Wall Street's regulations, rules, policies, and protocols often appear as a challenge for some stockbrokers. It's not that brokers don't understand the meaning of "NO." They do; however, they may smile at you and shrug, and then freely admit that they knew that they weren't supposed to do what they did but . . . It's that "but" that often alters a droll regulatory fine or suspension into a fascinating tale of misplaced human ingenuity and an epic example of one individual's unbridled but misdirectedpassion for finding short-cuts and detours in life and business. In today's featured FINRA regulatory settlement, we come across a Merrill Lynch iconoclast who aspired to fly beneath his firm's compliance radar. Sadly, his second-rate stealth protection failed and he was shot down by his firm's detection system -- plummeting back to earth in flames. A once bright career now in smoking ruins. The old crash and burn.
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, Bhenoy ("Ben") Dembla submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Bhenoy ("Ben") Dembla, Respondent (FINRA AWC 2016051014801 , February 5, 2019).
The AWC asserts that Dembia was first registered in 2001 with FINRA member firm Merrill Lynch, Pierce, Fenner & Smith Incorporated. The AWC asserts that "Dembla has no disciplinary history in the securities industry."
To B or Not To B
The AWC alleges that from the relevant time of December 2015 through April 2016, Dembla
placed and then cancelled 41 fictitious sell orders in order to execute 29
purchases of Class B shares; and, moreover, he falsely entered on each order regarding why the customer purportedly wanted to sell the fund.
So . . . what the hell's going on here?
The AWC alleges that during the relevant time, Merrill Lynch's written policies prohibited buy orders for Class B share mutual
funds if the client's accumulated household holdings of said shares within the
fund family exceeded $100,000. Similarly, the pertinent mutual fund prospectuses noted the existence of limits on a given household's Class B shares "in light of those shares' ongoing 12b-1
distribution fees and contingent deferred sales charges that are higher than other
share classes." Finally, Merrill Lynch's electronic order system was programmed to prevent the entry of orders for Class B shares if it would result in a client exceeding an accumulation limit.
B That As It May
Apparently, Dembia was a creative and enterprising fellow because the AWC states in part that ion order to circumvent Merrill Lynch's built-in order system accumulation limit, he
entered one or
more fictitious sell orders a few minutes prior to buying additional Class B shares.
After the system accepted the new purchase order, Dembla canceled the fictitious
sell order, resulting in the customer exceeding the Firm and fund imposed
thresholds for Class B shares. From December 2015 through April 2016, Dembla
placed and then later cancelled 41 fictitious sell orders in order to execute 29
purchases of Class B shares that caused the accounts of 18 customers to exceed
the accumulation limit by a total of $863,000. Dembla also provided false entries
on each order regarding why the customer purportedly wanted to sell the fund. . . .
Merrill Lynch paid $31,801 in restitution to the customers at issue.
The AWC asserts that:
[I]n September 2016, Merrill
Lynch filed a Form U5 for Dembla reporting that he had been discharged for
"circumventing Firm limitations on the accumulation of mutual fund shares in
customer accounts resulting in a loss of management's confidence." On February
16, 2017, the Firm amended Dembla's Form U5 to disclose a customer complaint
against him alleging unsuitable investment recommendations. . . .
In addition to allegedly violating FINRA Rule 2010 through the entry of fictitious sell orders and false information, Dembia's subterfuge also caused Merrill Lynch to maintain inaccurate books and records in violation of FINRA Rules 2010 and 4511.
In accordance with the terms of the AWC, FINRA imposed upon Dembia a Bar from associating with a FINRA member firm in any capacity.
Bill Singer's Comment
Online FINRA BrokerCheck disclosures as of February 7, 2019, under the heading "Customer Dispute - Settled," show four matters involving customer complaints from January 2016 to October 2017, and all involved Unit Investment Trusts amid allegation of unsuitable recommendations. The following damages were sought with the resulting settlements (Dembia did not contribute to any of the settlements):
Unspecified: $110,000; and
In "Class B Mutual Fund Shares: Do They Make the Grade?" (FINRA Investor Alert, October 11, 2008 update) http://www.finra.org/investors/alerts/class-b-mutual-fund-shares-do-they-make-grade, the self-regulatory-organization provides a useful analysis of the merits and detriments of Class B mutual fund shares, which typically do not charge a "load" (front-end sales charge) but off-set that feature by charging 1) higher expenses than Class A shares and 2) a CDSC or contingent deferred sales charge that works as a penalty for withdrawals made within a stated period of years (usually within 6 years). Before you buy mutual funds, read FINRA's helpful Alert.