. The Panel barred Sears for the unauthorized trades and imposed only a one-year suspension for the outside business activities in light of the Bar.
On appeal, FINRA's National Adjudicatory Counsel (NAC) modified the Panel's findings to reduce the number of unauthorized trades to 20 and also lowered the Bar to a two-year suspension. In affirming the outside business violation, the NAC reduced the suspension from one year to six months.
The NAC noted that Sears adduced additional evidence in the form of affidavits from three customers that materially contradicted the memorandum of her supervisor. Because the affidavits came directly from the customers, the NAC credited them and essentially removed those three customers from the number of unauthorized trades. In rejecting the balance of Sear's due process challenges, the NAC stated that "because FINRA is not subject to constitutional and common law due process requirements," due process does not apply at FINRA. As to other procedural/evidentiary matters, the NAC was not bothered by the introduction of declarations against Sears because she "had an opportunity at the hearing to cross-examine the FINRA investigator that prepared the declarations."
McClure testified against Sears at the FINRA hearing. The FINRA panel clearly believed her. Gwaltney testified. The
FINRA panel believed him. Two customers claiming unauthorized trades in their personal accounts went the extra mile and testified. Two
warm, live bodies. Swearing to the truth. Looking Sears dead in the eye and
calling her a cheat and a liar. Worse, Sears then got to tell her side of things
and it doesn't look like she scored much on the credibility meter. However,
in addition to finding against Sears for the two trades noted, FINRA also tacked
on violations for an additional 18 unauthorized trades in the account of four
Eighteen trades and four clients in addition to
the documented, specified, and testified-to allegations of McClure and Gwaltney.
FINRA submitted Declarations alleging unauthorized trades from four other
clients. Apparently, a FINRA examiner courteously prepared the Declarations
(such thoughtful customer service!) and the customers signed them. Customer
Laura Rossie accused Sears of twelve unauthorized trades. Customer Charles
Hoskins added on four more. Customer Paul DiMarco tacked on one. Customer Diane Rinehard cleared the bases with one more.
Sears appealed FINRA's findings and sanctions
to the Securities and Exchange Commission In the Matter of the Application of
Wanda P. Sears, (Securities Exchange Act of 1934 Rel. No. 58075, July 1,
Now, here's a tidbit that I didn't mention above: None of those additional four customers testified about the 18 trades
at the hearing.
Neither Rossie, Hoskins, DiMarco, or Rinehard
testified against Sears at the FINRA hearing! Not a single one swore to tell the
truth and then testified. All they did was sign a Declaration prepared by
FINRA's staff. Sears' supervisor at AMEX was called, and he did testify to
having spoken to those and other customers, and he did corroborate (or tried to)
FINRA's allegations -- but it was still testimony about a conversation with a
third party. And Sears couldn't cross examine the third party; and she
couldn't impeach their credibility. Not exactly due process or fairplay.
Oh, so what. You lawyers
and your procedural nonsense that coddles crooks. The FINRA panel didn't need to
sit and listen to more of the same testimony. Why not just let the panel read
the documentation that proved their allegations?
Chew on this: FINRA did not introduce to
the panel any documentation about the additional 18 allegedly unauthorized
trades! FINRA's lawyer tried to argue to the panel (and apparently succeeded
there) that it was sufficient for the regulator to allege something and then for
the regulator to simply introduce that complainant's Declaration. Almost from
the Stephen Colbert School of Law--- it's so because I say so, and if you
doubt it, look…here, I put it in writing and signed it.
(Your mouth opens as you try to say something but then you raise your hands,
palms facing me, and then let them drop in annoyance). Bill, this Sears is
guilty of outside business activity and the unauthorized trading in the two
accounts where the clients testified. So what's the big deal here? Anyway, she
knew way ahead of time that FINRA was also charging here with 18 specific
unauthorized trades in those additional four accounts. That was in the Complaint
filed by FINRA. Chapter and verse.
Those additional 18 allegedly unauthorized
trades were NOT identified nor the subject of any cause of action in FINRA's
Complaint. Worse, the Complaint alleged unauthorized trading in the McClure and
Gwaltney accounts (that much FINRA seems to have done right), but then added a
third customer: Jean Thomas. Thomas was supposed to be called by FINRA but the
Enforcement Staff didn't produce her to testify. She was 85 years old and
recently hospitalized, and Enforcement described her likely testimony as
cumulative and redundant. As such, the panel correctly made no findings with
respect to her account.
The Courts and the SEC have often warned regulators that although Complaints
need not specify ALL the details in the case to be prosecuted, there must be
enough meat on those bones to ensure that the charged party understands the
issue and afforded a full opportunity to justify his/her conduct. As the SEC so
aptly crystallized the issue: It's less a matter of the adequacy of the pleading
and more a matter of "the fairness of the whole procedure." Since
FINRA is required under the '34 Act to "provide a fair procedure
for the disciplining of members and persons associated with members," this
concern is more than a passing fancy.
Thus defeat is snatched from the jaws of victory and FINRA sent to the SEC's
woodshed. Here is the damning language, verbatim (footnotes omitted):
Here, the record does not
indicate that Sears had adequate notice that the claims made by the four other
customers in the Declarations were intended to provide a basis for additional
findings of violation. There is no reference to any of these four additional
customers in the complaint. Enforcement's pre-hearing brief discussed only the
trades that the complaint alleged were unauthorized. Although Enforcement
introduced the Declarations at the hearing, it adduced no underlying
documentation related to the trades, and it did not indicate that it sought to
hold Sears liable for those trades. In closing arguments, Enforcement counsel
asserted only that the evidence of unauthorized trading in the accounts of
McClure and Gwaltney was "corroborated by the other [D]eclarations."
Enforcement's proposed findings of fact did not seek a finding that Sears
engaged in unauthorized trading in the accounts of Rossie, Hoskins, DiMarco,
or Rinehard, and its post-hearing brief urged only that the Hearing Panel find
that "Sears violated NASD Conduct Rule 2110 by effecting [the]
unauthorized transactions as alleged in the Complaint."
FINRA, however, found that
Sears violated Rule 2110 by executing unauthorized trades in the accounts of
not only McClure and Gwaltney but also in the accounts of Rossie, Hoskins,
DiMarco, and Rinehard. Under the circumstances, we conclude that it is not
appropriate to hold Sears liable for additional Rule 2110 violations based on
the Declarations because it appears Sears lacked adequate notice that the
Declarations were an additional basis for FINRA's allegations. We
therefore set aside the additional findings of unauthorized trading based on
In issuing its Opinion, the SEC sustained the
sanction imposed on Sears for failing to disclose an outside business activity
in violation of FINRA Rules 3030 and 2110; but ordered that the sanction imposed
by FINRA on Sears for engaging in unauthorized transactions in violation of
FINRA Rule 2110 be vacated and remanded to FINRA for further proceedings.
A Difficult But Important Point
George Bernard Shaw said that "The love of
fairplay is a spectator's virtue; not a principal's." Those of us who
love sports have been saddened in recent years by the revelations of steroids,
point shaving, bribery of officials, and outright cheating. Why do we care
if our team wins by cheating? Because the victory is cheapened, as is the sport.
Much the same can be said for regulatory and criminal proceedings. Win but
win fairly. It strengthens the system.
If you read the full FINRA case involving
Sears, it does not paint a flattering picture of her or our industry. You
will likely be repulsed, as I was, by the allegations involving numbers of
vulnerable clients. My analysis here is not intended as a paen for Sears
or her conduct; rather, my commentary is a warning. You cannot cut corners when regulating Wall Street. You cannot sleepwalk through the job of regulating when our economy is melting down and the opportunities for misconduct are ripe.
There was a strong enough case here against Sears involving two customers and unauthorized trading in their accounts (plus the apparent slam-dunk case involving the outside activity). As a former regulatory prosecutor myself, I am all too aware of the desire by some regulators to gild the lily and throw in a kitchen sink of charges NOT with the knowledge that you can prove your case but with a misplaced "hope." Worse, sometimes the piling on of charges is viewed as a perfectly acceptable tactic to force settlement.
I have no first-hand knowledge of the decision making process in FINRA's prosecution of Sears, but I do know one thing: In this country and in this industry we must insist upon fairplay when the arena is controlled by the same folks who conduct the investigation, file the charges, hear the case, and impose the sanctions. I am less appalled with the SEC's description of the lack of adequate notice of charges by FINRA, than I am with FINRA's failure to catch this practice and nip it in the bud. Why was the Sears Complaint approved in the form it was? How much more work would have been required to specify the details--the names of stocks, the dates of trades, etc.?
And what is the net result of all this strong
arming and gamesmanship? More delay and more cost. The case now
comes back into FINRA's lap. Resources are wasted on a remanded case when
there are many other pressing matters requiring FINRA's attention. This is not the time for a regulatory Mulligan.
Are there any among you who still doubt the
need to overhaul our nation's financial regulatory system?