Embedded in popular culture is the dubious moral proposition that "ya do what ya gotta do." This mind-set often manifests itself when we decide that something is "wrong" but immediately follow that thought with "but." And don't even pretend that you haven't come to that threshold at various points in your life and stepped over. Some of us quickly step back. Others stand still. Others move further into the darkness to a place from which there is no return. In a recent FINRA regulatory settlement, we got a guy who sent wires from one of his bank accounts to another at a time when he didn't have covering funds. This bit of financial sleight-of-hand got him fired by his employer. Then it got him fined and suspended by Wall Street's self regulator. BrokeAndBroker.com Blog publisher Bill Singer doesn't excuse or defend the stockbroker. That much is clear. Bill does ask some uncomfortable questions and provides a number of unsettling answers.
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, Damani A. Barham submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Damani A. Barham, Respondent (AWC 2017053148502, July 12, 2018).
The AWC asserts that Barham entered the securities industry in 2013 with FINRA member firm Morgan Stanley.
Banking On It
The AWC alleges that from about September 2016 through January 2017, Barham maintained:
an online savings account at an unidentified bank,
a Morgan Stanley brokerage account, and
a Morgan Stanley Active Assets Account.
The AWC characterizes the Active Assets Account as:
akin to a bank account in that it allowed for cash deposits and withdrawals and had both a debit card and checks associated with it (the "MS Account"). Banking activity in the MS Account was conducted on-line. Fund transfers from external accounts into the MS Account were available immediately up to $1,000 for accounts held 90 days or less and up to $5,000 for accounts held for more than 90 days.
17 Wire Transfers
During the relevant period from October 21, 2016, through December 30, 2016, the AWC alleges that Barham sent from his unidentified bank account into his Active Assets Account 17 electronic wire transfers ranging from $100 to $1,250 each and totaling $6,975. The AWC alleges that all 17 wires were returned for insufficient funds; however, prior to the returns, Barham allegedly used the temporarily inflated Active Assets Account balance to purchase goods and services at restaurants, bars, hotels and Uber; make cash withdrawals; and pay monthly personal expenses. The AWC asserts that in each of the 17 cited wires, Barham's unidentified bank account balance was "significantly less than the amount of the transfer effected, and the pre-transfer balance in the MS Account was insufficient to cover his spending after the transfer was completed." Notwithstanding Barham's apparent kiting of the funds at issue, the AWC concedes that the:
Deficits in the bank account and the MS Accounts were cleared up, typically within a week, when funds from Barham's twice monthly pay were directly deposited in those accounts. Neither the Firm nor the bank incurred losses as a result of Barham's conduct.
Online FINRA BrokerCheck records as of July 18, 2018, disclose that Morgan Stanley Smith Barney, LLC "discharged" Barham on Januay 11, 2017, based upon:
Allegations regarding employee's registered representative's conduct relating to the maintenance of his personal account and activity.
FINRA deemed Barham's conduct as not comporting with "high standards of commercial honor and just and equitable principles of trade," in contravention of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Barham a $5,000 fine and a three-month suspension from association with any FINRA member in any capacity.
Bill Singer's Comment
When all is said and done, during a two-month period in 2016, Barham overdrew his accounts, which, in and of itself, is not a particularly earth-shattering or unusual result for many American households and businesses. It's so common a practice that they got names for it and its variations: Kiting. Working the float. Advanced accrual. Creative accounting. Cooking the books.
As I frequently note with these FINRA kiting cases, I have no problem whatsoever if the employer brokerage firm fires its employee. On the other hand, for FINRA to get its regulatory underwear into a bunch with such matters often strikes me as phony, insincere, high dudgeon. Worse, it tends to put FINRA in the unflattering role of a lap dog for its larger member firms -- and degrades the self-regulatory-organization's mission to that of a collection agent. After all, how often does FINRA pursue member firms who fail to timely pay their associated persons, or who fail to honor referral fees, or who charge unconscionable trainee fees that are typically imposed upon inexperienced and vulnerable young entrants into our industry? No . . . you don't need to answer that last question. It's posed sarcastically in the rhetorical manner tinged with a dismissive dose of irony.
FINRA's regulatory premise -- indeed the statutory underpinning -- for filing charges against Barham is that his conduct falls below the so-called "high standards of commercial honor and just and equitable principles of trade" that form the venerated moral bedrock of Wall Street. Are you kidding me? What unadulterated bull shit! Oh yeah, sure, two months' worth of 17 NSF wires that were all covered without harm to anyone or any institution is shocking to Wall Street's collective high standards and principles. Remind me again: just exactly what are Wall Street's high standards of commercial honor and just and equitable principles of trade?
No . . . I'm not defending Barham's actions. Relying upon NSF checks or wire transfers to balance your day-to-day finances is wrong and, under certain circumstances, could be criminal. It certainly raises concerns about a financial professional's competency to give public customers investing advice -- and under the worst light, it could impose temptation to generate unwarranted fees or commissions at a customer's expense. That's why I take no issue should a FINRA member firm terminate such an employee. Did Barham's conduct during what appears to have been the holiday season of 2016 warrant his discharge by Morgan Stanley? Maybe. Maybe not -- but I allow the employer such discretion given the facts. We should not lose sight of the fact, however, that Barham typically cleared up the deficits within a week at no loss to his employer or the outside bank. Notwithstanding, Barham's covering his 17 NSF deficits does not rise to a renunciation of his misconduct. His after-the-fact remedies are not a sincere demonstration of remorse.
While FINRA is publicly wringing its hands and shedding crocodile tears for the oh-so irreversible monetary pain and soul-searing suffering sustained by its large member firm Morgan Stanley, let's not pretend that Morgan Stanley has been a paragon of virtue in recent history. Let's not pretend that FINRA's large member firms haven't had their own dalliances when it came to handling their customers' and their public shareholders' funds. Let's not pretend that FINRA has not disenfranchised its member firms' employees from any vote on any aspect of the charade of self-regulation. FINRA fined and suspended Barham for screwing around with 17 NSF wires over two months at no loss to any institution. And when the highly compensated folks in FINRA's large member firms' C-suites nearly brought our economy to the brink with their own forms of creative accounting and attendant fraud, which of those honorable and principled CEOs, COOs, CFOs, and CCOs were fined and suspended by FINRA? Funny . . . I just can't seem to recall any names. Can you?