Voluntary Resignation, Diversion of Customer Funds, and FINRA Bar

November 16, 2017

In a recent FINRA Acceptance, Waiver & Consent ("AWC") regulatory settlement, a registered person is barred after voluntarily resigning . If you read the published AWC, you come away with the sense that the respondent quit his job amid some nebulous allegations that he had diverted customer funds. On top of that, you find out that the respondent was barred because he refused to cooperate in the regulator's investigation. By the time you've digested this AWC,you pretty much figure that it's not much about anything other than some guy who didn't want to be bothered answering FINRA's annoying questions. Not quite!

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 M. Dandridge III submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Victor M. Dandridge III, Respondent (AWC 2016052599901, November 13, 2017).

The AWC asserts that Dandridge entered the securities industry in January 2011 and in January 2012, he was associated was associated with Thompson Davis & Co., Inc. as a Director of Investment Management but did not first become registered until February 2012. The AWC states that he had "no relevant disciplinary history."

Because We Say So!

When an associated person asks me on what basis FINRA has the right to demand that he produce documents or that she appear to give testimony under oath, I show them the following:

FINRA Rule 8210: Provision of Information and Testimony and Inspection and Copying of Books

(a) Authority of Adjudicator and FINRA Staff
For the purpose of an investigation, complaint, examination, or proceeding authorized by the FINRA By-Laws or rules, an Adjudicator or FINRA staff shall have the right to:
(1) require a member, person associated with a member, or any other person subject to FINRA's jurisdiction to provide information orally, in writing, or electronically (if the requested information is, or is required to be, maintained in electronic form) and to testify at a location specified by FINRA staff, under oath or affirmation administered by a court reporter or a notary public if requested, with respect to any matter involved in the investigation, complaint, examination, or proceeding; and
(2) inspect and copy the books, records, and accounts of such member or person with respect to any matter involved in the investigation, complaint, examination, or proceeding that is in such member's or person's possession, custody or control.
(b) Other SROs and Regulators
(1) FINRA staff may enter into an agreement with a domestic federal agency, or subdivision thereof, or foreign regulator to share any information in FINRA's possession for any regulatory purpose set forth in such agreement, provided that the agreement must require the other regulator, in accordance with the terms of the agreement, to treat any shared information confidentially and to assert such confidentiality and other applicable privileges in response to any requests for such information from third parties.
Any such agreement with a foreign regulator must also meet the following conditions:
(A) the other regulator party to the agreement must have jurisdiction over common regulatory matters; and
(B) the agreement must require the other regulator to reciprocate and share with FINRA information of regulatory interest or concern to FINRA.
(2) FINRA staff may exercise the authority set forth in paragraph (a) for the purpose of an investigation, complaint, examination, or proceeding conducted by another domestic or foreign self-regulatory organization, association, securities or contract market, or regulator of such markets with which FINRA has entered into an agreement providing for the exchange of information and other forms of material assistance solely for market surveillance, investigative, enforcement, or other regulatory purposes.
(c) Requirement to Comply
No member or person shall fail to provide information or testimony or to permit an inspection and copying of books, records, or accounts pursuant to this Rule.
(d) Notice
A notice under this Rule shall be deemed received by the member or currently or formerly registered person to whom it is directed by mailing or otherwise transmitting the notice to the last known business address of the member or the last known residential address of the person as reflected in the Central Registration Depository. With respect to a person who is currently associated with a member in an unregistered capacity, a notice under this Rule shall be deemed received by the person by mailing or otherwise transmitting the notice to the last known business address of the member as reflected in the Central Registration Depository. With respect to a person subject to FINRA's jurisdiction who was formerly associated with a member in an unregistered capacity, a notice under this Rule shall be deemed received by the person upon personal service, as set forth in Rule 9134(a)(1).
If the Adjudicator or FINRA staff responsible for mailing or otherwise transmitting the notice to the member or person has actual knowledge that the address in the Central Registration Depository is out of date or inaccurate, then a copy of the notice shall be mailed or otherwise transmitted to:
(1) the last known business address of the member or the last known residential address of the person as reflected in the Central Registration Depository; and
(2) any other more current address of the member or the person known to the Adjudicator or FINRA staff who is responsible for mailing or otherwise transmitting the notice.
If the Adjudicator or FINRA staff responsible for mailing or otherwise transmitting the notice to the member or person knows that the member or person is represented by counsel regarding the investigation, complaint, examination, or proceeding that is the subject of the notice, then the notice shall be served upon counsel by mailing or otherwise transmitting the notice to the counsel in lieu of the member or person, and any notice served upon counsel shall be deemed received by the member or person.
(e) Electronic Interface
In carrying out its responsibilities under this Rule, FINRA may, as appropriate, establish programs for the submission of information to FINRA on a regular basis through a direct or indirect electronic interface between FINRA and members.
(f) Inspection and Copying
A witness, upon proper identification, may inspect the official transcript of the witness' own testimony. Upon written request, a person who has submitted documentary evidence or testimony in a FINRA investigation may procure a copy of the person's documentary evidence or the transcript of the person's testimony upon payment of the appropriate fees, except that prior to the issuance of a complaint arising from the investigation, FINRA staff may for good cause deny such request.
(g) Encryption of Information Provided in Electronic Form
(1) Any member or person who, in response to a request pursuant to this Rule, provides the requested information on a portable media device must ensure that such information is encrypted.
(2) For purposes of this Rule, a "portable media device" is a storage device for electronic information, including but not limited to a flash drive, CD-ROM, DVD, portable hard drive, laptop computer, disc, diskette, or any other portable device for storing and transporting electronic information.
(3) For purposes of this Rule, "encrypted" means the transformation of data into a form in which meaning cannot be assigned without the use of a confidential process or key. To ensure that encrypted information is secure, a member or person providing encrypted information to FINRA staff pursuant to this Rule shall (a) use an encryption method that meets industry standards for strong encryption, and (b) provide the confidential process or key regarding the encryption to FINRA staff in a communication separate from the encrypted information itself.
*** Supplementary Material ***
.01 Books and Records Relating to Investigations. This rule requires FINRA members, associated persons and persons subject to FINRA's jurisdiction to provide FINRA staff and adjudicators with requested books, records and accounts. In specifying the books, records and accounts "of such member or person," paragraph (a) of the rule refers to books, records and accounts that the broker-dealer or its associated persons make or keep relating to its operation as a broker-dealer or relating to the person's association with the member. This includes but is not limited to records relating to a FINRA investigation of outside business activities, private securities transactions or possible violations of just and equitable principles of trade, as well as other FINRA rules, MSRB rules, and the federal securities laws. It does not ordinarily include books and records that are in the possession, custody or control of a member or associated person, but whose bona fide ownership is held by an independent third party and the records are unrelated to the business of the member. The rule requires, however, that a FINRA member, associated person, or person subject to FINRA's jurisdiction must make available its books, records or accounts when these books, records or accounts are in the possession of another person or entity, such as a professional service provider, but the FINRA member, associated person or person subject to FINRA's jurisdiction controls or has a right to demand them.

The Dandridge AWC gives us an opportunity to examine how FINRA Rule 8210 comes into play and the consequences of not complying with Staff demands for documents, information, and/or testimony.

Voluntary Termination

The AWC asserts that on July 19, 2016, Thompson Davis & Co., Inc. filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") reporting that Dandridge had been "voluntarily terminated" on July 18, 2016. As will became apparent by the end of this article, Dandridge's so-called "voluntary" termination (which I infer means a "voluntary resignation") is an interesting way of putting the circumstances of his departure.

FINRA Investigation

The AWC asserts that on January 23, 2017:

as part of an investigation into allegations that Dandridge diverted customer funds from accounts held at the Firm to accounts and businesses that he controlled, FINRA staff sent a letter to Respondent pursuant to FINRA Rule 8210 (the "January 2017 Request") requesting, among other things, that Respondent provide copies of certain bank and brokerage account statements. In his February 10, 2017 response, provided through his counsel, Dandridge failed to provide the referenced account statements.

Second Request

FINRA Staff sent a second 8210 request on March 28, 2017, and Dandridge's April 11, 2017 response, provided through counsel, again failed to provide the referenced account statements.

Thanks But No Thanks

Both the January and March 2017 Requests informed Dandridge that he is obligated to respond fully, promptly and without qualification and advised that any failure to do so could expose him to sanctions, including a permanent bar from the securities industry.
The AWC asserts that on May 1, 2017, Dandridge's counsel informed FINRA that his client would not provide further regarding his financial matters in and following June 2012; and, as of the date of the AWC, Dandridge had not provided the requested bank and brokerage account statements.

FINRA Sanction

FINRA deemed that Dandridge had violated FINRA Rules 8210 and 2010 by failing to provide to FINRA documents and information requested pursuant to FINRA Rule 8210, in violation of FINRA Rules 8210 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Dandrige a Bar from association with any FINRA member in any capacity. 

Bill Singer's Comment

So . . . y'all got what happened here? By way of reminder, this is about the only substantive allegation concerning what prompted FINRA's investigation and the imposition of a Bar:

allegations that Dandridge diverted customer funds from accounts held at the Firm to accounts and businesses that he controlled

From my perspective, Dandridge's cited misconduct comes off in the AWC as a tad droll. The word "diverted" seems yet another FINRA euphemism for "stole." There isn't even a hint that any customer complained or filed a lawsuit. It all comes off as somewhat of run-of-the-mill sales practice issue.

Now, let's consider what FINRA didn't set forth in the Dandridge AWC.

Civil Lawsuit

Online FINRA BrokerCheck records as of November 16, 2017, disclose under the heading "Customer Dispute - Pending" the following allegations as filed in Virginia state court in November 2016:

[Customer] alleged multiple defendants including Mr. Dandridge of misappropriation of funds during the period 2007 to 2016. In summary, plaintiff alleged breach of fiduciary duty, breach of contract, fraud and negligence.

Oh . . . so, in fact, there was a customer-initiated civil lawsuit. Not sure why that's not disclosed in the AWC.

Criminal Plea

Under the BrokerCheck heading "Criminal - Final Disposition" is the disclosure that Dandridge had been charged with felony wire fraud and bank fraud and had pled guilty on July 19, 2017, and was sentenced on November 9, 2017. Under the heading "Sentence/Penalty":

84 months prison terms + 3 years supervised probation. Restitution of $3.19 million to Lynne Kinder, $303,000 to Blue Ridge Bank and $118,000 Virginia Omicron Chapter was ordered and no less than $500 per month beginning 60 days after release.

Oh . . . so, in fact, there was a criminal case and it involved felonies and Dandridge pled guilty and he was sentenced to 7 years in federal prison and he was ordered to undertake payment of over $3.6 million. That a lot of "ands" that didn't find their way into the AWC.

Not sure exactly what FINRA thinks it is accomplishing or who it is protecting when it publishes a regulatory settlement that omits important information about a barred respondent's underlying conduct and attendant civil and criminal actions.

LEARN MORE:


For details as to the underlying criminal allegations, see "Guilty plea: Dandridge admits bilking widow, bank and fraternity" (C-ville.com / July 25, 2017)

For details as to the underlying civil allegations, see "Widow bilked: Former Farmington president sued for allegedly stealing $7 million" (C-ville.com / December 16, 2016)