FINRA Bars Stockbroker After RBC Makes $1 Million Pricing Error

The Department of Enforcement filed a two-cause Complaint against Respondent Thomas Lee Johnson ("Johnson" or "Respondent") on January 22, 2019. Cause one charges Johnson with converting $1,059,544.98 from his employer, FINRA member firm RBC Capital Markets, LLC ("RBC" or the "Firm"), after the Firm incorrectly priced sales of his holdings in Doosan Heavy Industries & Construction Co. ("Doosan"), a South Korean company whose securities trade on the Korean stock exchange. RBC incorrectly priced the sales in U.S. dollars instead of South Korean won. Because of a system error, Johnson received $1,059,544.98 in his RBC securities account from the sales, but he was entitled to less than $1,000. Eight days after RBC's error, Johnson moved the money to a personal bank account. Johnson later returned the funds to his RBC account when he saw that the Firm had corrected its error and reversed the credit, causing the account to have a negative balance. The Complaint alleges that this misconduct violated FINRA Rule 2010. 

Cause two alleges that twice during Enforcement's investigation Johnson provided FINRA staff with false information about the mistaken credit in his account-in a written statement to the staff and during on-the-record testimony ("OTR"). The Complaint alleges that Johnson's misconduct violated FINRA Rules 8210 and 2010. 

Johnson filed an Answer to the Complaint in which he denied that his conduct constituted conversion and that he provided FINRA staff with false information during Enforcement's investigation. 

The Hearing Panel finds that, as alleged in cause one, Respondent converted $1,059,544.98 from RBC, in violation of FINRA Rule 2010, and bars him from associating with any member firm in any capacity. The Panel dismisses cause two because Enforcement failed to prove that Johnson violated FINRA Rules 8210 and 2010.

[N]ovember 14, 2017, RBC liquidated Johnson's 60 Doosan shares and ten warrants. Because of a system error, RBC priced the securities in U.S. dollars instead of South Korean won. As a result, according to the trade confirmations, the Firm priced the Doosan stock at $17,184.58 per share (instead of 17,184 South Korean won per share). RBC reported the value of the liquidation of the stock, after deducting fees and other charges, as $1,031,074.80 (instead of 1,031,074.80 South Korean won). It was actually $939.30.  

The same system error occurred with the liquidation of the ten Doosan warrants. RBC recorded that it sold each warrant for $2,849 (instead of 2,849 South Korean won), or $28,494.The true value of all ten the warrants at the time was less than $30.41 

As a result of the system error, on November 14, 2017, RBC deposited $1,059,544.98 in Johnson's account as the net proceeds from the sale of the 60 Doosan shares and ten warrants.

[H]e was "surprised" when he saw the extra million dollars in his account. He initially thought it was a mistake. "My initial reaction was yes, it was a mistake, and RBC would fix it over night [sic] if - I don't know if mistake is the right word. It was probably not correct, if that's the same as a mistake, but I worked for 35 years [in the securities industry]. I've seen things priced incorrectly. They get reversed immediately." According to Johnson, at no point did he think there was a currency conversion error.  

When the transactions were not immediately reversed, Johnson testified that he thought that his father "who's a very smart man, had hit another home run." According to Johnson, the fact that RBC did not immediately correct the trade gave him confidence. "The longer it went on with - you know, the next day the fact is if I have $1 million that's not supposed to be mine, someone is short $1 million. That gets corrected immediately." Johnson reiterated in his hearing testimony that when RBC did not correct the transactions after settlement date and the money was still in his account, he thought his father had "had another one of his big winners." As a result of the supposed unexpected windfall in Doosan, Johnson considered distributing the after-tax proceeds from the liquidations to himself and his four siblings.  

Johnson explained that he did not contact RBC's trading desk about the pricing of the transactions because he had not initiated the trade: "You know, if I had made a trade and they priced it wrong, yes. But I had nothing to do with the trade itself." Instead, Johnson said that he assumed that RBC would fix the transactions the next day, as it had when the Firm on a different occasion mistakenly credited his sister's brokerage account with $666 million. As more time passed during which RBC did not correct the transactions, Johnson testified that he "started to believe that it was accurate." According to Johnson, "I mean, it's not like someone deposited $1 million by mistake. It's not like someone - I had a wire transfer in my account that I knew wasn't mine RBC liquidated a position at $17,000 a share." "It was a good thing," Johnson testified, that he got $17,000 per share for stock that was worth $15 per share a few weeks previously. 

The morning of November 28, 2017, RBC canceled the liquidations of Johnson's Doosan shares and warrants and rebilled the transactions, pricing the Doosan stock at $15.8102 per share and the warrants at $2.6215 per warrant. After deducting fees, Johnson received $924.79 from the rebilled sale of the Doosan shares and $26.22 from the rebilled sale of the warrants. The rebilling of the two transactions immediately generated a negative balance in the account exceeding $1 million because Johnson had transferred that money to his bank account a week earlier.  

Johnson immediately saw that RBC reversed the Doosan transactions because he was looking at his RBC account on his work computer when it occurred. Johnson went to Chase Bank the same day, obtained a cashier's check for $1,060,000, and deposited it into his RBC account the next morning, November 29.

RBC was not immediately aware that Johnson had withdrawn over $1 million from his account on November 22. But depositing the $1,060,000 check into the RBC account on November 29 generated an exception report. That report prompted the Firm's operations manager to ask Johnson's supervisor to talk to Johnson about the business purpose and source of the funds. 

Soon after Johnson returned the money, RBC concluded that Johnson had transferred the funds even though he had to have known that the Doosan stock was not worth $1 million. On December 1, 2017, as part of the Firm's investigation, four managers interviewed Johnson about what happened. He acknowledged to them that even though he knew there might have been a pricing error, he removed the money from his RBC account because he "felt more comfortable getting it out of RBC."

Enforcement has satisfied each of the elements needed to show that Johnson engaged in conversion. The act of conversion was complete when Johnson transferred the money on November 22, 2017. First, his transfer of the money from the RBC account to the Chase Bank account was intentional. Second, Johnson's transfer was not authorized because the money was not his. RBC credited the money to his account in error, and Johnson knew it. Third, by placing the money in the Chase Bank account, Johnson exercised ownership over the money and deprived RBC of it. Johnson knew he did not own the money and was therefore not entitled to possess it. 

Conversion generally is an intentional and unauthorized taking of and/or exercise of ownership over property by one who neither owns the property nor is entitled to possess it.

[B]ecause of a system error, Johnson received $1,059,544.98 in his RBC securities account from the sales, but he was entitled to less than $1,000. Eight days after RBC's error, Johnson moved the money to a personal bank account. 

RBC was not immediately aware that Johnson had withdrawn over $1 million from his account on November 22. But depositing the $1,060,000 check into the RBC account on November 29 generated an exception report. That report prompted the Firm's operations manager to ask Johnson's supervisor to talk to Johnson about the business purpose and source of the funds.

No mitigating circumstances exist that would warrant any sanction less than a bar. Instead, the Panel is disturbed by multiple aggravating factors. Johnson took a large sum of money. Johnson did not bring the obvious pricing error to RBC's attention, but chose instead to hope the Firm would never detect the mistake. He also has not acknowledged his misconduct. Instead, he blamed RBC for incorrectly pricing the securities and not quickly correcting the error, which he used to rationalize transferring the funds to an outside bank account eight days after the error. He minimized the wrongdoing, stating that he did not think he did anything wrong. Johnson acknowledged that he would have kept the money had RBC never caught the error. The Panel therefore finds that Johnson intended to permanently deprive RBC of its funds and that he acted knowingly when he took possession of the money and transferred it to his bank account.

Nor does the Panel find it mitigating that Johnson returned the money to RBC. Johnson argues that in fashioning appropriate sanctions the Panel "should consider that [he] acted voluntarily, without any request from RBC, to return" the proceeds from the Doosan transactions to his brokerage account. Under the Guidelines, an effort to remedy misconduct is mitigating only when a respondent takes action before detection and intervention. Johnson returned the money only when RBC corrected its pricing error on November 28, 2017. The Panel finds that he did not act voluntarily, as the correction generated a deficit in his RBC account and quickly would have triggered a margin call had Johnson not returned the funds immediately. As he testified, Johnson would not have returned the money on his own had RBC not caught its error. Johnson's misconduct demonstrates to the Panel that he lacks the "commitment to the high fiduciary standards demanded by the securities industry."

[J]ohnson acknowledged that he would have kept the money had RBC never caught the error. The Panel therefore finds that Johnson intended to permanently deprive RBC of its funds and that he acted knowingly when he took possession of the money and transferred it to his bank account.

I'm walking on the street and see a wallet on the sidewalk. I pick it up and see that it is filled with debit and credit cards, contains about $1,000 in $20 bills, and has its owner's name and address on several forms of ID. Not wanting to leave the wallet on the sidewalk, I take it home. For about a week, I look at the wallet, which is sitting on a desk in my apartment, and I wonder whether I should post a "wallet found" poster on the street, call the police, call the owner, or just keep the lost-and-found property. I debate whether I should keep the cash and return everything else. For whatever reason, I telephone the wallet's owner, who is thankful that I found his property, and he comes over and picks up the wallet with all of its contents untouched. Yes, I hesitated. I thought about keeping the wallet. I thought about removing the cash. In the end, my better angel won and I did the right thing. I wish that I had made the call to the wallet's owner the day that I had found it. On the other hand, at least I finally did the right thing. It took me a week to do the right thing. Better late than never. Perhaps.

SIDE BAR: For an interesting study, read: "What Dropping 17,000 Wallets Around The Globe Can Teach Us About Honesty" (NPR.com / June 20, 2019) https://www.npr.org/2019/06/20/734141432/what-dropping-17-000-wallets-around-the-globe-can-teach-us-about-honesty

• RBC
• Doosan
• Conversion
• Mispriced
• Pricing Error
• JPMorgan Chase
• Bank
• Joint Account
• Checks
• BrokeAndBroker
• Bill Singer