Stockbroker Undone By Email Trail Of Undisclosed Customer Settlement

September 18, 2012

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, Barry Pittman submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Barry Pittman, Respondent (AWC 2011030144801, September 13, 2012).

Beginning July 1, 2008, Pittman was registered with John Thomas Financial ("JTF") until his termination on November 16, 2011, at which time he became registered with another firm until August 3, 2012.

SIDE BAR: Although not disclosed in the AWC, an online FINRA disclosure document as of September 18, 2012 reflects that Pittman was discharged on July 6, 2012,  by Aegis Capital pursuant to the following explanation:


According to the AWC, Pittman has no prior regulatory disciplinary history.

Just Between Us

Around January 2011, a JTF customer complained to Pittman about losses in his account, which the stockbroker failed to bring to the firm's attention. Thereafter, without JTF's knowledge or approval, Pittman agreed in emails to the customer to pay $65,000 in reimbursed losses at a minimum rate of $5,000 monthly payments. Pittman failed to make any of the promised payments.

SIDE BAR: Bad enough that Pittman didn't disclose the complaint as he was required.  Bad enough that he negotiated a settlement away from his firm.  Bad enough that it put it all in emails.  The worst thing is that having left a written trail of his misconduct, Pittman compounded the mess by reneging on the payments to his customer.


At least five emails were sent to the complaining customer from Pittman's personal account rather than a JTF address during January 2011 to October 2011; notwithstanding that the firm did not permit the use of personal email addresses for business-related communications.  The AWC alleged that Pittman's

  • use of the unapproved non-JTF email account circumvented the firm's ability to monitor such correspondence under NASD Conduct Rule 3010(d); and
  • attempt to settle the matter away from the firm without its knowledge or approval

constituted separate violations of NASD Conduct Rule 2010.

NASD Conduct Rule 3010: Supervision

. . .

(d) Review of Transactions and Correspondence

(1) Supervision of Registered Representatives

Each member shall establish procedures for the review and endorsement by a registered principal in writing, on an internal record, of all transactions and for the review by a registered principal of incoming and outgoing written and electronic correspondence of its registered representatives with the public relating to the investment banking or securities business of such member. Such procedures should be in writing and be designed to reasonably supervise each registered representative. Evidence that these supervisory procedures have been implemented and carried out must be maintained and made available to the Association upon request.

(2) Review of Correspondence

Each member shall develop written procedures that are appropriate to its business, size, structure, and customers for the review of incoming and outgoing written (i.e., non-electronic) and electronic correspondence with the public relating to its investment banking or securities business, including procedures to review incoming, written correspondence directed to registered representatives and related to the member's investment banking or securities business to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with firm procedures. Where such procedures for the review of correspondence do not require review of all correspondence prior to use or distribution, they must include provision for the education and training of associated persons as to the firm's procedures governing correspondence; documentation of such education and training; and surveillance and follow-up to ensure that such procedures are implemented and adhered to.

(3) Retention of Correspondence

Each member shall retain correspondence of registered representatives relating to its investment banking or securities business in accordance with Rule 3110. The names of the persons who prepared outgoing correspondence and who reviewed the correspondence shall be ascertainable from the retained records and the retained records shall be readily available to the Association, upon request.

NASD Conduct Rule 2010: Standards of Commercial Honor and Principles of Trade

A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.


In accordance with the terms of the AWC, FINRA imposed upon Pittman a fine in the amount of $7,500 and a suspensions for 60-days in all capacities.

Bill Singers Comment

For starters, the sanctions are quite generous to Pittman and hopefully he appreciates that things could have gotten far worse.  Personally, I'm not exactly clear anymore what a stockbroker needs to do to get barred by FINRA but, hey, at least we know that hiding a customer complaint, entering into an undisclosed settlement, using an unapproved email account, and not honoring that settlement don't invoke the ultimate sanction from the industry's self-regulatory organization.

Ah yes, it's all so easy these days - you don't even need to go home and use an old-fashioned bulky PC. Just use your iPhone or iPad. Take it out at work along with everyone else. Log on to Facebook or Google or AOL or GMail.  Who the hell is gonna know - everyone is online 24/7 doing something.  Okay, maybe you've got a point there but, you know, at least pay the damn settlement bucks you promised to the customer, right?

The theory behind undisclosed settlements - which detractors correctly characterize as "hush money" - is that it may be sound business to reimburse the losses of a good (but presently unhappy) customer.  Quietly forking over a few hundred or thousand dollars as the cost of retaining thousands of dollars in annual commissions or fees often seems a no-brainer to many stockbrokers.  Of course the same set of facts seems a violation to many in-house compliance officers and industry regulators because it subverts, compromises, and circumvents perhaps the most critical of all first lines of defense: knowledge of a customer complaint.

Without question, this is as pandemic a problem as Wall Street has. Producers at Merrill LynchMorgan Stanley, JP Morgan, Wells Fargo, or UBS are just as likely as a counterpart at a smaller local/regional firm to go the route of handing over a relatively piddling sum to assuage an unhappy customer.  A perceived nuisance is a nuisance no matter how large or small the member firm.  And who the hell needs to or wants to answer all those idiotic questions from those morons in compliance?  I'll take care of this on my own and make it up with some house product or cross-selling some higher compensated crap.

While, in some instances, the customer-service goal may be commendable, unfortunately, the execution of this scenario often runs afoul of engaging in a violation of as basic a building block, a keystone as it were, of compliance and regulation as exists. Whatever the motivation behind the undisclosed payments, they tend to come off looking more like hush money than honorable reimbursement. Of course, let's be honest here: Stockbrokers often figures it's easier and cheaper to shut up a client before the firm finds out and before a regulator starts poking around.  Note the outcome of that logic in this case!

For additional "Street Sweeper" coverage on this topic, READ:

FINRA Punishes Customer Loss Reimbursement By Stockbroker

Failure To Report Email Customer Complaints About Unauthorized Trades Gets Broker Fined and Suspended

Undisclosed Customer Settlement Checks Move Broker Into Regulatory Checkmate

The Desperate Stockbroker and Her Father's Korean War Medals