An irreverent Wall Street Blog
by Bill Singer
Join BrokeAndBroker blog on Facebook  Follow the BrokeAndBroker blog on Twitter  Connect with BrokeAndBroker on LinkedIn  Join Bill Singer on Google+  Subscribe to RSS Feed

Written: October 24, 2014

Voices were raised, a waitress was upset, and large man with hotel bar intervened. Now if that doesn't pique your interest, I might as well get myself a glass of Merlot, and, trust me, I hate Merlot -- and when I say that I "hate" Merlot, keep in mind that before I became a lawyer, I was the third generation of my family in the wine business; but, I digress. Hey, it's my blog; you don't like my digressions, go read something else. In fact, why don't you get yourself a thin, watery, lousy glass of insipid Merlot while you're at it? And have yourself a chaser of Pinot Grigio.

Bottle of Wine

In a Financial Industry Regulatory Authority (“FINRA”) Arbitration Statement of Claim filed in July 2013, Claimant Clay alleged breach of employment contract; fraud; intentional interference with business relationship; and defamation. Claimant asserted that Respondent Edward Jones breached his employment agreement and purposefully placed defamatory language on his Uniform Termination Notice for Securities Industry Registration ("Form U5"). Additionally, Claimant Clay alleged that Respondent Edward Jones had intentionally interfered with his other job opportunities and industry business relationships. At the close of the FINRA arbitration hearing, Claimant sought $300,000 in compensatory damages, costs, and an expungement of the cited language from his Form U5. In the Matter of the FINRA Arbitration Between Keith Clay, Claimant, vs. Edward D. Jones & Co., LP d/b/a Edward Jones, Respondent (FINRA Arbitration 13-02272, October 3, 2014). 

On or about September 5, 2014, Claimant Clay voluntarily dismissed the fraud, breach of contract and intentional interference claims. 

Respondent Edward Jones generally denied the allegations and asserted various affirmative 

Red Red Wine

The FINRA Arbitration Panel recommended:
  • the “Reason For Termination” be changed to “Other;” and 
  • expungement of the “Termination Explanation” on Claimant’s Form U5 and its replacement with the following:
Conduct deemed inappropriate not securities or client related; to wit, participating in a verbal dispute over possible double charges for 3 glasses of wine, involving Keith Clay and 2 or 3 other parties.

Spill The Wine

In providing its rationale, the Panel explained that:

The testimony presented indicated a misunderstanding occurred in a hotel bar, where some of the Respondent's Trainees (including Claimant) and officials were staying. Claimant thought he was being double charged for a few glasses of wine. He admitted to having had a couple of glasses of wine over an hour or so, but denied being drunk. Voices were raised, a waitress was upset, and large man with hotel bar intervened. When the manager arrived, the matter was resolved. Testimony varied as to whether or not Claimant used strong language. There was no physical altercation; however the large hotel man intervened vigorously. The matter was reported to Respondent's officials by the manager and by Claimant's roommate for the training (who had witnessed some of the incident) later in the evening and the next day. Respondent's officials made no effort to contact hotel personnel. Respondent's official stated the termination decision was influenced by Claimant's attitude when questioned - his lack of remorse and lack of any admission of improper conduct. 

There was no claim of improper discharge. However, Claimant maintained the U5 was defamatory; especially the use of the word "unprofessional" as a modifier of "mis-conduct," because it suggested Claimant could have been guilty of gross or serious misconduct. Claimant was turned down for a position with Merrill Lynch because of the U5 statement. The Panel does not award damages as requested because there was no showing of malice or gross negligence on the part of Respondent. 

Bill Singer's Comment

Folks, it's finally happened. The loquacious Bill Singer is left speechless. I can't improve one whit on this arbitration panel's incredible rationale. It is a thing of beauty. A tale told by great raconteurs. As such, my hat's off to these arbitrators. Job well done!

In the spirit of today -- a Friday -- I offer my loyal readers three musical interludes. If you crank up the volume on your computer or smartphone speakers, perhaps you can get everyone in the office to join along.  Join me on a trip down memory lane where we hear that wonderful song from 1967: "Bottle of Wine" performed by the Fireballs. As an added attraction, I offer you UB40's "Red, Red Wine" and Eric Burdon and War's "Spill The Wine." 


Written: October 23, 2014

What would you think if I told you that the Blog was a live performance or that an email was a theatrical correspondence event? Sounds odd, right? Like most normal people, you'd probably wonder what the hell is wrong with me and what the hell am I talking about.  So . . . how would you feel if the nation's largest financial industry self-regulatory organization called a Tweet a "public appearance?" Consider this recent FINRA regulatory settlement.

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, Jon Robert Hickman submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Jon Robert Hickman, Respondent (AWC  2011030501201, October 14, 2014).

In 2003, Hickman first became registered and by 2005, he was registered with FINRA member firm MDB Capital Group LLC., where he remained until June 16, 2011, at which time he registered with another firm. The AWC asserts that Hickman has no prior disciplinary history with the Securities and Exchange Commission, any state securities agency, FINRA or any other self-regulatory organization.

50 Followers On Twitter

The AWC asserts that Hickman maintained a Twitter account from at least April 2009 through June 2011.  That account purportedly had a mere 50 followers. 

While registered as a research analyst through MDB but without his firm’s knowledge, Hickman allegedly Tweeted about equities he covered. The AWC alleges that in eleven of the Tweets, Hickman discussed seven securities that he personally owned but failed to disclose that conflict.  Further, 14 of his Tweets purportedly failed to be fair and balanced by disclosing risk or contingent factors or failed to provide a sound basis for evaluating certain facts discussed. 

FINRA deemed Hickman’s Tweets to  constitute 
  • public appearances under NASD Conduct Rules 2711(a)(5) and 2210(a)(5) and
  • communications with the public under NASD Conduct Rule 2210(a).  
Additionally, FINRA deemed Hickman’s inadequate disclosures to violations of NASD Conduct Rules 2711(h)(1)(A) and 2210(d)(1)(A), FINRA Rule 2010 and 1M-2210-1. 

NASD Conduct Rule 2711. Research Analysts and Research Reports

(a) Definitions
For purposes of this rule, the following terms shall be defined as provided.
. . .

(5) "Public appearance" means any participation in a conference call, seminar, forum (including an interactive electronic forum) or other public speaking activity before 15 or more persons or before one or more representatives of the media, radio, television or print media interview, or the writing of a print media article, in which a research analyst makes a recommendation or offers an opinion concerning an equity security. This term does not include a password protected Webcast, conference call or similar event with 15 or more existing customers, provided that all of the event participants previously received the most current research report or other documentation that contains the required applicable disclosures, and that the research analyst appearing at the event corrects and updates during the public appearance any disclosures in the research report that are inaccurate, misleading or no longer applicable. . .

(h) Disclosure Requirements
(1) Ownership and Material Conflicts of Interest
A member must disclose in research reports and a research analyst must disclose in public appearances:
(A) if the research analyst or a member of the research analyst's household has a financial interest in the securities of the subject company, and the nature of the financial interest (including, without limitation, whether it consists of any option, right, warrant, future, long or short position); . . .

Going Offline

In accordance with the terms of the AWC, FINRA imposed upon Hickman a $15,000 fine and a 10-business-day suspension from association with any FINRA member firm. 

Bill Singer's Comment

I get this one and truly don't have a problem with FINRA's action -- frankly, even the fine and suspension strike me as fair.

On the other hand, there's something awfully tortured when the only way a Wall Street regulator can corner a violator is by deeming a Tweet to be a "public appearance."  If you ask me (go ahead, please, ask me. Gee, thanks!), this case underscores how outdated much of Wall Street's regulation has become and how we seem to be trying to regulate 21st Century misconduct by 20th Century rules.  To make matters even worse, although FINRA replaced the old NASD in 2007, the current self-regulatory organization is still charging violations pursuant to the NASD Rulebook. After seven years of existence, FINRA still can't produce a consolidated rulebook and is relegated to pretending that Tweets are "public appearances."  

Also READ:


Written: October 22, 2014

FINRA has this thing about registered representatives engaging in so-called "Outside Business Activities" ("OBA"). Frankly, I don't agree with certain aspects of the FINRA's OBA Rule. None of which is to suggest -- even remotely -- that the ultimate goal of the OBA Rule isn't valid. In my opinion, there is great merit in having a broker-dealer aware of the OBA of its registered staff -- and there are many compelling circumstances when a proposed OBA should be denied or restricted. On the other hand, since FINRA is a self-regulatory organization ("SRO") that limits voting for its elected offices and rule proposals to its member firms, the legitimate needs and concerns of the hundreds of thousands of disenfranchised registered individuals must be given fair consideration by the SRO. Unfortunately, too much of what's involved in policing the OBA issue comes off as FINRA siding with management/employer against labor/employee and depicts the SRO as a tool of management. Consider this case, for example.

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, Matthew King Absher submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Matthew King Absher, Respondent (AWC  2013038446701, October 3, 2014).

Absher was first registered in 2009 and on April 23, 2010, was registered with FINRA member firm New England Securities.

The Inactive Company And Construction Biz

The AWC asserts that from April 2010 to November 2011, Absher served as a director of an inactive "but still registered company he incorporated for day trading;" and from June 2013 to September 2013, he served as president of a company that provided containers for construction sites.

The AWC alleges that in his capacities as director and president of the two companies, Absher failed to provide prior written notice to FINRA member firm New England about his "outside business activities," and in the case of his directorship of the inactive company, he "inaccurately answered four New England questionnaires about that outside business activity."

FINRA Conduct Rule 3270. Outside Business Activities of Registered Persons

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.

• • • Supplementary Material: ————–

.01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person’s responsibilities to the member and/or the member’s customers or (2) be viewed by customers or the public as part of the member’s business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member’s review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person’s outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).

According to online FINRA records as of October 10, 2014, METLIFE [sic]“Discharged” Absher on September 16, 2013, based upon allegations that:


FINRA deemed Absher's conduct in violation of NASD Rule 3030, FINRA Rule 3270, and FINRA Rule 2010.

In accordance with the terms of the AWC, FINRA imposed upon Absher a $5,000 fine and a 60-day suspension in all capacities from association with any FINRA member firm.

Bill Singer's Comment

A $5,000 fine?  Not exactly sure why that substantial amount is even remotely appropriate given the published facts in this case.  Similarly, on that same basis, a two month suspension strikes me as so over-the-top that the sanctions come off a punitive. On the other hand -- and this is an important point that largely undermines my high dudgeon -- Absher voluntarily entered into this settlement with FINRA and if he is okay with the fine and suspension, then that's that.

Of course, I am one of those obstinate bastards who doesn't often take "no" for an answer; so, in that spirit, permit me to chew and gnaw a bit on the fleshy parts of this AWC.  

If we examine the language of FINRA's OBA Rule 3270, we note that the prohibition is not actually against "outside business" but, more pointedly, "outside business activity." To underscore that point, we merely need to note that Rule 3270 notes the context "as a result of any business activity. . ." and also removes so-called "passive investments" from the ambit of the proscribed conduct.  Passive, in my lexicon, further suggests a state of relative lack of activity.

It does not appear that Respondent Absher is an attorney and the AWC implies that he represented himself during the negotiations involving his alleged regulatory misconduct. If I had represented Absher, I would have challenged FINRA's charge in the AWC about the "inactive, but still registered company."  I mean, you know, if the company is "inactive," then isn't there a fair question as to whether Absher engaged in an outside business "activity" that needed to be disclosed?  After all, acting and preparing to act are two different things.

Yes, I understand that there are two-parts to the AWC's charges against Absher and that the OBA Rule specifically restricts conduct as a "director" or "officer" (the latter would cover Absher's role as "president" of the construction business). Consequently, FINRA may indeed have Absher dead to rights on that second charge.

The OBA violation for the "inactive company he incorporated for day trading" is a troubling allegation, however, because:
  1. the company was inactive; and
  2. FINRA asserts that the company was incorporated to engage in "day trading" but oddly fails to disclose whether any such trading actually occurred or if the company actually engaged in any business.
FINRA and its predecessor NASD have had a history of antagonism to the old SOES trading and the more recent day trading manifestations.  There are, admittedly, legitimate regulatory concerns when it comes to day trading but in Absher's case, we have no assertion that he violated any day trading rules or even opened the doors for his business. Consequently, I'm not quite sure that I understand why he was charged with being the director of a company that was preparing to engage in a business.  If the company was actively engaged in a business and Absher was a director, then that's another issue.

As such, even if I grant FINRA its right to go after Absher for his role as President of the active, construction-related company, that still does not off-set my concern about also charging him with what looks like the "preparation" to engage in a business.  If I have misinterpreted the true status of FINRA's day trading business charge, then that is on the SRO for the inarticulate nature of the AWC.  My old high school English teacher used to admonish the class "Say what you mean, don't mean what you say." I would say to FINRA that the AWC should have been better drafted to say exactly what the SRO meant to allege: had Absher's company engaged in day trading but then became inactive; or, to the contrary, did Absher's company intend to engage in day trading but never crossed that threshold?

How does that old Beatles song go?  OBA-di OBA-da . . . and something about "happy ever after in the marketplace"?


Email Bill Singer Connect with Bill Singer on Facebook Follow Bill Singer on Twitter Link up with Bill Singer on LinkedIn Join Bill Singer on Google+