FINRA Getting Personal With Taxi And Meal Reimbursements

October 27, 2014

They got a name for it: padding the old expense account. The way I see it, whenever some misconduct has an acronym or generally accepted term, it means that the no-no is fairly widespread. Not widespread as in everyone. Not widespread as in it's okay. Just widespread as a lot of folks tend to do something that's not ethical and, at times, not legal. On Wall Street, the padding of expense accounts by stockbrokers and traders is a thing of legend. As in hookers, strippers, Super Bowl parties, and far too many other ribald excesses to set forth here. The odd thing about inflating expenses on Wall Street, however, is how differently regulators treat that issue when it occurs in the C-suites versus the rest of the firm.

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, Timothy Johnson II, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Timothy Johnson II, Respondent (AWC  2013039579401, October 20, 2014).

In 2003, Johnson was first registered and from April 2011 to November 2013 he was associated with Prudential Annuities Distributors, Inc.


The AWC asserts that between October 4, and October 24, 2013, Johnson submitted to Prudential 11 Travel and Entertainment Expense Reports in the cumulative amount of $9,700 for business expenses purportedly accrued between August 5, and October 17, 2013.


The AWC asserts that $8,400 of the sought reimbursement was for personal expenses such as taxis and meals unrelated to Prudential's business. Determining that the cited items were "personal" expenses, Prudential declined to undertake the requested reimbursement.


Online FINRA records as of October 27, 2014, disclose that on November 19, 2013, Prudential Annuities Distributors, Inc. filed a notice of "Voluntary Resignation" for Johnson as of November 19, 2013.  The disclosure notes these allegations:


The same online FINRA records disclose Nixon's response:


The Bar Tab

FINRA deemed Johnson's conduct to constitute violations of FINRA Rules 4511 and 2010 because Johnson actions caused Prudential to maintain inaccurate books and records in violation of '34 Act Section 17(a) and Rule 17a-3. Further, Johnson failed to comply with FINRA requests for information and demands in violation of FINRA Rules 8210 and 2010.

In accordance with the terms of the AWC, FINRA imposed upon Johnson a Bar from association in any and all capacities with any FINRA-regulated entity.

Bill Singer's Comment

I am not going to defend the abuse of business expenses; so, do me and yourself a favor, don't even go there -- and don't set me up as some convenient strawman on the issue.  I have no sympathy for brokers and traders who lack the ethics to separate their personal expenses from legitimate business ones. Apparently, FINRA is now on a rampage when it discovers stockbrokers and traders submitting bogus expense reimbursements for non-business expenses. To that extent, Johnson picked the wrong time to play these games -- and by refusing to cooperate with FINRA's investigation, he essentially sealed his fate with a Bar.

My annoyance with this AWC, however, is with how differently things get regulated by FINRA when the misconduct occurs higher up rather than lower down. Or, as I so often put it, when the misconduct involves a whale rather than the small fry. Too big to fail. Too big to investigate. Too big to charge. And so on.

Which brings to mind John Thain. According to his online biography at CIT:

John A. Thain is Chairman and Chief Executive Officer. Prior to joining CIT, from December 2007 to January 1, 2009, he was Chairman and Chief Executive Officer of Merrill Lynch & Co., Inc, one of the world's leading wealth management, capital markets and advisory companies. From June 2006 to December 2007, Thain served as Chief Executive Officer and a director of NYSE Euronext, Inc. following the NYSE Group and Euronext N.V. merger.

He joined the New York Stock Exchange in January 2004, serving as Chief Executive Officer and a director. Before joining the NYSE, Thain was the President and Chief Operating Officer of The Goldman Sachs Group Inc. He had been President and Co-chief Operating Officer from May 1999 through June 2003. From 1994 to 1999, Thain served as Chief Financial Officer and Head of Operations, Technology and Finance. From 1995 to 1997, he was also Co-chief Executive Officer for European operations. He is a member of the MIT Corporation Board, the Dean's Advisory Council of MIT/Sloan School of Management and the U.S. National Advisory Board of INSEAD.

He serves on the Board of Managers of the New York Botanical Garden, is a member of the Board of Directors of the French-American Foundation, and is a trustee of New York-Presbyterian Hospital. He received a BS degree from Massachusetts Institute of Technology and an MBA from Harvard University.

Let me refresh your recollection as to a business expense issue involving Thain. "Ex-Merrill Head Thain Says He'll Repay Office Costs" (Bloomberg, by Bradley Keoun and Josh Fineman, January 26, 2009), reminds us of the dark days of the Great Recession:

Former Merrill Lynch & Co. Chief Executive Officer John Thain, ousted last week after his firm posted an unexpectedly large fourth-quarter loss, apologized for paying $1.2 million last year to renovate his office and said he will repay the costs.

"They were a mistake in the light of the world we live in today," Thain said in a memo to top executives dated yesterday. "I will therefore reimburse the company for all of the costs incurred."

Thain was dismissed on Jan. 22 by Bank of America Corp. CEO Kenneth Lewis after Merrill's $15.3 billion loss forced the lender to seek more money from the U.S. government and amid contentions he accelerated year-end bonus payments to Merrill employees before the deal closed. The firm, which hasn't disclosed the exact amount of the bonuses, had $4.34 billion of total compensation costs in the fourth quarter.

. . .

Thain said his office renovations last year also included two conference rooms and a reception area. CNBC reported that he hired Los Angeles-based decorator Michael Smith, who was also chosen by President Barack Obama and his wife Michelle to redecorate the White House.

Thain paid Smith $837,000, and his purchases included $87,000 for area rugs, $35,115 for a commode on legs, $25,000 for a pedestal table and $68,000 for a 19th-Century credenza, CNBC reported last week. Thain, who took over as Merrill's CEO on Dec. 1, 2007, began the renovations in early 2008 and moved into the new office in March of that year, two people familiar with the matter said last week.

In the spirit of encouraging you all to do your own due diligence, how about you do an online search to see whether FINRA ever charged Thain with any "business expense" misconduct. You know, something that might address an $87,000 rug, a $35,115 commode, and the like. 

FINRA had no problem investigating, charging and barring Respondent Johnson for some $8,400 in improper travel/meal expenses.  Thain, the CEO of one of FINRA's largest member firms, had his firm spend on an office rug over ten times what Respondent Johnson's indiscretions added up to -- and let's not forget the nearly four-fold purchase of a commode. Thain's office renovations apparently came in at $1.2 million -- about 143 times Respondent Johnson's T&E overcharges.  And yet, today, only Johnson is barred from the business. So much for the goose and the gander. It all smacks of the differences between the whales and the small fry.

Oh, yeah, sure . . . it's different.  What Johnson did and what Thain did are different.

It's different because Johnson sought reimbursement of bogus taxi and meal expenses. Thain didn't seek reimbursement of anything that was bogus. Thain was legitimately redecorating his office. You can't have the CEO of Merrill Lynch take a crap on anything less than a $35,115 commode, right? What? It's not that type of commode? It's a piece of furniture and not a toilet?  Oh, that's different too.

What's also different is that Wall Street's regulators simply let Thain repay his irksome expenses. Not that they were excessive expenditures. Not that the charges raised questions about legitimate expenses. Course not. Not that FINRA would have simply allowed Johnson to write out a personal check for $8,400 and let him off too.

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