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, AXA Advisors, LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of AXA Advisors, LLC, Respondent(AWC 2009020149901, March 13, 2012).
Respondent AXA Advisors, LLC employs about 5,800 registered persons at 1,300 branch offices; and the firm is a subsidiary of AXA Financial, Inc. (a member of AXA Group). Respondent AXA conducts a general securities business, primarily engaged in the distribution of mutual funds, variable life insurance and variable annuity contracts. According to the AWC, Respondent AXA has no prior relevant disciplinary history.
Former Registered Representative Kenneth Neely was first registered in the securities industry in 1987 and affiliated with several FINRA member firms. By 2001, he was registered with UBS PaineWebber, Inc. and thereafter with Stifel, Nicolaus & Co., Inc.. Beginning in August 2007, Neely was employed at Respondent AXA's Clayton, MO branch office.
According to FINRA's allegations, when Neely became associated with Respondent AXA in August 2007, he had been the subject of four customer complaints, including three arbitrations, concerning his business practices at prior employers. Moreover, Respondent AXA was aware that he was experiencing financial difficulties. The AWC alleges that in 2001, while employed at UBS, Neely began a Ponzi scheme, which he continued during his employ with Stifel and thereafter at Respondent AXA, where he induced that firm's customers and others to participate in a fictitious "St. Louis Investment Club" and to invest in an equally fictitious real estate investment trust, the "St. Charles REIT." Following his July 2009 termination by Respondent AXA for admittedly commingling and converting funds, FINRA entered into an AWC with Neely (AWC/20080157230901 /July 23,2009) whereby he was barred from the industry.
In April 2008, during an annual audit of Neely, Respondent AXA reviewed Neely's computer and discovered an Excel spreadsheet, which reflected a payment schedule for eight individuals. The AWC characterizes those individuals as having been induced by Neely to participate in his fraudulent scheme. The spreadsheet was titled "Statement of Accounts with Clients," marked "Ken Neely," listed Neely's home address, and showed a total amount invested of $323,000. Additionally, the spreadsheet set out the initial amount each listed individual had invested and the amounts due in April 2008.
One of Respondent AXA's examiners who conducted the audit became suspicious about the spreadsheet and asked Neely to explain it. According to the AWC, in person and later in an email, Neely explained that a friend and potential client planned to start a business and needed advice on how to manage business finances. In response to that need, Neely claimed that he had used the spreadsheet to show his friend how to keep track of assets and liabilities.
In an email describing the spreadsheet, the AWC alleges that Neely falsely explained that he used his name instead of his friend's company name, and names of individuals, instead of various vendors of his friend's company. Why such substitutions? According to the AWC, Neely claimed he took these steps to ensure that he "would not be liable for any plans that [his friend] put together on his own or any mistakes he made while inputting his information." Apparently for good measure, Neely added that his friend provided the individual names - which likely raised quite a few eyebrows given that one of the provided names was a client of Neely's at Respondent AXA's. The AWC states that "[d]espite these statements, the Firm accepted Neely's explanation without adequate further review.
FINRA concluded that Respondent AXA's response to the red flags raised by Neely's spreadsheet, his explanations, and his background constituted a failure to reasonably supervise him and a further failure to investigate adequately the various indications concerning his misconduct, in violation of NASD Rules 2010 and 2110.
Accordingly, FINRA imposed upon Respondent AXA the sanctions of a Censure and $100,000 fine.
A commendable FINRA regulatory action and fair sanctions. That being said, this is a recurrent problem not only at Wall Street's brokerage firms but at its regulators. As recent history has sadly demonstrated, even when presented with a relatively gift-wrapped tip about fraud, the industry's compliance and regulatory professionals have let the opportunity dribble through their fingers - be that Madoff, Stanford, or far too many other matters to name.
Why this fumbling? Frankly, as this FINRA case notes, it's rarely the fault of the grunts doing the audits and investigations - they frequently walk into their bosses's offices with the damaging findings. Unfortunately, be it politics or incompetence or both, what happens once a subordinate smells the smoke and sees the first flickers of flame is disappointing. Time and again, the failure is one of management.
As I have often noted, in recent decades, we have gone down the dubious path of centralizing bureaucracies to the detriment of more local, flexible offices - and that's a malady of business and regulation. Too-big-to-fail replaced the independent/regional brokerage firms. Washington-centric bureaucracies staffed by cronies and incompetents overwhelmed the efficiency of local offices, often closing them down. Ask Harry Markopolos about what else he could have done to get the SEC to go after Madoff. Read the history of Stanford and wonder what more the SEC, the states, and NASD / FINRA needed to get them to move.
You want to prevent more delays in pulling the fire alarm on Wall Street? Step one: empower local compliance and regulatory staffs with far more autonomy. Step two: decentralize, decentralize, and decentralize.