Regular readers of the BrokeAndBroker.com Blog know that our publisher, Bill Singer, Esq., regularly rails against the lack of adequate "content and context" in many regulatory documents. As demonstrated in a recent FINRA regulatory settlement, Bill is once again on the warpath. Today's settlement involves allegations of unauthorized discretion and improper use of margin. Frankly, those charges don't really wash . . . except, okay, they do after you uncover some issues not in the AWC . . . except, to be fair, the new information isn't exactly probative or relevant . . . except you're uneasy about where you uncovered and you no longer know how to feel about the Respondent's guilt or lack thereof. At last, you begin to understand why Bill Singer makes such a point about holding FINRA's feet to the fire when the self-regulator does such a piss poor job presenting its cases.
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, Stuart L. Pearl submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Stuart L. Pearl, Respondent (AWC 2015046329201, October 9, 2017).
Pearl was first registered in 1986, and between June 2010 and June 2015, he was registered with FINRA member firm Ameriprise Financial Services, Inc. The AWC asserts that: "Pearl has no disciplinary history."
The Senior Investor
The AWC asserts that prior to May 14, 2015, Pearl had discussions with a customer who is characterized in the settlement document as "a senior investor" and referenced only as "TD." During the pre-May 14th discussions, TD had authorized Pearl to liquidate six different securities positions worth about $20,000 in total. The AWC asserts that on May 14, 2015, Pearl liquidated said positions.
The AWC alleges that notwithstanding the pre-May 14th authorization to liquidate the six positions, because "Pearl failed to speak with TD again on May 14, 2015, to confirm TD's authorization to make these sales," that the Respondent had improperly exercised discretion without TD's and Ameriprise's prior written authorization in violation of NASD Rule 2510(b) and FINRA Rule 2010.
SIDE BAR: Okay, I'll bite: What the hell is a "senior investor?" Is that in contrast to a freshman, sophomore, and junior? Does that mean someone over the age of 50, 60, 70, or what??? Does that mean someone with a substantial prior history of self-directed investing? Would someone please point out the where in FINRA's rulebook a "senior investor" is defined. [This paragraph written by BrokeAndBroker.com Blog Senior Correspondent Bill Singer.]
Also, the AWC is devoid of indicating the number of (or an estimate of) or any date(s) on which the referenced pre-May 14th discussions took place. That's sort of a ridiculous and absurd omission given the fact pattern. If, for example, TD and Pearl had 1,000 discussions about liquidating six specific positions but the last conversation took place one year before the date on which the sales were entered, that's a far different context than if the last 10 conversations took place on the day before the entry of the trades.
With the exception of Time & Price discretion, NASD Rule 2510(b) requires that a trade discussion occur on the day of the trade date and prior to the entry of the trade. I readily concede that NASD Rule 2510(b) would still be violated regardless of whether there were 1 or 1,000 discussions prior to the trade date and regardless of whether the last discussion took place one year or one day prior to the trade date of entry. On the other hand, even if such missing facts would not alter Pearl's liability they would still go to the issue of mitigation or exacerbation and provide the investing public and industry with pertinent guidance.
NASD Conduct Rule 2510: Discretionary Accounts
. . .
(b) Authorization and Acceptance of Account
No member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Rule 3010.
. . .
This Rule shall not apply to:
(1) discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite amount of a specified security shall be executed, except that the authority to exercise time and price discretion will be considered to be in effect only until the end of the business day on which the customer granted such discretion, absent a specific, written contrary indication signed and dated by the customer. This limitation shall not apply to time and price discretion exercised in an institutional account, as defined in Rule 3110(c)(4), pursuant to valid Good-Till-Cancelled instructions issued on a "not-held" basis. Any exercise of time and price discretion must be reflected on the order ticket; . . .
At the Margin
The AWC asserts that in June 2010, two retired individuals in their seventies opened a joint brokerage account with Pearl at Ameriprise. These customers are referred to in the AWC only as "JD" and "MD." As set forth in the AWC:
At the time they opened their account, JD and MD had an investment objective of "growth and income," a risk tolerance of "conservative/moderate" and limited experience with trading on margin. They also had a combined annual income of $30,000, a liquid net worth of $500,000 and investable funds of $400,000.
The AWC alleges that between the relevant period of September 2011 and March 2012 Pearl recommended that:
JD and MD purchase four securities valued at approximately $122,000 on margin. Prior to making those purchases, the customers had no margin debt balance in their account. As a result of those purchases, JD and MD experienced a significant increase in their margin debt balances in relation to their available funds and their account was subject to seven margin calls during the Relevant Period.
The AWC deemed Pearl's recommendations to purchase on margin as "unsuitable" in violation of NASD Rule 2310(a) and FINRA Rule 2010.
In accordance with the terms of the AWC, FINRA imposed upon Pearl a $7,500 fine and a 45-calendar-day suspension from associating with any member firm in any and all capacities.
Bill Singer's Comment
At first blush, this regulatory settlement not only struck me as ticky-tacky but I was also annoyed by the lack of content and context. Wholly absent from either the discretionary or margin allegations was any indication that the subject customers had complained about Pearl's conduct or had sustained any losses. As a former regulator, I get it: The occurrence of a loss is not dispositive to a determination of a rule violation. The same would apply to attempting to kill someone by firing at them point blank but missing. You see, I really do get it. Notwithstanding, let me inject a bit of cynicism and suggest that it's not as if all potential respondents stand equally before FINRA or any prosecutor or regulator. The politics of regulation does not treat one and all alike. All sorts of bias and inappropriate considerations impact who gets investigated, who gets charged, who gets a slap on the wrist, and who gets the book thrown at them.
The Discretionary Sales
Pearl apparently had several conversations with so-called "senior investor" TD about selling $20,000 worth of stocks. There isn't even the suggestion - not even a hint - in the AWC that the customer was unhappy with the sales or disputed the sales or somehow suffered a loss because of the sales. As noted above, I understand that the pertinent rule required an on-the-trade-date order from the customer and the number of conversations on days before the trade date is irrelevant. Except that it's not. FINRA's "Sanction Guidelines" contemplate such considerations as fraud, deceit, repetitive misconduct, etc. when concocting the dollar amount of fines and the appropriate length of suspension. As such, you would think that there would be different sanctions imposed against a stockbroker who never spoke with a customer and improperly exercised discretion by selling off blue chip stocks with taxable realized profits in order to generate excessive commissions versus a stockbroker who had numerous prior conversations with a customer about the sale of specific stocks within a price range and, thereafter, faithfully executed that strategy without any subsequent customer complaint.
It is asserted that JD and MD opened a joint account. Are they a husband and wife? Oddly, that's left unstated in the AWC. A minor point but something that should either be disclosed or, if they are not a married couple, than indicate that they are brothers, or sisters, or brother and sister, or whatever. Parsing through some of the assertions in the AWC about these two customers, we are informed that the two customers purchased on margin four securities for a total of $122,000, and that:
JD and MD had . . . a combined annual income of $30,000, a liquid net worth of $500,000 and investable funds of $400,000.
Why, in and of itself, is carrying four stocks worth $122,000 versus $500,000 in liquid net worth so unacceptable as to expose this stockbroker to regulatory scrutiny? Were these blue chips or speculative stocks? Were the stocks consistent with the account's prior investment history but for the use of margin?
Before you're too quick to answer the questions above, note that the AWC does not assert that either customer complained about the trades or about the outcome of same. Also note that there is no indication that any manager or compliance officer at Ameriprise was troubled by the entry of or the existence of the margin trades and there is no suggestion that Ameriprise reprimanded Pearl on a contemporaneous basis. On of the more asinine allegations in the AWC is that:
Prior to making those purchases, the customers had no margin debt balance in their account.
Under "D" for "Duh," of course an account that had not previously engaged in margin trading would not have had a "margin debt balance in their account," until such time as a margin trade took place.
There is no allegation in the AWC that the customers did not comprehend that they had signed a Margin Agreement and what was countenanced by such an authorization. I infer from that omission in the AWC that JD and MD understood that they had requested approval to trade on margin and that Ameriprise had reviewed that request and duly approved it. Further, there is no suggestion in the AWC that any trade on margin was not properly discussed with the customers before entry. There is no suggestion that the margin trades were not duly confirmed and that trade confirmations and statements disclosing those trades were not transmitted to the customers.
Where the AWC is indeed on firmer ground is in its assertion that JD and MD's "account was subject to seven margin calls during the Relevant Period." Where the AWC squanders that important disclosure is in failing to specify the dates for the calls and the amounts of each -- and, critically, whether the customers readily met the calls. Ultimately, the lack of adequate content and context in this AWC forces me to wonder where is Ameriprise's responsibility in this matter:
Why did the firm approve this joint account for margin trading?
If the firm's approval of the margin account was okay, then why wasn't Pearl's recommendation to purchase four securities totaling $122,000 in cost okay too?
Did Ameriprise's Compliance Department review these trades on a timely basis and either reject them or cancel the trades?
Did JD and/or MD complain about the seven margin calls?
Did JD and MD sustain any losses on the trades?
What, if anything, Ameriprise do in terms of monitoring or supervising the customers' account following each of the seven margin calls?
Did the firm contact the customers and receive affirmation of the trades?
Did the firm contact Pearl and demand an explanation?
Did the firm withdraw approval for further margin trading after the second or third margin call?
In the absence of any customer complaint or Ameriprise intervention, did Pearl assume that the trading was sanctioned?
Why is FINRA only now, in 2017, addressing alleged margin trades from 2011 and 2012?
The Quality of Mercy (Gets Strained)
At this point, let me note -- but only tentatively -- that I was feeling sympathetic for Pearl. As will be made clearer below, I underscore that this was my feeling based upon everything noted above but not below. Frankly, I felt that FINRA had acted in a heavy-handed manner and Pearl had likely gotten on the wrong side of an examiner or looked the wrong way at some FINRA attorney. All of which sent me into research mode.
According to online FINRA BrokerCheck records as of October 13, 2017, under the heading "Registration History," Pearl worked at the following FINRA member firms:
1986 to 2001 at Merrill Lynch, Pierce, Fenner & Smith Inc.;
2001 - 2009 at Citigroup Global Markets;
2009 to 2010 at Morgan Stanley Smith Barney;
2010 - 2015 at Ameriprise Financial Services;
2015 to the present with David A. Noyes & Company.
During some 21 years of industry employment, there is only one disclosure on BrokerCheck under the heading of "Employment Separation After Allegations." As filed by Ameriprise indicating that on June 20, 2015, the firm had "discharged" Pearl based upon allegations that:
REGISTERED REPRESENTATIVE WAS SUSPENDED ON JUNE 22, 2015 AND SUBSEQUENTLY TERMINATED ON JUNE 30, 2015 FOR COMPANY POLICY VIOLATIONS RELATED TO: THE USE OF DISCRETION IN NON-DISCRETIONARY ACCOUNTS AND COMPLYING WITH SUPERVISION.
In response to his firm's discharge disclosure, Pearl responded that:
Rep disagrees with allegation of discretionary trading. Clients confirmed to firm compliance officer that approval was provided prior to trading.
There is no reference in the AWC to Ameriprise's "Discharge" of Pearl, which, given the circumstances, is an odd omission.
Three Settled Customer Disputes
Under the BrokerCheck heading of "Customer Dispute - Settled" are three disclosures.
1. Merrill Lynch reported receiving a customer complaint on December 23, 2002, in the form of an NASD Arbitration complaint seeking $450,000 in damages and alleging:
CUSTOMER ALLEGES FAILURE "TO PROPERLY APPRAISE CLAIMANT OTC INCREASING RISKS TO WHICH THE ACCOUNT WAS BEING EXPOSED."
Merrill Lynch reported that the matter settled on April 28, 2004, in the amount of $350,000 with no contribution from Pearl. I have no idea what "OTC INCREASING RISKS" means.
BrokerCheck further indicates under this same disclosure item that Salomon Smith Barney also reported receiving a customer complaint on December 23, 2002, in the form of an NASD Arbitration complaint seeking $450,000 in damages and alleging:
BREACH OF FIDUCIARY DUTY, NEGLIGENCE, BREACH OF DUTY OF GOOD FAITH AND FAIR DEALING, VIOLATION OF NASD & NYSE RULES, BREACH OF CONTRACT, RICO VIOLATIONS. 6/5/01 -11/18/02.
Salomon Smith Barney reported that the matter settled on April 20, 2004, in the amount of $60,000 with no contribution from Pearl.
2. Ameriprise Financial Serivces, Inc. reported receiving a customer complaint on May 29, 2012, seeking $80,000 in damages and alleging:
THE CLIENTS ALLEGED UNAUTHORIZED TRADING AND USE OF MARGIN BORROWING OCCURRED FROM JULY 2010 THROUGH MAY 2012.
Ameriprise reported that the matter settled on February 12, 2013, in the amount of $55,000 with no contribution from Pearl.
3. Citigroup Global Markets, Inc. and Morgan Stanley Smith Barney LLC reported receiving a customer complaint on March 5, 2013, in the form of a FINRA Arbitration complaint seeking $300,000 in damages and alleging:
CLAIMANT ALLEGES, INTER ALIA, THAT FROM 2004 THROUGH 2010 THE FINANCIAL ADVISOR BOUGHT AND SOLD INVESTMENTS WITHOUT FIRST CONSULTING THE CLAIMANT, EXERCISING DE FACTO DISCRETIONARY CONTROL OVER HER ACCOUNT.
Citigroup and MSSB reported settling the matter for $9,500 on December 10, 2013, and Pearl did not contribute to the settlement.
BrokerCheck further indicates under this same disclosure item the addition of Ameriprise Financial Services Inc. as a reporting source with the added allegations that:
ALLEGATIONS AGAINST AMERIPRISE - CLAIMANT ALLEGES THAT SINCE 2004, RESPONDENTS OVER TRADED AND HEAVILY MARGINED HER ACCOUNTS AND RECOMMENDED UNSUITABLE INVESTMENT. CLAIMANT SEEKS $300,000 IN DAMAGES, FILING FEES, ATTORNEY'S FEES AND COSTS.
Ameriprise reported settling the matter for $95,500 on December 11, 2013 and Pearl did not contribute to the settlement.
I have no idea what to make of any and all of this. Whatever sympathy I had for Pearl pretty much dissipated after I read through his BrokerCheck file. I'm also wondering why the AWC didn't disclose the discharge by Ameriprise or incorporate any of the allegations that appear on BrokerCheck. Consider that this is how Pearl's background is presented in the AWC:
In May 1986, Stuart Pearl became registered as a General Securities Representative with a FINRA member firm. Between June 2010 and June 2015, he was registered in the same capacity with Ameriprise Financial Services, Inc. ("Ameriprise"). Since leaving Ameriprise, he has been registered with another FINRA member firm. Pearl has no disciplinary history.
As a lawyer, I comprehend that most of what is disclosed on Pearl's BrokerCheck file is merely allegation and that he did not contribute a single penny to any settlement but, geez, there is important content and context in the BrokerCheck files that is missing from the AWC. There is also that puzzling misdirection in the form of the blanket assertion in the AWC that "Pearl has no disciplinary history." Technically, that's correct; on the other hand, I'm not sure that such a statement is discharging FINRA's duty of consumer protection. Keep in mind that the disclosures in BrokerCheck are online and publicly available, so it's not like they exist in some hermetically sealed environment. In the end, FINRA just muddies the waters and the waters are dirty enough. That's where you'll find me. Along with lovers, muggers, and thieves