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by Bill Singer
 
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Written: August 27, 2014

What's A JP Morgan employee and a customer's debit card have to do with smoking too much dope and singing about it on the old Lawrence Welk show? Well, frankly, nothing at all . . . well, sort of, but it's a stretch. If nothing else, however, this is a hell of a tease to get you to read the article. I promise that there is something in here about a debit card, toking, and Lawrence Welk.

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, Pedro Castaneda submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Pedro Castaneda, Respondent (AWC 2013037774401, August 13, 2014).

Castaneda was first registered in 2006 and by October 1, 2012, he was registered
with J.P. Morgan Securities, LLC (JPMS). While associated with JPMS, Castaneda was also employed by JP Morgan Chase Bank (JPMC Bank) as a personal banker. The AWC asserts that he had no prior relevant disciplinary history.

Inadvertently

On February 28, 2013, Castaneda assisted a bank customer in adding her sister as a new signatory to her JPMC Bank checking account, and, in furtherance of that change, Castaneda printed a debit card for the sister and another debit card for the customer. The AWC asserts that Castaneda “inadvertently” put the customer’s card in his pocket and took it home.
Thereafter, on March 1, 2013, Castaneda instructed his girlfriend to pay for plumbing services that were to be performed at his home that day, and he gave her a debit card to use to make the payment.

Yeah, you got it: Castaneda gave his girlfriend the Bank customer’s debit card. 

As a result, on March 1, 2013, the customer’s and sister’s Bank account was charged $505.08 for plumbing services performed at Castaneda’s home.

An Error

Now, here’s the thing: According to the AWC, and we must fully defer to FINRA’s recitation of facts because that self-regulatory organization investigated this matter and brought the charges, did not realize that the card he had given to his girlfriend was the Bank customer’s. Moreover, when he “realized the error shortly thereafter,” the AWC asserts that Castaneda not only contacted the customer and sister and disclosed the erroneous charge to their account but “arranged to have the plumbing company refund the charges,” which was purportedly accomplished on March 4, 2013. 

A Matter Of Notice

Castaneda did not notify the Bank or JPMS of the erroneous charge. The two employers learned of the matter pursuant to a March 5, 2013, complaint from the Bank customer. 
According to online FINRA records, on June 28, 2013, the Bank “discharged” Castaneda based upon allegations that:

TERMINATED BY AFFILIATE BANK—NON SECURITIES RELATED. REGISTERED REP PRINTED DUPLICATE DEBIT CARD FROM A BANK CUSTOMER ACCOUNT AND USED THE CARD FOR A $505 PERSONAL TRANSACTION

FINRA deemed Castaneda’s conduct to constitute a violation of FINRA Rule 2010 and fined him $5,000 and suspended him for one year from association with any FINRA member firm in any capacity.

Bill Singer’s Comment

I don’t like this case. I don’t understand this case. I don’t understand the sanctions.

For starters, it appears that Castaneda was not represented by legal counsel and apparently negotiated the AWC on his own. That may well explain why he agreed to a $5,000 fine and a one-year suspension – and “yes” this was a voluntary settlement, so let’s at least acknowledge that Castaneda entered into this settlement on his own. I'll give that much to FINRA.

As I noted in my discussion above, we really have to accept the facts as set forth by FINRA in the AWC. As such, what do we have here? We have a registered person/banker who “inadvertently” took home a customer’s debit card. It may have helped if FINRA explained why it had concluded that the pocketing of the card was inadvertent. For example, and this may well be the case, Castaneda may have physically handed one card to the sister and intended to mail the customer’s card upon returning to his desk but forgot. I’m not saying that’s what happened. I am merely offering that as an explanation of how one inadvertently takes a debit card home. Notwithstanding, that’s FINRA’s version of the facts.

Next, we are told that Castaneda gives a debit card to his girlfriend, not realizing it’s the customer’s. I truly have to call FINRA out on this sloppy recitation of the facts. I mean, seriously, couldn’t you offer a bit more detail as to this act? For starters, assuming that Castaneda inadvertently put the card in his jacket pocket and absent-mindedly took it home, did he discover his mistake at some point after taking off his jacket and put the customer’s card someplace in his home with the intent to bring it back the next day? February 28, 2013 was a Thursday and March 1, 2013, was a Friday.  We’re talking next day.

When the AWC says that Castaneda didn’t realize that the debit card he had handed to his girlfriend was the customer’s – just how the hell do you not realize that? Again, I fully blame FINRA for this lack of clarity.  Perhaps Castaneda had removed the customer’s card from his jacket pocket, put it in a desk drawer with his own Bank debit card or he had placed the customer’s debit card in his wallet with the intent of taking it back the next day, and then pulled the customer’s debit card thinking that it was his own. Yeah, like I said, “perhaps.” Except, you know, by the time an individual is getting charged and settling in an AWC, the “perhaps” stuff should no longer be in play. Even more inexplicably, FINRA doesn’t he confirm that Castaneda had his own Bank debit card, which would at least make his confusion a tad more understandable.

In the end, we are left with an AWC that asserts that Castaneda put the customer’s debit card in his pocket, absent mindedly took it home, and mistakenly used it to pay for his plumbing repairs. According to the AWC, and I accept it, there wasn’t a scintilla of a suggestion that Castaneda intended to do anything wrong. Moreover, he immediately communicated his errors to the customer and her sister and had the charges reversed. As classic a no-harm-no-foul bit of nonsense as one can imagine. If, in fact, there was any misconduct, it appears to have been in not disclosing to the Bank and/or JPMS that the screw-up had occurred. 

Since FINRA is entitled to play games with not filling in the blanks in this AWC, let me enjoy myself with whatever speculation such regulatory shortcomings encourage. How about we assume that Castaneda just had one of those “oh shit” moments that we all do? He realized he had mixed up the customer’s debit card with his own and before anyone wound up paying for something that wasn’t theirs, he reversed the mistake without consequence to the customer or sister. As such, he may have assumed that there was nothing to report as he had managed to extinguished the flame before it became a larger regulatory or compliance fire. If that’s the case, then all that we have here is someone who made two mistakes. One, he took home a customer’s debit card by accident. Two, he mistakenly handed that card to his girlfriend to pay a plumber.

You may have your own theories and opinions as to what did or did not really happen here. If you want to blame someone for that uncertainty, I point you in the direction of FINRA. Notwithstanding, as a matter of law and regulation, the facts as set forth in the AWC are the final words.  Consequently, Castaneda simply forgot about the card in his pocket and mistakenly handed it to his girlfriend. That’s it. No ifs, ands, or buts.

And for this colossal bit of humanity, this guy gets fined $5,000 and suspended for a year? I mean are you kidding me?  What the hell – a respondent shows up without a lawyer and you wring him out for as much as you can get?  

Speaking Of -- Or Singing Of -- Mistakes

In the end, all that I see is a guy who made a mistake. Frankly, the whole episode comes off more funny -- in the eye rolling sense -- than serious. 

It sort of reminds me of the the 1971 Lawrence Welk Show featureing a lovely couple singing "One Toke Over The Line" by Brewer and Shipley. No, I'm not kidding. They were actually singing about one toke too many. And on the Lawrence Welk show.

If you listen to Mr. Welk at the end of the clip, he apparently thought, mistakenly, that this song was a "modern spiritual by Gail and Dale." All of which makes you wonder why Myron Floren, the accordionist who introduced the song, was coughing. You think Mr. Welk got fined $5,000 and suspended from the air for a year because he featured a song about someone who likely had one puff too many on a joint?


 

Written: August 26, 2014

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Written: August 25, 2014

The Financial Industry Regulatory Authority ("FINRA") has a seemingly short and sweet rule in its Code of Arbitration Procedure for Customer Disputes, which defines mandatory customer-industry arbitration as follows:

FINRA Rule 12200Arbitration Under an Arbitration Agreement or the Rules of FINRA

Parties must arbitrate a dispute under the Code if:
•  Arbitration under the Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer;

•  The dispute is between a customer and a member or associated person of a member; and

•  The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.

At first glance, it all seems straightforward and, frankly, fairly simple to comprehend. But first impressions are notoriously misleading. In this case, you would be wrong, very wrong, if you thought that you truly understood all the nuances and implications of FINRA Rule 12200.

Ask And You Shall Receive (If You're A Customer)

FINRA arbitration is mandatory if there's a written agreement in place and the dispute is between a customer and member/associated person, and the dispute is in connection with the member/associated person's business activities. The alternative -- when there is no written agreement -- incorporates the same requirements of dispute and business activities but merely requires a "request" for arbitration be made by a customer. 

Look It Up

Things begin to get a tad less simple and tad  incomprehensible when we try to figure out what, at first blush, seemed like obvious terms: Member, Associated Person, Dispute, and Customer. You might have thought, wrongly, that those words didn't need any explanation -- that they're common enough terms. Again, you would be wrong. What you might not have known is that FINRA has a rule that defines those and other terms. When we look up "member", "associated person" "dispute" and "customer," we get these explanations:

FINRA Code of Arbitration Rule 12100. Definitions

Unless otherwise defined in the Code, terms used in the Rules and interpretive material, if defined in the FINRA By-Laws, shall have the meaning as defined in the FINRA By-Laws.

(a) Associated Person

The term "associated person" or "associated person of a member" means a person associated with a member, as that term is defined in paragraph (r).

. . .

(i) Customer

A customer shall not include a broker or dealer.

. . .

(l) Dispute

The term "dispute" means a dispute, claim or controversy. A dispute may consist of one or more claims.

. . .

(o) Member

For purposes of the Code, the term "member" means any broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated or cancelled; and any broker or dealer admitted to membership in a self-regulatory organization that, with FINRA consent, has required its members to arbitrate pursuant to the Code and/or to be treated as members of FINRA for purposes of the Code, whether or not the membership has been terminated or cancelled.

. . .

(r) Person Associated with a Member

The term "person associated with a member" means:

(1) A natural person who is registered or has applied for registration under the Rules of FINRA; or
(2) A sole proprietor, partner, officer, director, or branch manager of a member, or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with FINRA under the By-Laws or the Rules of FINRA.

For purposes of the Code, a person formerly associated with a member is a person associated with a member.

The Challenge

So . . . howsabout a little challenge?  

According to FINRA's official rulebook, please define what is exactly meant  by the term "customer".  

Okay . . . time's up. And the answer is?  

Ummmm . . . whatsamatta, you can't really come up with a great explanation as to who is a customer, but you can come up with an explanation as to who isn't?  Yeah, you got it, a "customer" is anything or anyone in the Universe, apparently, who is not a broker or a dealer.  

You ain't feelin' all that cocky about defining that term now, are you?  In fact, what, at first blush, seemed fairly simple and easy to comprehend has now turned into one of those annoying mind games about the sound of one hand clapping or of that damn lone tree falling in the forest. As a federal court recently stated:

The proceedings conducted in this case amount to a controlled experiment in what happens when customer status entails inquiring into each communication, agreement, side agreement, understanding, and rendering of advice, and when big guns are drawn in contentious discovery disputes and at trial

Welcome To the Controlled Experiment

The fun thing about crappy statutes and codes is that they invite lots and lots of expensive litigation. Why is that a fun thing, you ask? Oh, that's because I'm an attorney and I can run up lots and lots of billable hours having to deal with such nonsense. 

Take the recent appeal in Citigroup Global Markets Inc. v. Abbar (2Cir, 13-2172, August 1, 2014)..As set forth in the United States Court of Appeals for the Second Circuit's preamble:

Ghazi Abbar, a Saudi businessman who managed Abbar family trusts, lost $383 million invested with a United Kingdom affiliate of Citigroup, Inc. He seeks to arbitrate his grievances under the rules of the Financial Industry Regulatory Authority (“FINRA”) against a New York affiliate, which is a FINRA member. The United States District Court for the Southern District of New York (Stanton, J.) permanently enjoined the arbitration on the ground that Abbar is not a “customer” of the New York affiliate. 

The Abbar family trusts were administered through two wholly‐owned investment vehicles (defendants Amatra Leveraged Feeder Holdings, Limited and Ajial 1 Leveraged Feeder Holdings, Limited) that held the family portfolio. Abbar pursued a risky leveraged investment by purchasing options from Citigroup Global Markets Ltd. (“Citi UK”), which is incorporated in the United Kingdom under the laws of England and Wales. The options entitled Abbar to the value of certain assets in a fund held by Citi UK. Some of the investment bankers who helped develop Abbar’s trading strategy, and some of the personnel who worked on the investments, were employed at another Citigroup affiliate, Citigroup Global Markets Inc. (“Citi NY”), which is incorporated under the laws of New York. When the investments lost all value, Abbar commenced a
FINRA arbitration in New York against Citi NY, a FINRA member.

Citi NY brought an action in the Southern District of New York to enjoin the arbitration, citing the FINRA Code of Arbitration Procedure for Customer Disputes (“FINRA Code”), which provides that a FINRA member consents to arbitration with its customers. After a bench trial, the district court ruled that Abbar, who purchased no goods or services from Citi NY and had no account with it, therefore lacked the indicia of a customer. Accordingly, the injunction was issued. We affirm.
Pages 3 - 4 of the Opinion


Our case lies in between. Citi NY employees certainly provided services to Abbar: they helped structure and manage the option transactions. However, Abbar did not purchase those services from Citi NY. His investment agreements were with Citi UK, and the fee for all services rendered by Citigroup personnel and offices was paid to Citi UK. Citi UK‐‐not Citi NY‐‐was the counterparty to the option agreements and the structuring services letters. While Abbar was certainly a “customer” of Citi UK, that relationship does not allow Abbar to compel arbitration against its corporate affiliate. See Wachovia, 661 F.3d at 171 (holding that a purchaser of a credit default swap from “Wachovia Bank, N.A.” was not a “customer” of affiliate “Wachovia Capital Markets, LLC”). The district court found as fact that when Citi NY provided management services to Abbar,
it acted primarily for Citi UK in connection with the services Citi UK was providing to Abbar. CGMI v. Abbar, 1 943 F. Supp. 2d at 406‐07. That finding of fact is not clear error, and is well supported by the record.
Pages 16-17 of the Opinion


We are thus presented with an issue that, until now, this Court has been able to avoid: the “precise boundaries of the FINRA meaning of ‘customer.’” Wachovia, 661 F.3d at 173‐74. We hold that a “customer” under FINRA Rule 12200 is one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.
Page 17 of the Opinion


The only relevant inquiry in assessing the existence of a customer relationship is whether an account was opened or a purchase made; parties and courts need not wonder whether myriad facts will “coalesce into a functional concept of the customer relationship.” Id. To the extent and in the event such a bright‐line rule allows for evasion and abuse, we think that sufficient relief can be afforded by FINRA’s power to discipline its members and adjust its rules, and by Judge Stanton’s caveat that exceptions may be compelled in rare instances of injustice. See Oppenheimer, 56 F.3d at 357 (finding customer relationship with FINRA member, despite the claimant’s lack of an account with the member, because the claimant would have had an account with the member but for the fraud asserted in the FINRA arbitration); cf. UBS, 660 F.3d at 650 (noting that a customer may also be one who “undertakes to purchase a good or service” from a FINRA member”).

As this case illustrates, finance nowadays often involves worldwide sources, networks of information, talent and technology. But multiple inputs do not necessarily create customer relationships in different places simultaneously. The proceedings conducted in this case amount to a controlled experiment in what happens when customer status entails inquiring into each communication, agreement, side agreement, understanding, and rendering of advice, and when big guns are drawn in contentious discovery disputes and at trial. The sprawling litigation that can (and did) result defeats the express goals of arbitration to yield economical and swift outcomes.

A simple, predictable, and suitably broad definition of “customer” is therefore necessary. See UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319, 325 (4th Cir. 2013) (defining “customer” as “one, not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member’s business activities . . . .”). True, the definition closes the FINRA forum to some foreign transactions with little connection to the United States. But a foreign business that wants to assure access to FINRA arbitration for its grievances need only transact business with a FINRA member or hold an account with one.
Pages 19 -21 of the Opinion

 

 
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