall be payable in five $1,000 installments, plus a sixth and final payment consisting of accrued interest as described above, commencing with the first payment to be made on the 15th day of the month following notice that this AWC has been accepted. Interest shall continue to accrue as described above.
Respondent shall submit satisfactory proof of payment of restitution or of reasonable and documented efforts undertaken to effect restitution after each payment due under the installment plan . . . and includes a copy of the check. money order or other method of payment or by e-mail, with pdf copies of the payment documentation . . . This proof shall be provided to the FINRA staff member listed above no later than 15 days after each payment is due.
If for any reason Respondent cannot locate customer T.C. after reasonable and documented efforts within 15 days from the date each payment is due under the installment plan, or such additional period agreed to by a FINRA staff member in writing, Respondent shall forward any undistributed restitution and interest to the appropriate escheat, unclaimed property or abandoned property fund for the state in which the customer is last known to have resided. Respondent shall provide satisfactory proof of such action to the FINRA staff member identified above and in the manner described above, within 14 days of forwarding the undistributed restitution and interest to the appropriate state authority.
Respondent has specifically and voluntarily waived any right to claim an inability to pay at any time hereafter the monetary sanction(s) imposed in this matter.
The imposition of a restitution order or any other monetary sanction herein, and the timing of such ordered payments, does not preclude customers from pursuing their own actions to obtain restitution or other remedies. . .
Bill Singer's Comment
First and foremost, compliments to FINRA for publishing an excellent AWC replete with sufficient content and context.
Now, for a few quibbles.
August 2016 Lawsuit
Online FINRA BrokerCheck records as of August 29, 2017, disclose that on August 16, 2016, Raymond James received a customer complaint in the form of a state-court lawsuit seeking $50,000 in damages based upon allegations of:
Breach of Contract, Unjust Enrichment and Restitution, Violation of Washington Consumer Protection Act RCW 19.86.020, Negligence, Respondent Superior.
BrokerCheck discloses that the matter settled on May 2, 2017, for $25,000 to which Yip did not contribute.
September 2016 Discharge
BrokerCheck further discloses that Raymond James "discharged" Yip on September 14, 2016, based upon allegations that:
Advisor was terminated for activity related to a client initiated litigation involving an investment sold away from the Firm.
A Loss of Facts
In pertinent part, the AWC alleges these three facts:
T.C. invested $50,000;
Raymond James "partially" reimbursed T.C.'s losses;
Yip agreed to indemnify his former manager for the partial-reimbursement payment.
Not disclosed in the AWC is the detail of Raymond James' $25,000 settlement payment resolving the litigation, which may or may not be the "partially" reimbursed payment referenced in the AWC. Frankly, the AWC could have done a better job addressing that reimbursement issue. For example:
What happened to T.C.'s $50,000 investment -- did the company fail to repay any of the convertible promissory note when the two-year maturity was reached? By the time the two-year term expired, was the weight management company bankrupt, insolvent, or seeking a delay in repayment?
How much did Raymond James' "partial" reimbursement amount to and what, if anything, happened to the balance of T.C.' s non-reimbursed losses/claims? Was Raymond James' $25,000 court settlement the referenced "partial" reimbursement or T.C.'s $50,000 investment, or was that in addition to the reimbursement?
The AWC asserts that Yip agreed to indemnify Raymond James' "partial" reimbursement. Did Yip fully repay his former employer for its unstated reimbursement to T.C.? Did Yip's indemnification promise to his manager cover the $25,000 settlement notwithstanding that the BrokerCheck disclosure asserts that he did not "contribute" to that payment?
As to the AWC's ordered $5,000 restitution, how did FINRA come up with that number? Was that the shortfall incurred by T.C. after receiving Raymond James' partial reimbursement and the $25,000 settlement; or had Yip made payments to T.C. in addition to the $25,000 settlement?