Edward Jones Broker Trips Over Outside Business and Private Transactions

October 24, 2013

You're going to have to read this one a bit slowly and carefully because it's a bit murky and filled with some odd cross-currents.  At times it looks like a private securities transaction violation; at times, like an outside business activity violation; and, at times, it's got something to do with something else that's a composite of the two violations but not quite except, yes, it may well be. You got that? Really?

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, Steven Lee Goldberg submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Steven Lee Goldberg, Respondent (AWC 2012032656701, October 15, 2013).

Goldberg entered the securities through FINRA member firm Edward Jones in 1981 and was first registered in 1982, and he remained with the firm until May 2012. The AWC asserts that Goldberg had no prior relevant disciplinary history.

Private Investments

The AWC asserts that Goldberg was a co-managing member of GIFI, LLC (''GIFI"), a limited liability company formed in 2002 and owned by Goldberg's wife and a friend. The AWC alleges that Goldberg used:

GIFl as a type of "holding company" for which, in his capacity as co-manager, Goldberg made several private investments. Goldberg's management over the investment decisions, on behalf of and through GIFI, led to his participation in seven separate private securities transactions involving securities such as interests in an entity that owned shares of a publicly traded company, convertible promissory notes, and common stock.. .

Failure To Communicate

The AWC alleges that Goldberg failed to:
  • provide Edward Jones with prior written notice of his participation in each of the alleged private securities transactions;  and 
  • obtain Edward Jones's approval of his participation in the cited investments. 
Out The Door

Online FINRA records as of October 24, 2013, disclose that Edward Jones "Discharged" Goldstein on May 16, 2012, based upon allegations that:


FINRA's View

As FINRA characterizes the misconduct:

Collectively, Goldberg made investments through, or on behalf of OIFI, and thus participated in private securities transactions, outside the scope of his employment with Edward Jones, involving seven separate purchases of securities which occurred sporadically over a lengthy period of time (September 2003 through February 2011), and involving the investment of almost $2 million.

FINRA asserts that Goldberg violated NASD Conduct Rules 3040 and 2010 (for conduct prior to December 15, 2008) and FINRA Rule 2010 (for conduct from December 15, 2008), and in accordance with the terms of the AWC imposed a $15,000 fine and a two-month suspension from association with any FINRA member in any capacity.

Bill Singer's Comment

There's something about this case that just doesn't sit well with me -- and the odd thing about it is that I can't exactly put my finger on it. It's not that Edward Jones was wrong; to the contrary, I understand the firm's concerns. It's not that FINRA was out of line; to the contrary, I fully appreciate the self-regulatory organization's concerns.

Okay, so just what the hell is troubling me?

As best I can explain, we start off with some allegation involving Goldberg's apparent personal investment in a company owned by his wife and a friend. Then there is some issue made about his role in picking investments for this company. Oooooookay . . . but, you know, I'm not sure that I actually see a violation here. It sort of looks and feels like it could be one but I don't exactly agree that it is. It could be but it's not clear cut.

To make matters worse, where the initial charges seem to border on Goldberg's having wrongfully engaged in what one would anticipate would be an Outside Business Activity ("OBA"), it suddenly turns out that FINRA has characterized the misconduct as involving failed disclosure of a private securities transaction ("PST").

From one perspective, it seems that FINRA is promulgating a rule that registered persons need to get prior approval from their firm in order to make a decision to buy or sell securities. From another perspective, FINRA seems to be pointing a finger at what seems like an OBA violation but is cited as a PST.  

Then, just when things are dizzying enough, I uncovered Edward Jones' allegations explaining why they had terminated Goldberg, and that language talks about OBA and some oblique reference to some investment activities. We seem spinning around between two possible violations without coming to rest cleanly on either one.

Having something of the proverbial last word, FINRA seems to sum up its case as one involving PST activity over eight years and involving some $2 million in separate investments.  In the end, it looks like a duck, it walks like a duck, but it seems to be a goose.

For those of you still looking for more puzzles, I have reprinted in full-text NASD Conduct Rule 3040, with highlights added:

NASD Conduct Rule 3040: Private Securities Transactions of an Associated Person

(a) Applicability
No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.

(b) Written Notice
Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.

(c) Transactions for Compensation
(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:
(A) approves the person's participation in the proposed transaction; or
(B) disapproves the person's participation in the proposed transaction.
(2) If the member approves a person's participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.
(3) If the member disapproves a person's participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.

(d) Transactions Not for Compensation
In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.

(e) Definitions
For purposes of this Rule, the following terms shall have the stated meanings:
(1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3050, transactions among immediate family members (as defined in Rule 2790), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.
(2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.

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