Unstrained Mercy Gently Rains Down After FINRA Bar

January 4, 2019

On a rainy evening in 2011, stockbroker and insurance agent Jeffrey A. Schumaker was driving when two young girls ran out in front of his car, and he could not avoid hitting and injuring one of them. Schumaker was sued over the accident and he incurred legal defense costs. After the accident, Schumaker experienced a medical issue and needed to write a substantial check to pay his medical bills -- unfortunately, he had anticipated a substantial commission check would cover his payment. As you may have anticipated, the commission check didn't materialize. Faced with an overdrawn checking account, Schumaker took $8,300 in funds from the homeowners' association where he served as Treasurer. His intent was to repay the funds. In 2014, when the homeowners' association had bills coming due and needed funds, he made a deposit into the association's account of $9,000, which included the $8,300 unauthorized withdrawal and his own dues. Thereafter, Schumaker disclosed to the association his $8,300 misappropriation and how he had repaid it; and then he resigned as Treasurer. Such, then, is the stuff of the prologue for today's blog.

2014 Transamerica Discharge

After repaying the misappropriated association funds, Schumaker reported the incident to his employer Transamerica Financial Advisors, Inc. which, in turn, reported it to the Financial Industry Regulatory Authority ("FINRA"). According to FINRA's online BrokerCheck records as of January 4, 2019, Schumaker was first registered in 1990, and was registered with FINRA member firm Transamerica Financial Advisors, Inc. from May 1997 to July 2014. https://brokercheck.finra.org/individual/summary/2014844

Under the BrokerCheck heading "Employment Separation After Allegations," Transamerica Financial disclosed that it had "discharged" Schumaker on June 24, 2014, based upon allegations that:

THE FIRM RECEIVED NOTICE THAT THE REPRESENTATIVE HAD MISAPPROPRIATED APPROXIMATELY $8,200 FROM A HOMEOWNER'S ASSOCIATION FOR HIS PERSONAL USE. THE REPRESENTATIVE SERVED AS THE TREASURER FOR THE ASSOCIATION DURING THE TIME THE MISAPPROPRIATION TOOK PLACE. ACCORDING TO THE REPRESENTATIVE, THE MISAPPROPRIATION OCCURRED IN 2011 AND HE MADE FULL REPAYMENT TO THE ASSOCIATION PRIOR TO HIS RESIGNATION FROM THE TREASURER POSITION ON MAY 5, 2014.

FINRA Investigation

After learning of the reasons for Schumaker's discharge and the alleged underlying reasons, FINRA revved up its regulatory machinery:

9. FINRA began an investigation, which its attorneys pursued aggressively. Tr. 27. Mr. Schumaker learned that even if [he] avoided being barred from association with FINRA, the process would be expensive. Id. He heard from one individual who spent approximately $100,000.00 in attorneys' fees, costs, and fines. Id. Accordingly, Mr. Schumaker did not contest or otherwise participate in the investigation. Ex. 5. Under FINRA' rules, nonparticipation leads to a bar against further association with FINRA. Id. FINRA's attorneys and his own counsel assured him he could continue in his insurance business, he just could no longer sell securities. Tr. 27-28. 

The Commissioner of the Indiana Department of Insurance, Appellant, v. Jeffrey A. Schumaker, Appellee (Opinion, Court of Appeals of Indiana, 18A-MI-864 / December 31, 2018) 
http://brokeandbroker.com/PDF/SchumakerIndCtApp.pdf 
Page 7 of the Court of Appeals Opinion (citing the Indiana Superior Court's "Findings of Fact")

2014 FINRA Suspension and Bar

Apparently, Schumaker opted to take the "nonparticipation" route:

http://www.finra.org/sites/default/files/publication_file/november%202014%
20disciplinary%20action.pdf states under the heading "Individuals Suspended for Failure to Provide Information or Keep Information Current Pursuant to FINRA Rule 9552(d)" that Jeffrey Alan Schumaker was suspended effective September 22, 2014.

"Disciplinary and Other FINRA Actions" (February 2015), http://www.finra.org/sites/default/files/02_February_Disiplinary
%20Actions_15.pdf
states under the heading "Individuals Barred for Failure to Provide Information or Keep Information Current Pursuant to FINRA Rule 9552(h)" that Jeffrey Alan Schumaker' was barred effective December 2, 2014.

2016 Indiana Department of Insurance Nonrenewal

In addition to his FINRA broker-dealer registrations, since 1990, Schumaker held an insurance producer license. In terms of the Indiana Department of Insurance, Schumaker believed that FINRA had communicated with the Commissioner of the Indiana Department of Insurance,  about his Bar; and when his state insurance license came up for renewal, he did, in fact, disclose FINRA's Bar to the department. Unfortunately, on August 12, 2016, the Commissioner issued an Administrative Order Notice of Nonrenewal of License based upon the assertions that i) the Department had received untimely notification from Schumaker of FINRA's suspension and Bar and, ii) the misappropriation of the homeowners association's funds. Schumaker pursued his administrative remedies in the face of the nonrenewal and:

On September 14, 2016, the ALJ held a hearing. In November 2016, the ALJ issued Findings of Fact, Conclusions of Law and Order. The ALJ found, "[i]n response to Question 2, of his application for renewal to [the Department] Schumaker made a full and complete disclosure of the FINRA bar and the circumstances leading thereto."5 Appellant's Appendix Volume II at 35. The ALJ found that no evidence was presented that Schumaker has ever committed any conduct that is fraudulent, coercive, dishonest, incompetent, untrustworthy, or financially irresponsible in the conduct of his insurance business or any other business venture. The ALJ also found "the evidence in this case demonstrates that Schumaker took $8300 from the homeowners' association bank account with the intent to repay it" and "[w]hile dishonest, all evidence presented at the hearing was that this was a singular issue, out of character for Schumaker, and not part of a pattern of deceit or a series of 'practices' in either his personal or professional life." Id. at 37. The ALJ recommended that the order of nonrenewal be reversed on the conditions that Schumaker's license be granted on a two-year probationary basis and that he pay a civil penalty of $1,000.

Page 4 of the Court of Appeals Opinion (citing the Superior Court's "Findings of Fact")

The Department of Enforcement objected to the ALJ's Order. Upon consideration of the record, the Commissioner rejected the ALJ's recommendation and ordered the non-renewal of Schumaker's license. 

2018 Indiana Superior Court Vacatur

Schumaker appealed to the Indiana Superior Court, which on March 19, 2018, vacated the Commissioner's nonrenewal order. As cited in the subsequent Court of Appeals Opinion, the In the Superior Court's "Findings of Fact" stated in part:

1. Mr. Schumaker concentrates his business in life and health insurance, disability and Medicare supplement insurance. Ex. 5. In his insurance business, Mr. Schumaker does not handle any cash for insureds. Tr. 35. Instead, the insured pays all premiums directly to the insurance company. Id. The only funds Mr. Schumaker deals with are his own commission checks from which he pays his salary and his office expenses. Id. 

2. At the time of the administrative hearing, Mr. Schumaker had held a license from the Department for 26 years and was serving about 300 customers. Ex. 5. He has never [had] a complaint relating to [the] manner in which he conducted his business. Id. 

. . .

18. Mr. Schumaker is the sole financial supporter for his family, which includes his wife, two sons in college, his mother-in-law who lives with him, and a young family member placed in their home by family services. Tr. l l-12; Tr. 53. Losing his producer income would be devastating to the family, Ex. 5; And, at age 53 with 26 years in the insurance industry, Mr. Schumaker does not know what he would do to replace that income. Ex. 5; see also Tr. 37. 

Pages 5, 6, and 9 of the Court of Appeals Opinion (citing the Superior Court's "Findings of Fact")

In granting Schumaker's petition and remanding the matter back to the Department of Insurance, the Superior Court offered these observations in its "Conclusion of Law":

10. The appropriate remedy in this case is not, however, simply a remand. There is no dispute what the facts are or any suggestion that they could be found differently on remand. Once the Commissioner's erroneous reliance on Ind. Code § 27-1-15.6- 12(b)(8) is removed, all that is left of the case is an inadvertent failure to report the FINRA suspension, which was voluntarily reported, unprompted, on the next renewal application. 

11. It would be unreasonable, and an abuse of discretion, to deny the renewal of Mr. Schumaker's license based on tardiness alone, particularly when that tardiness was inadvertent. 

12. At the hearing, Mr. Schumaker's lawyer suggested that the appropriate remedy would be for the Court to order Mr. Schumaker's license renewed, in accordance with the ALJ's proposed order. Unfortunately, the Court cannot order such relief and must remand to the Commissioner under Indiana State Bd. of Health Facility Adm'rs v. Werner, 841 N.E.2d 1196 (Ind. Ct. App. [(2006)]), decision clarified on reh'g, 846 N.E.2d 669 (Ind. Ct. App. 2006). 

13. While the Court has held that Mr. Schumaker did not engage in "fraudulent, coercive or dishonest practices" under the statute, and has further found that non-renewal is too harsh a sanction, the Commissioner has other remedies he can impose. For example, the Commissioner can "reprimand, levy a civil penalty, [or] place an insurance producer on probation. . ." Ind. Code § 27-1-15.6-12(b). Other statutory sanctions, such as a revocation or suspension are either inapplicable in the circumstance where a producer does not have a current license or are, like non-renewal, too harsh for a minor reporting violation. Nevertheless, the Commissioner must be afforded an opportunity to determine whether to reprimand Mr. Schumaker or place him on probation and whether to impose a civil penalty. That choice belongs to the Commissioner on remand. 

Pages 13-14 of the Court of Appeals Opinion (citing the Superior Court's "Findings of Fact")

2018 Indiana Court of Appeals Affirms

The Commissioner appealed the Superior Court's order vacating the nonrenewal of Schumaker's insurance producer license, and the case was argued before the Court of Appeals, which affirmed the lower court's decision. Pointedly, the Court of Appeals found that [Ed: footnotes omitted]:

Ind. Code § 27-1-15.6-12(b)(8) provides the Commissioner may take action with respect to a producer's license for the causes of "[u]sing fraudulent, coercive, or dishonest practices, or demonstrating incompetence, untrustworthiness, or financial irresponsibility in the conduct of business in Indiana or elsewhere." The ALJ found, and the Commissioner does not dispute, that Schumaker's action of taking funds from his homeowners association did not occur "in the conduct of business." Thus, the subsection is inapplicable in this case to the extent the phrase "in the conduct of business" modifies each of the causes listed in subsection (8). Even assuming the phrase "in the conduct of business" does not modify the phrase "[u]sing fraudulent, coercive, or dishonest practices," we note that the ALJ found as noted by the trial court that Schumaker "took $8300 from the homeowners' association bank account with the intent to repay it" and that, "[w]hile dishonest, all evidence presented at the hearing was that this was a singular issue, out of character for Schumaker, and not part of a pattern of deceit or a series of 'practices' in either his personal or professional life." Appellant's Appendix Volume II at 37. The evidence supports the conclusion that Schumaker's action of taking money from his homeowners association, under the specific circumstances of this case as set forth in the administrative record, did not constitute "practices" in Schumaker's professional or personal life which warrant the severe sanction of refusal to renew his insurance producer license.

Also, the ALJ found that Schumaker "made a full and complete disclosure of the FINRA bar and the circumstances leading thereto" in his application for renewal, and the Commissioner, in its decision, adopted this finding and noted that the Department's objection to the ALJ's recommended order challenged in relevant part the ALJ's conclusions related to subsection (8), not subsection (1), of Ind. Code § 27-1-15.6-12(b). Id. at 35. To the extent that he did not timely report the FINRA action to the Department and was required to do so, Schumaker testified that, because he was going through everything with FINRA, he assumed FINRA shared all of that information with the Commissioner, that he did not realize that was something he needed to do as well, and that as soon as he went online to complete his renewal he provided an explanation for what had happened. We agree that any delay does not merit the strict sanction of nonrenewal of Schumaker's license. We do not disturb the trial court's ruling.

Pages 18 - 20 of the Court of Appeals Opinion

Bill Singer's Comment

First and foremost, let me be clear -- very, very clear -- that at least in this case, FINRA is blameless. It would be absurd for the self-regulatory-organization to not investigate a registered representative allegedly involved in the theft of funds. 

I am empathetic with Schumaker's plight and understand why he and others similarly situated might choose to not contest or otherwise participate in a FINRA investigation, however, such a choice has consequences. In the case of FINRA, the path of so-called nonparticipation passes through an interim suspension on the way to a Bar. Accordingly, I will not chastise FINRA for merely revving up its regulatory machinery in the face of serious allegations against Schumaker and his own admission of wrongdoing. 

Given that the sanction of a FINRA Bar was imposed upon Schumaker for his nonparticipation, he might have at least given it a shot by exhausting his administrative remedies at the self-regulatory-organization. Schumaker may have cooperated in FINRA's investigation and tried to negotiate a multi-month/year suspension versus a Bar; or, in the alternative, have argued his case pro se (if he could not afford a lawyer) before a FINRA Office of Hearing Officers Panel and, if need be, on appeal to the National Adjudicatory Council. There may well have been folks on the OHO and NAC panels who would have exhibited the same thoughtful analysis and compassion demonstrated by the ALJ, the Superior Court, and the Court of Appeals. No . . . I am NOT asserting that Schumaker made the wrong choice. I am simply making sure that others who trod down his path of nonparticipation give due consideration to the consequences and alternatives.

There will be many who disagree -- vehemently -- with the decision to renew Schumaker's insurance license; and, I take no issue with such disagreement. Schumaker did everything to justify the nonrenewal of his license and I would have respected an ALJ's or court's decision to deny the renewal. Schumaker's theft of funds was wrong and could well have resulted in criminal charges. Similarly, I harbor serious concerns about unleashing the likes of Schumaker upon the investing public and/or those purchasing insurance products. To reiterate, I do not fault the insurance Commissioner or his Department of Enforcement for pursuing their case for non-renewal of Schumaker's insurance license.

As harsh a judgment as it may be, Schumaker was a thief. If past is prologue, his theft of thousands of dollars from the homeowners' association does not entitle him to an insurance license by which to service the public. Truly, Schumaker has been the beneficiary of the thoughtful consideration by several judges. If you read the case slowly and in a quiet room, you will hear the gentle rattling of chains as the scales of justice tip and sway in the winds that buffeted the deliberation of the facts in this case. There is, at times, a certain "majesty" in the law; and it emerges in the most unexpected places from the most unlikely facts. Personally, I don't know if Schumaker was deserving of the gift bestowed upon him. Only time will tell. On the other hand, even thieves may find redemption and a way to paradise. In these harsh times, though, there is something refreshing when:

The quality of mercy is not strained.
It droppeth as the gentle rain from heaven
Upon the place beneath. 
It is twice blest:
It blesseth him that gives and him that takes.

The Merchant of Venice, Act 4, Scene 1.