[T]he actual loss on the Customer's $2,000.00 investment was $555.76 of which the firm charged Claimant one-half of that amount ($277.88) and offset it from his final compensation without notation. Accordingly, the Customer was made whole by adjusting the stock price to reflect the price from the date on which the Customer first requested that the trade be placed. Despite Claimant's contribution to the effective settlement amount, the Panel determined expungement to still be appropriate because Respondent negotiated and settled with the Customer without Claimant's consent, and finds that Claimant was not at fault in any manner.
The gist of the Underlying Complaint was that the Customer sustained damages in an unsolicited trade from the time he thought he placed the trade through his "representative" and the time it was actually executed.The Panel finds a troubling disconnect between Respondent's findings as reported on Claimant's Form U5 and the carefully crafted findings in Respondent's Letters (Exhibits 12 and 13). Based on the evidence presented, Claimant was "put between a rock and a hard place" by Mr. W, who does not have a Series 7 license and wrongfully took a stock purchase order, check and new account information (Exhibit 6) when Claimant was on vacation. Mr. W then left the order on Claimant's desk. On Claimant's return from vacation two days later, he noted the paperwork on his desk, called the Customer and left a voicemail message, and sent the papers in the normal, firm-required manner to get the next level up's approval so as to not incur further delay in executing the trade.The Panel finds that Respondent failed to include in its reporting and correspondence that Claimant did not enter the trade order pending receipt of the necessary approval, which was received after nine days. Respondent's procedures required another office, which was out of state, to review and approve the paperwork. Upon receipt of the approval, Claimant did not just place a trade. Instead, Claimant called the Customer to confirm whether he wanted to go forward with the trade, and reviewed various suitability matters with him. After which, the trade was entered. A review of the calendar, business days and intervening weekend during this time suggests Claimant acted in a reasonable manner per the procedures he was required to follow. The Panel finds that Claimant acted timely in light of the actions of Mr. W and in accordance with Respondent's normal, internal review processing times for its approval of the account and notification of such approval to Claimant.The Panel also noted the lack of any appropriate explanation regarding Mr. W's conduct, which the Panel finds precipitated and in fact caused the Customer's loss. Again, the facts are that Mr. W, who held only a Series 6 and not a Series 7 license, wrongfully took a trade, filled out the new account information form, took a check and failed to blotter the check. After returning from vacation two days later, Claimant tried his best to resolve an issue he neither created nor participated in from the beginning, regardless of Respondent's findings which leave these material facts out of the report. By way of example, the Form U5 language would leave a normal reader to believe a "rep" (The Panel questions whether this was referring to a properly registered representative) gave Claimant paperwork that Claimant failed to process timely. Respondent omitted that the "rep" was not licensed, gave the "paperwork" to Claimant by dropping it on his desk when he was on vacation, and that Claimant did not place the order until he received the proper approval and had a suitability discussion with the Customer. The Panel further noted that the investment at issue, RF Micro Devices, Inc., concerned a local, highly publicized company in the community and that the Customer solicited it and wanted it regardless of his financial situation. The Customer never mentioned to Claimant that he had "to liquidate some mutual funds to cover bills." The Panel also noted that the Customer requested that Claimant handle his account going forward which is hardly the action of a person who was injured by the wrongful acts of the broker. The Panel finds that the language used in the Form U5 places Claimant in a false and misleading light and must be expunged.In addition, Claimant's testimony that he never knew he was the subject of any investigation was unrebutted. Claimant was asked to assist in the investigation of Mr. W, but had no notice that he himself was going to be investigated, as set out in Respondent's letter dated June 19, 2000 to him, which was mailed to the wrong address. The Panel finds that although Claimant's Form U5 (Exhibit 21) had his proper address, the "disciplinary letter of June 19, 2000" was mailed to Claimant six days after he voluntarily terminated his employment to move to another firm, but was not sent to an address for him, while the letter addressed to Mr. W was mailed to an address for him. Claimant testified that he never saw the letter until it was produced in discovery for this case. Additionally, Mr. W remained employed by Respondent subsequent to Claimant's resignation from Respondent. The Panel believes that Claimant became a scapegoat in this matter in part because he was no longer employed by Respondent.
Based on the documentary evidence and credible testimony presented at the hearing, the Panel finds the allegations are defamatory in nature, misleading, clearly erroneous and false since the investment was taken by Mr. W and entered by Claimant only after he received approval and discussed the trade with the Customer.
The Panel finds that it serves no public or regulatory interest to keep the reported occurrence on Claimant's CRD records, and that expunging it will have no adverse effect on the investing public or regulators.
The Panel finds a troubling disconnect between Respondent's findings as reported on Claimant's Form U5 and the carefully crafted findings in Respondent's Letters (Exhibits 12 and 13). . . .The Panel also noted the lack of any appropriate explanation regarding Mr. W's conduct, . . .The Panel believes that Claimant became a scapegoat in this matter in part because he was no longer employed by Respondent. . . .
Rule 12104. Effect of Arbitration on FINRA Regulatory Activities; Arbitrator Referral During or at Conclusion of Case(a) Submitting a dispute to arbitration under the Code does not limit or preclude any right, action or determination by FINRA that it would otherwise be authorized to adopt, administer or enforce.(b) During the pendency of an arbitration, any arbitrator may refer to the Director any matter or conduct that has come to the arbitrator's attention during a hearing, which the arbitrator has reason to believe poses a serious threat, whether ongoing or imminent, that is likely to harm investors unless immediate action is taken. Arbitrators should not make referrals during the pendency of an arbitration based solely on allegations in the statement of claim, counterclaim, cross claim, or third party claim. If a case is nearing completion, the arbitrator should wait until the case concludes to make the referral if, in the arbitrator's judgment, investor protection will not be materially compromised by this delay.(c) If any arbitrator refers a matter or conduct for investigation under paragraph (b) of this rule, the Director will disclose the act of making the referral to the parties. A party may request that the referring arbitrator(s) recuse themselves, as provided in the Code, no later than three days after the Director notifies the parties of the referral. If a party does not make the recusal request within the prescribed timeframe, the party forfeits the right to request recusal of the referring arbitrator(s).(d) The Director will evaluate the arbitrator referral to determine whether to transmit it to other divisions of FINRA. Only the Director shall have the authority to act under this paragraph (d).(e) At the conclusion of an arbitration, any arbitrator may refer to FINRA for investigation any matter or conduct that has come to the arbitrator's attention during and in connection with the arbitration, either from the record of the proceeding or from material or communications related to the arbitration, which the arbitrator has reason to believe may constitute a violation of the rules of FINRA, the federal securities laws, or other applicable rules or laws.
SuitabilityUnauthorized TradingFailure to comply with injunctionTrading aheadSelling awayFailure to submit to arbitrationChurningFailure to superviseFailure to comply with other order of arbitrator(s)FraudOther (please describe below)
FINRA Rule 1122. Filing of Misleading Information as to Membership or Registration
No member or person associated with a member shall file with FINRA information with respect to membership or registration which is incomplete or inaccurate so as to be misleading, or which could in any way tend to mislead, or fail to correct such filing after notice thereof.
FINRA Rule 2010. Standards of Commercial Honor and Principles of Trade
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
1122, Filing of Misleading Information as to Membership or Registration
2121.01, Mark-Up Policy
2342, "Breakpoint" Sales
5130, Restrictions on the Purchase and Sale of Initial Equity Public Offerings
5210, Publication of Transactions and Quotations
5220, Offers at stated Prices
5270, Front Running of Block Transactions
5320, Prohibition Against Trading Ahead of Customer Orders
IM-10100, Failure to Act Under Provisions of Code of Arbitration Procedure
IM-11110, Refusal to Abide by Rulings of the Committee
Absence of Regulatory ReferralsFINRA's regulatory response to arbitration findings of defamatory / materially false statements filed by its member firms is, at best, tepid, and, at worst, benign neglect. Notwithstanding that FINRA has empowered arbitrators under FINRA Arbitration Code Rule 12104 of the Customer Code and Rule 13104 of the Industry Code to "refer to FINRA for investigation any matter or conduct that has come to the arbitrator's attention during and in connection with the arbitration," it does not appear that arbitrators are regularly referring these U5 cases for regulatory investigation.Uneven RegulationWhen it comes to investigating the men and women working for its member firms, FINRA has proven remarkably agile and adept at fining, suspending, and barring those folks for their non-disclosures on their Forms U5. When it comes to tossing folks out of the biz for filing misleading or false responses on their firm's in-house annual compliance questionnaires, FINRA is quick to take action. In cases where the transgression is deemed intentional, FINRA drags out a finding of "willful" misconduct, which frequently results in an individual's statutory disqualification from the industry, even if the fine or suspension imposed is relatively modest.Would FINRA expel a member firm if there was a finding that a misstatement or defamatory comment was willfully placed on a Form U5? To answer my own question: I doubt it. And let's not muddy the issue by pointing out how FINRA expelled some pennystock firm or boiler-room long after that member firm came under criminal investigation and collapsed amid civil lawsuits and inadequate capital. I'm looking at the history of so-called "reputable" FINRA member firms who typically fall under the organization's category of "Large" or "Mid-sized" member firms. I'm looking at the so-called household names. I'm looking at the big boys with the fancy television ads. These are the recidivists that just don't seem to fall within FINRA's field of vision when it comes to troubling Form U5 practices.