October 6, 2017
Another day and another former FINRA registered rep throws in the towel and accepts a regulatory settlement imposing a Bar. Given the facts set forth in the settlement agreement, there isn't much to argue about. The rep refused to cooperate in a FINRA investigation. You go down that path and it's pretty obvious that your trip will end in expulsion from the biz, as should be the case. Given the extreme sanction of an industry Bar for non-cooperation in a FINRA investigation, however, a self-regulatory-organization has an obligation to at least offer sufficient content and context to explain why it needed to investigate the rep in the first place. In reading through today's featured FINRA regulatory settlement, it appears to have involved an investigation prompted by customer complaints pertaining to a $25,000 investment in collectible medals. Except . . . no matter how many times you read through the AWC, there isn't a single assertion that any customer complained to anyone about anything.
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, Dale Earl Krueger submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Dale Earl Krueger, Respondent (AWC 2015048137601, September 22, 2017).
The AWC asserts that Krueger entered the industry in 1982 and was first registered in 1983. By 2011, Krueger was registered with FINRA member firm Moloney Securities Co., Inc., where he remained until December 2015.
The AWC asserts that in December 2011:
[F]ormer registered representative RT solicited Firm customers KL and RL to invest $25,000 in collectible medals sold by Krueger. The customers investment in the medals was made through a business entity controlled by Krueger and the $25,000 was deposited into a bank account owned or controlled by Krueger. Customers KL and RL intended that Krueger use the $25,000 to purchase and store collectible medals for them. However, Krueger failed to provide customers KL and RL with any documentation of the sale, to physically separate the medals that had been purchased from his own holdings, or to adequately document the customers' holdings in his own records. In addition, Krueger transferred to RT and RT's relatives at least $5,800 of the customers' funds as purported loans or commissions, without confirming directly with the customers that they had authorized any such loans or commissions. In fact, they had not.
In August 2017, FINRA demanded that Krueger provide documents and information but his counsel informed the self-regulator that the client would not provide certain documents sought.
SIDE BAR: FINRA Rule 2150: Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts
No member or person associated with a member shall make improper use of a customer's securities or funds. . .
FINRA deemed Krueger's conduct in connection with the medals transactions as constituting violations of FINRA Rules 2150(a) and 2010; and his refusal to cooperate in its investigation by providing documents as violations of FINRA Rules 8210 and 2010.
In accordance with the terms of the AWC, FINRA barred Kreuger from assocaiating with any FINRA member.
Bill Singer's Comment
Yet again let me affirm without any equivocation or reservation that associated persons at FINRA member firms are obligated to comply with FINRA investigative demands or to timely raise objections and await the requisite administrative response. Intentional efforts to undermine FINRA investigations prevent the self-regulatory-organization from doing its job. In almost all cases where an associated person refuses to cooperate in a FINRA investigation, the regulator's imposition of a Bar is warranted, appropriate, and necessary. I don't quite understand why Krueger refused to cooperate and agreed to the imposition of a Bar. The inference from such a decision is troubling but he opted to settle on that basis and having made his bed, he must now sleep in it.
That being said, let's walk through the AWC's fact pattern.
Solicitation of the $25,000 investment
Contrary to any impression that you may have formed, it does not appear that Krueger himself solicited the $25,000 medal investment from KL and RL. In fact, there isn't even any indication that Krueger so much as spoke to those two investors. Go back and re-read the AWC: "[F]ormer registered representative RT solicited Firm customers KL and RL to invest $25,000 in collectible medals sold by Krueger. "
Customers of Whom?
After my first reading of this AWC, I formed the impression that KL and RL were brokerage customers of Krueger's at Moloney Securities. Upon further scrutiny, I'm not sure that my inference is or is not correct. KL and RL are only referred to as "Firm customers," and it is clearly asserted that the medal investment was solicited only by "former registered representative RT."
Former -- As Of When?
Interesting word "former," particularly when it's left to float aimlessly before us.
Was RT a "former" registered rep in December 2011 when he solicited KL and RL, or did he become a "former" rep as of the date that FINRA began its investigation, which appears to have been in August 2017? Was RT a former Moloney Securities rep or of another FINRA member firm? Was RT a registered rep of Moloney in 2011 when he solicited its customers to invest in collectible medals?
The AWC alleges that Krueger controlled a business entity through which the medals were sold to the customers; however, there is no assertion that this Outside Business Activity ("OBA") was not properly and fully disclosed to Moloney Securities and approved by the member firm. There is no allegation in the AWC that either the member firm or FINRA were investigating OBA violations. Online FINRA BrokerCheck records for Krueger as of October 6, 2017, indicate, in part, under the heading "Other Business Activities":
COLLECTING AND DEALING IN GOETZ MEDALS, COLLECTIBLE GERMAN ART MEDALLIONS; NOT INVESTMENT-RELATED; 1--5 HOURS/WEEK, NON-BUSINESS HOURS; . . .
The AWC alleges that the $25,000 investment was deposited into a bank account owned/controlled by Krueger. Why is that an issue? If I purchase 100 shares of XYZ stock through a FINRA member firm, isn't my check in payment for that transaction deposited into an account owned/controlled by the firm? Similarly, the AWC asserts that after said investment funds were deposited into the bank account, Krueger allegedly transferred $5,800 as "purported loans or commissions" without the customers' authorization. Why is this an issue? Why would Krueger even need a customer's permission to utilize funds deposited into his banking account? Once a customer purchases a service or product, that transaction ends and the funds generally become available to a seller as "proceeds." Is FINRA suggesting that I somehow retain the right to "approve" the payment of commissions by any brokerage firm for each and every trade that I make? Before you are too quick to answer, make sure that you are differentiating between a customer's right to approve the payment of a stockbroker's commission and a brokerage firm's obligation to disclose such a payment.
The Medals Investment
Then there is the entire issue of the $25,000 investment by KL and RL in collectible medals. Did either customer ever complain to anyone about their investment? Did either customer initiate a lawsuit against Krueger? Did either customer sustain a loss on their investment? Was either customer unable to obtain physical possession of their assets? A noteworthy issue that is not addressed at all in the AWC is that the questioned investments were solicited in December 2011 but there is no assertion of a single customer complaint in 2012, 2013, 2014, 2015, 2016, or 2017! Given that Krueger was barred for failing to cooperate in an investigation of KL and RL's $25,000 investment in collectible medals that his company purportedly sold to them, I would have appreciated just a tad more content and context as to the questions raised in this paragraph. And then there's that whole other issue as to how any of this rose to the level of a violation of FINRA Rule 2150.
Tangible Assets LLC
Finally, I was curious about Krueger's collectible medal business and my research took me to an "About" page at a website for Tangible Assets LLC. Under the heading of "Dale Krueger and Joe Earle bring over 60 years combined experience to Tangible Assets LLC." is, in part, this:
Dale has over 25 years experience in investment grade rare coins and rare, historical, commemorative medals. Dale has been an avid collector since the late 1960's. Initially, he focused on coins and by 2000 had assembled one of the finest and complete sets of Barber Quarters in the world (as noted in an April 14, 2000 press release by Heritage Auctions). In 1998, he happened across Goetz medals and was immediately hooked. Ever since then, Dale has enjoyed the fun and excitement of collecting these amazing masterpieces.
Joe has combined 35 years experience in capital markets and asset management, as well as having served as a CFO in numerous companies and technologies since 1995.
Under the heading "Industry Partners" is this:
Tangible Assets LLC is Seeking Industry Partners!
We are experienced in working with financial advisers, brokers, and dealers to provide hard asset alternatives.
Also, here is a video posted on the Tangible Assets LLC website:
I don't know Dale Krueger. I don't know anything about Tangible Assets LLC other than what I have noted above. I am not endorsing either Krueger or his company.
For reasons that escape me, Krueger thought it best to refuse to cooperate in FINRA's investigation of his alleged sale of $25,000 worth of collectible medals to two individuals who may or may not have been his customers but who were apparently customers of his employer brokerage firm. FINRA is wholly justified in barring any individual who responds to its investigative demands with a blanket refusal to produce information or documents absent a justified reason. Keep in mind that Krueger executed the settlement agreement that sets out the fact pattern noted above and that imposes the Bar. I do not and cannot criticize his decision. There may be far more damning facts that he avoided making public by his settlement; or, he may simply have tired of dealing with FINRA and the brokerage industry and figured it was cheaper to throw in the towel and move on. All that aside, FINRA needs to implement better quality control over the content and context of its published regulatory materials. Without reservation, I accept that each published AWC is not intended to serve as a treatise on every bit of conduct and every applied rule or regulation. On the other hand, FINRA has an obligation -- particularly when imposing the industry's equivalent of capital punishment: the Bar -- to do its utmost to explain why a given respondent's actions required an investigation that prompted demands for production that prompted his refusal to comply that prompted the imposition of a Bar. To make my final point, one could easily infer from this AWC that
- Krueger had disclosed his collectible medals OBA to Moloney Securities;
- obtained his firm's approval for his proposed OBA;
- only former rep RT had solicited the investment from customers RL and KL;
- the customers received timely confirmation of the depositing of their investment funds;
- the customers failed to complain or file a lawsuit pertaining to any aspect of their investment for in excess of five years; and
- the customers did not sustain any loss on their investment.