Sometimes you read a FINRA AWC settlement and you shrug. They're barring the guy for this? Really?? Other times, you read an AWC and you're trying to figure out just what kind of adding machine FINRA used -- how the hell did all these violations add up to such a tepid sanction? In today's featured AWC, I'm wondering if FINRA has been social distancing too long and needs to take a bit of a break from its self-imposed quarantine. Open up some windows. Step outside. Clear your head. Get some fresh air. In those powerful, moving, and unforgettable lyrics of the Quicksilver Messenger Service:
I want to know where you're going,
I want to know, sweet mama, where you're gonna go, yeah.
Ooo, have another hit of fresh air, ooo, have another hit.
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, Manish Shah submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Manish Shah, Respondent (FINRA AWC 2019062305901)
The AWC alleges that Manish Shah was first registered in 2003 with Northwestern Mutual Investment Services, LLC. The AWC alleges that Manish Shah "does not have any relevant disciplinary history."
2016 Loan from Customers
The AWC found that Shah had violated FINRA Rules 3240 and 2010 by engaging in the following conduct:
In July 2016, Shah borrowed $75,000 from one of his brokerage customers. Shah documented the terms of the loan in a loan agreement and repayment schedule. Shah failed to repay the loan in accordance with the repayment schedule. Although Shah told the customer that he would use the money to buy another registered representative's book of business, he did not do so but used it mostly for personal expenses. Nor did Shah provide notice to the firm or obtain its approval for the arrangement. In 2019, following Shah's termination from the Firm and the complaint by the brokerage customer to the firm regarding the loan, Shah repaid the customer. In addition, in September 2016 and December 2017, Shah completed two firm compliance questionnaires in which he falsely represented that he had not "borrowed money or securities from or lent money or securities to a client."
2018 Loan from Customer
Additionally, the AWC found that Shah violated FINRA Rule 2010 by engaging in the following conduct:
In September 2018, Shah borrowed $200,000 from an insurance customer. Shah
documented the terms of the loan in a loan agreement and repayment schedule. Although
Shah told the insurance customer, as he had his brokerage customer, that he would use
the proceeds to buy another registered representative's book of business, he did not do so
but used the proceeds mostly to retire other debt and for personal expenses. Shah did not
disclose to or obtain approval from the firm for the arrangement.
In October 2018, the insurance customer, through her accountant, asked Shah to provide
documents showing that the loan was "properly collateralized." In an email response, on
December 14, 2018, Shah sent an altered document that listed the insurance customer as a
beneficiary on Shah's personal life insurance policy. However, that policy had lapsed,
and the insurance customer had never been listed as a beneficiary. In addition, Shah sent
an inaccurate balance sheet to the customer's accountant. That balance sheet included
bank account balances that were inflated and also understated his liabilities.
After the insurance customer complained to the firm, it began an internal review.
Although Shah admitted he borrowed from the insurance customer, he told the firm in
March 2019 that he had not borrowed money from any other clients, which was not true.
In addition, in response to the firm's request for documents and communications, Shah
forwarded the firm three emails between him and the accountant, but he failed to provide
the December 14, 2018 email to the accountant and the accompanying falsified
documents. He further stated, inaccurately, that no other responsive documents existed.
Ultimately, Shah repaid the insurance customer $70,277 and the firm entered into a settlement agreement for the outstanding loan balance plus interest and attorney's fees.
Online FINRA BrokerCheck records as of February 3, 2021 disclose under "Employment Separation After Allegations" that Northwestern Mutual "discharged" Shah on March 29, 2019, base upon allegations that:
Representative was discharged, while under internal review for violating firm policy
by borrowing money from a customer, following his admission that he altered a
document to make it appear that the customer was a beneficiary on his (lapsed)
life policy which he then sent to the customer's CPA as an attachment in an email,
and the firm's discovery that in response to the firm's investigation request that he
produce all communications between himself and the customer's CPA, the altered
document was not included when the Representative forwarded said email to the
firm in response to its request.
In accordance with the terms of the AWC, FINRA imposed upon Shah a $15,000 fine and a 20-month suspension from associating with any FINRA member in any capacity.
Bill Singer's Comment
Online FINRA BrokerCheck records as of February 3, 2021, disclose that on October 14, 2005, the State of New York filed a $45,355 tax lien against Shah. Under the heading "Judgment/Lien Outstanding?" BrokerCheck discloses a "Yes."
Y'know -- I ain't feelin' this one. Not at all. Not one bit. Maybe it's the former industry regulator in me but this AWC imposes what strikes me as a generous suspension in response to what I view as serious misconduct. Consider these bullet points:
In July 2016, Shah borrowed $75,000 from a customer;
Shah did not provide prior notice or seek approval from his firm of the loan;
Shah falsely represented that he would use the loan proceeds to buy another registered representative's book of business -- but misused the proceeds for personal expenses;
Shah failed to honor the repayment obligations of the loan;
In September 2016 and December 2017, Shah falsely represented on annual compliance questionnaires that he had not "borrowed money or securities from or lent money or securities to a client;" and
Shah altered a document to make it appear that the customer was a beneficiary on his (lapsed) life policy.
Yes, I acknowledge that Shah fully repaid the $75,000 loan to one customer but he only repaid a second customer $70,277 as against a $200,000 loan -- Northwestern Mutual settled with the latter lender for the shortfall plus interests and attorney's fees. So . . . like how much credit do you want me to give Shah for coming up short to the tune of about $130,000-plus? Note that BrokerCheck discloses that on May 3, 2019, Northwestern settled with the customer for $145,865.95. The firm purportedly sought recovery from Shah and as set forth in BrokerCheck "has begun withholding of his insurance renewal commissions."
Maybe I'm getting older -- on second thought, I am. Maybe I'm getting crankier -- on second thought, nah, I can't get any more cranky than I already am. Whatever the case, I'm not sure what else Shah needed to do in order to invoke FINRA's ultimate sanction of a Bar. Frankly, As I read the AWC, it all adds up to a Bar: A 20-month suspension comes up short. Either FINRA over-stated the facts or the regulator has been in quarantine too long and needs to open a window and let in some fresh air.