May 10, 2018
When regulators and prosecutors realize that they're dealing with a defendant or respondent who simply wants to get it over with and settle, it's sometimes viewed as an invitation to pile on the prose and paint a far worse picture of what allegedly happened. After all, if the adversary has thrown in the towel and there's no chance of going to trial, why not burnish your image and do a little bit of self-serving public relations? In a recent FINRA regulatory settlement, it's hard to tell where the reality of what seems a horrific scenario begins and where the fiction of making a bad situation look even worse ends. We got a stockbroker with gambling debts. We got elderly customers. We got loans from those customers to their stockbroker. It could all be benign. Then again, it may be as frightening as it seems. Unfortunately, FINRA's statement of facts is so pregnant with negative possibilities that it's impossible to come away from this case with any sense that you know what went on and you understand how it all got wrapped up. And if the misconduct is truly as bad as FINRA suggests it is, then how are we to explain what comes off as a somewhat tepid fine and suspension?
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, Michael T. Swingle submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Michael T. Swingle, Respondent (AWC 2016051931501, May 4, 2018).
The AWC asserts that Swingle was first registered in 1980 and by 2007 had registered with FINRA member firm J.W. Cole Financial, Inc.
The AWC alleges that between August 2014 and October 2016, Swingle borrowed $118,500 from five J.W. Cole Financial customers. The AWC states that the loans were prompted by Swingle's "deteriorating financial circumstances caused in part by gambling." The AWC concedes that Swingle had a "personal relationship, " with "some" of the customers but, more ominously, the AWC notes that at least three of the five customers were elderly. The AWC further explains that:
Swingle borrowed a total of $96,000 of the $118,500 from one elderly couple. Swingle continued to gamble after receiving the loan proceeds. Of the $118,500 borrowed by Swingle, $102,786 remains outstanding.
The AWC alleges that in violation of FINRA Rule 3240: Borrowing From or Lending To Customers and J.W. Cole Financial's written supervisory procedures, Swingle obtained the loans without his firm's knowledge or pre-approval. The AWC asserts that after "Swingle self-reported the loans to the Firm in or about September 2016, he was terminated." Online FINRA BrokerCheck files as of May 10, 2018 disclose that J.W. Cole Financial, Inc. "discharged" Swingle on October 28, 2016, based upon allegations that:
Mr. Swingle was termed for cause due to this failure to disclose his entering into loan arrangements with clients.
FINRA deemed Swingle's borrowing from firm customers to constitute a violation of FINRA Rules 3240 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Swingle a $5,000 fine and an 18 month suspension from association with any FINRA member.
Bill Singer's Comment
Assuming that Swingle "self-reported" the loans to his firm in September 2016, why did J.W. Cole only first fire him a month later on October 28, 2016? To be fair to the broker-dealer, there may be many explanations for the delay; for example, the firm may have immediately suspended Swingle and fired him once the investigation disclosed the full extent of his misconduct. Given the presentation of the facts in the AWC by FINRA, we have what comes off as predatory conduct against the elderly. Given that setting, the AWC should have explained why Swingle was allowed to remain employed for at least 28 days after his apparent confession.
Between making my own inferences and running with FINRA's implications, it's hard for me to view Swingle as anything more than a gambler who placed himself in such dire financial straits that he had to borrow $118,500 from five customers, of which $96,000 came from one elderly couple. Further, of those funds borrowed in 2014, 2015, and 2016, the AWC asserts that as of May 2018, Swingle had not repaid $102,786. As I premised this paragraph by noting, a lot of what I just stated may be speculation, conjecture, or surmise. In truth, Swingle may not have had a gambling problem and his financial extremis could have been caused by the Great Recession or personal difficulties. In selling its case, FINRA painted an unflattering picture of Swingle and invited us to draw very damaging inferences and conclusions about him. In the end, I had expected to see a sanction of something along the lines of $25,000, an order of full restitution, and a Bar.
In re-reading the AWC several times, I realized that it did not indicate whether the loans made to Swingle were subject to a written agreement and what, if any, terms governed the interest on said loans and the timing of repayment. Given FINRA's injection of the explosive terms "gambling" and "elderly" into this case, the lack of content and context concerning the manner in which the loans were (or not) memorialized is ridiculous.
In concluding today's analysis, let's do a quick inventory:
- Swingle was a gambler.
- Swingle apparently lost so much money that he needed to borrow $118,500 from five customers (of which three were elderly) over a nearly two-year period from 2014 to 2016.
- Swingle hid the loans from his employer in violation of both the firm's policies and FINRA's rules.
- At some point in September 2016 Swingle confesses to the improper loans.
- At some point in October 2016, his employer fires him and informs FINRA that the termination was prompted by Swingle's failure to disclose the subject loans.
Here we are May 2018, which is about 19 months from when FINRA was first notified that Swingle had been fired for his borrowing activity.
At what point along that 19-month continuum did FINRA first learn that Swingle had borrowed money from at least three elderly individuals in violation of his firm's and FINRA's rules?
At what point along that 19-month continuum did FINRA learn that Swingle had self-reported his misconduct?
It's not like Swingle had been hiding since September 2016 when he self-reported the loans to J.W. Cole Financial. It's not like J. W. Cole Financial's Form U5, CRD, and BrokerCheck disclosures did not alert FINRA to a serious regulatory problem as early as October 2016. How, then, are we to explain why it took 19 months for FINRA to settle this specific case with these specific facts? I mean, for godsakes, we're talking about 1 1/2 years to settle a case in which the allegedly guilty party self-reported his misconduct in September 2016!
In summation, FINRA has presented us with a serious set of allegations in this AWC involving a stockbroker's misconduct with elderly clients -- misconduct prompted by an apparent inability to control gambling. I am not trying to whip a dead horse and I am truly sympathetic to whatever personal demons may have tormented Swingle. On the other hand, how the hell are we to reconcile the horrific allegations by FINRA with the self-regulatory-organization's imposition of a mere suspension? Sure, 18 months is a long time to sit on the bench but it's also a shorter period of time than what it took for FINRA to investigate and settle the allegations against Swingle.