Stockbroker's Friend, Cousin, And Ex-Wife Collide Into One Regulatory Mess

June 6, 2012

wedding rings

The rings came off, the property was divided, and a career got temporarily sidelined

In response to the filing of a Complaint on February 18, 2011, by the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA"), Respondent Dennis Zator submitted an Offer of Settlement dated May 4, 2012, which the regulator accepted.  Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Zator consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Dennis Zator, Respondent (Offer of Settlement, 2009020519501, May 31, 2012).

In 1975, Zator entered the securities industry as a General Securities Representative ("GSR) and during the relevant time of 2003 through November 13, 2009, he was registered as a GSR plus Series 5,15, 63, and 66 capacities with Oppenheimer & Co., Inc.

Around October 10, 2007, the Offer of Settlementalleges that without prior approval from Oppenheimer, Zator borrowed $40,000 from a cousin and $90,000 from a friend - both individuals were Oppenheimer customers serviced by Zator.

Zator recorded the two loans against his home with the local recorder of deeds, and used the proceeds to purchase his wife's share of their marital home during their divorce proceedings.

On September 3, 2008, and again on June 10, 2009, Zator completed an Oppenheimer branch office questionnaire, on which he responded "NO" to the question: "Have you made loans to or borrowed from any Customer?"

FINRA deemed Zator's conduct to constitute violations of NASD Conduct Rules 2370: Borrowing From Or Lending To Customers and 2110: Standards of Commercial Honor and Principles of Trade;  and FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade.  In accordance with the terms of the Offer of Settlement, FINRA imposed upon Zator a $2,500 fine and a  30-calendar day suspension in all capacities from any FINRA registered firm.

Bill Singer's Comment

As we discussed at length in Commonwealth Stockbroker's Private Securities Transaction and Customer Loan Prove Boiling Frog Story ("Street Sweeper," June 5, 2012), which presented a similar FINRA case involving a broker (Preston) who also borrowed money from two friends/customers :

As the "Boiling Frog" theory goes, a frog placed immediately into a pot of boiling water will try to jump out.  In contrast, if a frog is placed in room-temperature water, which is gradually heated to a boil, the relaxed frog will kick back, stretch out, and calmly allow itself to be boiled to death.

Preston's situation seems to support that the Boiling Frog Theory has some validity when it comes to the gradual increase in the degrees of compliance problems for stockbrokers. In fairness to the respondent in this case, a lot of brokers likely would not have sensed that their actions were improper.

What and when a registered person recognizes that he or she is crossing the line of compliant behavior is often far easier to discern in hindsight than when one is rambling and ambling into danger.  Nor is this a problem only found at indie and regional firms - of which Commonwealth is a major presence.  To the contrary, it's a challenge faced by brokers at Merrill Lynch, Morgan Stanley, Wells Fargo, JP Morgan, as well as Commonwealth, LPL Financial or even smaller firms.  Not realizing that the room-temperature water is beginning to dangerously bubble around you is a common danger for many registered persons.

In Preston's case, he may have seen the two customers as two friends, and, failing to mentally process the dual nature of the relationships, he never quite recognized that taking his pals along to the presentation was a FINRA violation - because those buddies were also customers and the presentation involved a securities offering. . .

Similar to the gradually warming compliance waters surrounding Preston, it's possible that the nature of his misconduct did not immediately strike Zator until it was too late.    In today's case analysis, we have a broker who borrowed money from a friend and a cousin who were also customers - a circumstance that may only presented itself to Zator as a private, social loan rather than one involving "customers."   Unfortunately, it was that latter characterization that brought the two loans in the ambit of both FINRA's rules and Oppenheimer's policies.  Moreover, since Zator recorded the loans against his deed, he may have given himself the false comfort that he was open and notorious about the source of the borrowed money.

Whatever allowances we are prepared to grant Zator for the above conduct, it remains disturbing that he failed to answer "YES" on two consecutive annual questionnaires inquiring about the existence of "customer" loans.  On the other, to be fair,  if the broker mentally processed the loans as one between "friends" and "family" but does not view it as a "customer" loan, simply asking the same question over and over again is not calculated to elicit a different answer.

Under the circumstances, FINRA's sanctions are appropriate and seem to have fully and fairly considered the unusual circumstances of the cited transactions.  A concise case and a reasonable settlement.