Check Kiting Hypocrisy Flies High At FINRA

May 23, 2014

Check kiting has apparently become an enforcement priority on Wall Street . . . at least when it involves the industry's men and women. Bill Singer asks in his Blog, how come there seems to be a double standard when the same type of conduct involves the employer firms?  And then Bill ask the even more provocative question: How come regulators are not fined and suspended for the same conduct?

Case In Point

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, Nicole Elise Holten submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Nicole Elise Holten, Respondent (AWC 2013036030901, May 8, 2014).

Holten became registered with FINRA member firm with Chase Investment Services Corp., on August 20, 2012; and pursuant to the mass transfer of registrations, in October 2012, she was associated with FINRA member firm J.P. Morgan Securities LLC. Also, Holten was employed as a Personal Banker by JP Morgan Chase Bank, N.A. (the ''JPM Bank"). The AWC asserts that Holten had no prior disciplinary history in the securities industry.

Check Kiting

During the relevant period of November 2012 through January 2013, Holten allegedly maintained two checking accounts and a savings account at JPM Bank, and wrote nine checks totaling $3,750 against those accounts. At the time she wrote each cited check, the AWC alleged that Holten knew she had insufficient funds ("NSF") to cover the transactions. Notwithstanding her alleged knowledge of the NSF status, Holten deposited each of the nine checks into either her savings account, or, in the alternative, into the checking account from which the draft was not written. 

Following her deposit of the checks from her purportedly underfunded checking accounts, the AWC asserts that in numerous instances, Holten immediately withdrew funds or made expenditures. The AWC labels the cited transactions as a "check kiting scheme." FINRA concedes, however, that Holten deposited sufficient funds within a few days to cover the deficits (typically via paychecks); and as of the date of her discharge, Holten had fully paid any outstanding balances. 

Bank Shot

According to online FINRA records as of May 22, 2014, Holten was "Discharged" on January 25, 2013, by JPM Bank based upon allegations that: 


Fined And Suspended

FINRA asserted that Holten check kiting schemed was a violation of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Holten a $5,000 fine and a three-month-suspension from association with any member of FINRA in any capacity.

Bill Singer's Comment

Lemme make sure . . . lemme make quite clear . . . that you fully understand the alleged misconduct on which this FINRA AWC settlement is predicated.  

Over the period of two months, which included the Thanksgiving, Christmas, and New Year's holidays, Holten wrote a massive number of purportedly NSF checks. By massive, I mean to underscore the number 9. Omigod!  That's like, what? Less than one lousy check a week over the three months at issue? 

Worse, this scandalous check-kiting scheme involved the astronomical total of $3,750. Do the math: Holten wrote, on average, $417 per cited check. Of course, JPM did more than enough damage putting its finances and everyone else's at risk when it engaged in misconduct involving LIBOR, mortgages, and that whole London Whale thing. Maybe I'm wrong -- I apologize -- it's possible that Holten's $3,750 compromised the firm's Net Capital.

How was JPM harmed by these 9 so-called NSF checks totalling $3,750? As the AWC notes, Holten deposited sufficient funds within a few days to cover the deficits, typically via paychecks.  

You may have missed that. 

Let me repeat it. 

Not that I'm trying to milk this or make a point or anything. 

Within a few days of allegedly kiting each of the 9 checks, Holten deposited her JPM paycheck to fully cover the deficits. Moreover, when JPM canned her, the bank was not owed a single penny by Holten, who fully paid any debits before walking out the door for the last time.

Not one cent was stolen or converted by Holten. Not a single individual or company was ultimately harmed by her conduct. Perhaps if she had checking account overdraft coverage, this whole mess would have been irrelevant. 

Check kiting may suggest larger financial issues, which may make a registered person vulnerable to improper influences or disposed to perpetrate fraud (see . . . I get it!). Does the issuance of 9 checks in the gross amount of $3,750 over a three-month span rise to the level of even a blip on the regulatory radar screen, particularly when each check was covered in fairly due course? In reality, cases such as Holten accomplish little beyond inflating FINRA's enforcement statistics with a tick in the column of a completed investigation, and a tick in the column of a violation charged, and a tick in the column of a settlement. Offsetting all those self-serving ticks are the uncalculated risks by which we measure the diversion of investigators, examiners, lawyers, and regulatory budgets from more important targets. Do the names "Bernard Madoff" or "Robert Allen Stanford" ring a bell?

Public customers are under siege by dangerous Wall Street fraudsters. There are ongoing, horrific crimes being perpetrated against the elderly, the infirm, and the naive. Life savings are being wiped out. Lives destroyed. Those perpetrating such fraud need to be tracked down, stopped, and prosecuted; but what happens when the cop on the block is busy meeting a daily ticket quota and is sidetracked from walking the beat? Taking into account the limited financial and manpower resources available to federal-, state-, and self-regulatory organizations, executives at those organizations must undertake a daily triage to determine how best to go into battle on behalf of public investors who can ill afford the losses caused by fraud and market manipulation. 

The other aspect of this case that upsets me -- frankly, often outrages me -- is that turnaround doesn't always seem to quite generate "fairplay" from FINRA.  I mean, you know, just what exactly does FINRA do when the shoe is on the other foot? 

Y'all ever see any active enforcement against FINRA member firms when they don't cut checks or wires in order to timely transfer funds from our brokerage accounts? 

Anyone note any FINRA enforcement action against its member firms when they delay the transfer of securities from one broker-dealer to another?

Someone want to show me a bank that was whacked by FINRA for trying to charge me some bogus fee or penalty -- or when the damn ATM isn't working and the institution is holding my money hostage?

Anyone recall a FINRA "collection" effort on behalf of stockbrokers stiffed by their employer firms when it came to the timely payment of earned commissions or bonuses? 

Oh, and one last shot.