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, Darin Bradley Whittington submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Darin Bradley Whittington, Respondent (AWC 2010022142701, June 12, 2012).
Whittington first became registered with a Series 6 and 63 in 1994, and during the relevant period of April 2008 through June 2009, he was registered with Jefferson Pilot Securities Corporation from May 2004 to June 12, 2008) and, thereafter, with Sammons Securities Company LLC from January 16, 2009 to January 1 2010. During his tenure with both firms, the AWC implies that Whittington had engaged in an approved outside business but does not specify the nature of that enterprise.
Between April 1, 2008, and June 30, 2009, while registered with Jefferson Pilot and Sammons, the AWC alleges that Whittington referred customers from his firm-approved outside business to invest in a security offered by Oxford Global Advisors ("Oxford"). The AWC characterizes the offered security as "the Oxford foreign currency exchange," and the self-regulator concedes that although this investment was eventually determined to be a Ponzi scheme that Whittington was unaware of the fact during the dates of the subject transactions. The AWC characterizes Whittington's Oxford transactions as constituting at least 40 private securities transactions, for which he received a finder's fee as compensation for 29 of those transactions.
The AWC alleges that the Oxford transactions took place outside Whittington's regular course of employment at Jefferson Pilot and Sammons, and that the registered representative failed to provide either firm with notice of his involvement in these transactions nor did he receive prior written approval for the transactions. Based upon this conduct, FINRA charged Whittington with violating NASD Conduct Rule 3040: Private Securities Transactions of an Associated Person and NASD Conduct Rule 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 AWC, FINRA imposed upon Whittington a $10,000 fine and a 12-month suspension from association with any FINRA member firm in any capacity.
According to the Complaint in United States Securities and Exchange Commission v. Trevor Cook et al. (DMN 09-CV-3333)
Oxford Global Advisors, LLC is a Minnesota limited liability company with its principal place of business in Minneapolis, Minnesota. Oxford Global Advisors, LLC is not registered with the Commission in any capacity. No registration statement has been filed with the Commission with respect to securities issued by Oxford Global Advisors, LLC. In or around July 2008, Oxford Global Advisors, LLC ceased doing business under his name and was later reformed as Oxford Global Partners, LLC.
Paragraph 28, page 7 of the Complaint
According to the SEC's November 24, 2009, press release announcing the filing of the Cook case:
The SEC alleges that from at least July 2006 through at least July 2009, Cook and Kiley, through the Defendant Companies, raised at least $190 million from at least 1,000 investors through the sale of unregistered investments in a purported foreign currency trading venture by misrepresenting that they would deposit each investor's funds into a separate account in the investor's name to trade in foreign currencies and generate annual returns of 10 percent to 12 percent. They also misrepresented that their foreign currency trading program involved little or no risk and that investors' principal would be safe and could be withdrawn at any time. The SEC alleges that Cook and Kiley did not place each investor's money into a segregated account in the name of the investor. Instead, they pooled the investors' funds in bank and trading accounts in the names of entities that they controlled, including the Defendant and Relief Defendant companies. The SEC alleges that Cook and Kiley misappropriated $42.8 million of investors' money, including $18 million that Cook used to buy ownership interests in two trading firms; $12.8 million that Cook and Kiley transferred to Panama to purportedly finance the construction of a casino; $2.8 million that Cook used to acquire the Van Dusen Mansion and $4.8 million that Cook lost through gambling. Cook and Kiley also misspent approximately $51 million to make Ponzi-like payments to earlier investors. The SEC further alleges that Cook and Kiley placed $108 million of investors' funds into banking and trading accounts in the names of their various shell companies and used some of this money to trade foreign currencies, resulting in losses of at least $48 million
On April 13, 2010, Cook pleaded guilty and, thereafter, on April 24, 2010, he was sentenced to 25 years in prison and ordered to pay $158 million in restitution on one count of mail fraud and one count of tax evasion for his role in a $190 million foreign currency trading scheme that defrauded approximately 1,000 investors. Cook was charged on March 30, 2010, and pleaded guilty on April 13, 2010.
For starters, let me be quite clear, Whittington's conduct was wrong and FINRA's sanction seem fair under all the attendant circumstances. When y'all make up some crap about how I'm defending Whittington, please reference the preceding sentence in your fantasy.
Now, you might ask (and if you don't, I will), what's my problem with this FINRA regulatory matter?
Okay, thanks for asking.
My main quibble with this AWC is that it is not particularly well drafted in terms of providing necessary context or explaining precisely what Whittington did or didn't do. As to the issue of context, the Oxford scam was a major fraud but is nary mentioned, much less explained, in this regulatory document. At a minimum, FINRA might have offered a citation or link to the SEC's history of this case. No, you're right, FINRA's case did not involve charges against Oxford or its principals but solely dealt with Whittington's sales; nonetheless, the enormity of the underlying Ponzi provides some context concerning Whittington's likely state of mind and underscores that he may well have also been duped by the con artists running this FOREX fraud.
Does Whittington's "state of mind" excuse his violations? Not one whit! The relevancy here is that in weighing the appropriateness of the sanctions, it helps to understand whether the registered representative was a co-conspirator, on notice of the fraud, or just another victim (albeit one who got paid a referral fee). Since even FINRA acknowledges that Whittington was unaware of Oxford's fraud, that justifies the relatively light sanctions.
Another problem with FINRA's exposition of the facts in this case is that the AWC obtusely informs us that Whittington engaged in approved outside business activity but then charges him with engaging in private securities transactions. While those are two separate violations, FINRA titillates us without satisfying our curiosity.
The omission of these facts inhibits us from fully grasping what occurred here - and that inhibits industry participants from drawing meaningful lessons and contemplating better practices to monitor such activity. Ultimately, such shortcomings reduce these regulatory actions to little more than revenue generators for FINRA with no educational value to the industry or to public investors.
The most puzzling aspect of this AWC is the lack of a substantive discussion about Whittington's due diligence attendant to his initial investigation of Oxford's securities offering and his ongoing due diligence during the time of his various solicitations of investors. While FINRA conceded that Whittington did not know at the time of his solicitations that Oxford was engaged in a Ponzi scheme, that hardly informs us as to why the registered person was in such a state of ignorance.
As I have often written concerning private securities transactions and outside business activities, the onset of the Great Recession placed tremendous strain upon many stockbrokers and prompted them to seek additional sources of income to replace or supplement their reduced commissions and fees. Starting in 2008 and continuing to the present day, we read of increasing numbers of cases involving so-called trading platforms, FOREX scams, and all sorts of odd investment opportunities offered by registered persons to their brokerage firm customers. And this phenomenon isn't solely a development at an indie/regional firm such as an LPL but something that has transpired at Merrill Lynch, Wells Fargo, Morgan Stanley, JP Morgan, and other firms. In many situations, the transactions occur without the employing firm's knowledge or consent; in other cases, the permission granted was for a far different proposition than subsequently played out.
If you are a public customer, this case is a stark warning. Even Wall Street professionals can be duped. As such, a public customer would be foolhardy to solely rely upon his or her broker's claims of due diligence - if it's your money, ask questions, demand answers, and verify everything. It will prove small comfort to learn that your broker was honest but didn't really do enough homework or was defrauded by the issuer.
If you are a registered person, note that even in a situation where you are honestly unaware of any red flags concerning an outside investment, FINRA may still tag you with a fine and a hefty suspension. Be clear that there are two distinct permissions needed from your employing firm when you intend to engage in an outside business and also in a private securities transaction. Simply obtaining permission for the former may not protect you if you also engage in the latter.
Also read these "Street Sweeper" columns:
UPDATE: The Flying Ponzi Commodities Pool Circus: Securities Fraud, Bank Fraud, and Tax Evasion (June 18, 2012)
Feds Say All That Glittered At Gold Coast Futures & Forex Was Not Gold (June 6, 2012)
Commonwealth Stockbroker's Private Securities Transaction and Customer Loan Prove Boiling Frog Story (June 5, 2012)
FOREX Trading Platform Scam Ends In Guilty Plea (March 19, 2012)
Brokerage Firm Sale Runs Afoul of FINRA Private Securities Transaction Rule (January 3, 2012)