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 Scott Shumate submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Scott Shumate, Respondent (AWC 2011026101501, December 14, 2012).
In 1984, Shumate first became registered in the securities industry, and during the relevant period of February through December 2010 was registered with MetLife, until his termination. The AWC asserts that Shumate had no prior relevant disciplinary history.
The AWC asserts the during the relevant period, Shumate used a personal "bellsouth.net" email account to send and receive business-related correspondence without permission from MetLife, whose procedures prohibited representatives from conducting firm business on personal email accounts at third-party providers.
On or about July 21, 2010, a MetLife compliance officer orally admonished Shumate to cease using personal email for business purposes; thereafter, on September 7, 2010, MetLife issued a formal written warning to cease the use of his personal email account, which Shumate signed. Notwithstanding the oral and written warnings, Shumate continued using his personal email account for business-related correspondence, thus preventing MetLife from monitoring, reviewing and retaining these business communications as required under NASD Rule 3010(d).
In a July 18,2010 email to a customer, Shumate stated that:
legal/tax/and advanced securities division units work in concert with me to develop the strategy & document(s) that will form the basis for their safety net
In a December 22,2010 email addressed to "Colleagues and Friends," which was sent to at least one customer, Shumate stated:
MSI manages a Trillion dollars per year and I am pleased to report that I am working with their Senior Investment Advisor, who is in fact responsible for their guidance-along with his most excellent team of legal, political, economic, analytical, and Tax experts . . .
[i]t pleases me to note that [Company A] and I have reached such an agreement as well. They are an unparalleled yardstick by which all other investment models are measured due to their non-profit and unbiased opinions.
The AWC alleges that Shumate's email comments above were baseless or unsubstantiated statements or claims that are unwarranted, exaggerated and misleading regarding MetLife's capacities and his own services.
About August 3, 2010,a customer complained to Shumate that $500 had improperly been debited from his bank account in connection with a MetLife insurance product. In response to the customer's demand for restitution but without informing MetLife, sometime around September 22,2010, Shumate offered $500 in cash.
Following FINRA's institution of an investigation into Shumate's conduct, the stockbroker failed to fully cooperate with FINRA's requests for testimony and documents made pursuant to FINRA Rule 8210.
In accordance with the terms of the AWC, FINRA deemed Shumate's conduct noted above to constitute violations of NASD Rule 2210(d)(1)(B), FINRA Rule 8210 and FINRA Rule 2010, and imposed upon him a Bar from association with any member in any capacity.
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 Lynch, Morgan 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 undisclosed settlements, READ: