A Tale Of Two Wall Streets And FINRA's Disparate Sanctions
February 11, 2015
We live in a time when much is made about disparity -- from New York City Mayor Bill de Blasio's "Tale of Two Cities" to the frequent references to the gender and the wage gaps. On Wall Street, we have our own growing divide in which those that I have often called the "small fry" seem to be singled out for more aggressive investigation and regulation replete with resort to the nuclear-option of a Bar or Revocation. In contrast, the "big fish" attract little more than a wagging finger and slap on the wrist. Which is not to say that we don't see the imposition of staggering fines on the big fish . . . we do; however, the dollars typically come out of the pockets of defrauded investors or abused shareholders and not from the personal coffers of those in charge. Worse, there's virtually no resort to the the nuclear option when it comes to the too-big-to-fail. They don't get their license to operate revoked. We don't see them forced to close for days, weeks, or months. We don't see any restriction on their ability to expand. Consider a recent FINRA regulatory settlement involving a small fry, and compare it to two former FINRA settlements with the big fish.
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, Adam B. Jensen submitted a Letter of
Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the
Matter of Adam B. Jensen, Respondent (AWC #2014040689101, January 30,
2015).
Jensen was registered with FINRA
member firm State Farm VP Management Corp. ("SFVFMC") from 2009 to 2013; and he
was also an insurance agent of SFVMC's parent company State Farm Insurance
Company. The AWC asserts that he had no prior disciplinary history.
41 Policies
The AWC asserts that between November 1, 2012 and
December 31, 2012, Jensen applied for 41 State Farm insurance policies for a
boat, automobiles, motorcycles, trailers, and all-terrain vehicles.
Purportedly, Jensen represented on the policies that the covered vehicles were
owned by him, his relatives, or one of his State Farm associates.
Can I Ask You Sumthin' ?
At some point in January 2013,
for reasons that are not set forth in the AWC, Jensen's principal SFVMC
supervisor questioned him about the 41 policies. As explained in the AWC:
Jensen verbally informed his supervisor that he was engaged in an automobile restoration business. Jensen explained that he had been going to auctions and had bought 10 or 11 automobiles, repaired the automobiles and then resold them. Jensen also stated that he insured the cars until they were sold. Once they were sold, he cancelled the policies. . .
A Matter Of Restoration . . . As In Production
The AWC asserts that Jensen had not engaged in any automobile restoration business. In fact, the AWC asserts that Jensen eventually admitted that he had submitted the false applications solely to increase his State Farm insurance sales production. From January through March 2013, all of the policies were cancelled.
Charges And Sanctions
FINRA
asserted that Jensen's submission of 41 falsified insurance applications for
the purpose of improving his insurance sales production and his denials of his
scheme in response to questions from his supervisor constituted violations of
FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon
Jensen a Bar from association with any FINRA-registered firm
in all capacities.
Bill Singer's Comment
FINRA's case against Jensen was that he inflated his production numbers by submitting false applications and then attempted a cover-up during his firm's inquiry. For that idiocy, FINRA imposed a Bar upon the individual registered representative. Don't get me wrong, though. I'm not shedding any tears for him. The nuclear option of a Bar is fair.
The FINRA 19
Consider, however, a not-so distant case in which FINRA trumpeted its purportedly aggressive reaction to the misconduct of 19 of its big fish members: "FINRA Fines 19 Firms a Total of $2.8 Million for Inaccurate Advertised Trade Volume Information" (FINRA Press Release, January 8, 2008):
How exactly did FINRA sum up the transgressions of those 19 member firms? The self-regulatory organization concluded that in providing knowingly "overstated trade volumes," the 19 respondent firms seemed to be gaming the manner in which the "inaccurate advertised trade volumes" would be used to "compile rankings and reports, including reports that rank the most active broker-dealers by security."Washington, D.C. - The Financial Industry Regulatory Authority (FINRA) announced today that it has fined 19 broker-dealers a total of $2.8 million for substantially overstating their advertised trade volume to three private service providers.
FINRA compared the firms' advertised trade volume in selected securities with the firms' executed trade volume for the same securities in August 2006 and found substantial overstatements for each firm in one or more of the securities reviewed. FINRA also found that, prior to September 2006, all of the firms lacked an adequate supervisory system and procedures for communicating trade volume to such services.
The firms' overstated trade volumes were made available to market participants by the service providers. The service providers also used the firms' inaccurate advertised trade volumes to compile rankings and reports, including reports that rank the most active broker-dealers by security.
"Consistent with the obligation to report accurate trades to FINRA, when firms provide their trade volume to third party vendors for dissemination to market participants, it is critically important that firms take appropriate steps to ensure that their advertised trade volume is accurate" said Thomas Gira, FINRA Executive Vice President and Head of the Department of Market Regulation. In September 2006, FINRA published Notice to Members 06-50 to remind broker-dealers of that obligation.
In the actions announced today, eight firms were fined $200,000 each (Broadpoint Capital, Inc., CIBC World Markets Corp., Lehman Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Needham & Company, LLC, Robert W. Baird & Co., Inc., Thomas Weisel Partners, LLC and UBS Securities, LLC). Six firms were fined $150,000 each (Bear, Stearns & Co., Inc., BMO Capital Markets Corp., Cowen and Company, LLC, Deutsche Bank Securities, Inc., Leerink Swann & Company, Inc. and RBC Capital Markets Corp.). Four firms were fined $50,000 each (Friedman, Billings, Ramsey & Co., Inc., Jefferies & Company, Inc., JMP Securities, LLC and Pacific Crest Securities, Inc.). . .
Deutsche Bank Securities 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, Deutsche Bank Securities Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Deutsche Bank Securities Inc., Respondent (AWC #20080136798-01, December 14, 2012).
The prior AWC involving the 19 firms was noted in the 2012 Deutsche Bank Securities AWC:
RELEVANT DISCIPLINARY HISTORY
On December 18, 2007, an AWC became final in which
the firm was censured and fined $150,000 for violating NASD Rules 2110, 3010
and 3310 as a result of overstating its trade volume in one particular equity
security that was advertised to three private service providers - Thomson AutEx
BlockDATA ("AutEx"), Bloomberg and Reuters - in August 2006, and for
related supervisory deficiencies.
In the 2012 AWC, it appears that FINRA found a
"recurrence of overstating of advertised trade volume during the period January
1, 2008 through June 15, 2012 (the "review period")." Let me
underscore that: a
recurrence! As in yet
again after a warning via the 2007 FINRA AWC involving the 19
firms.
As more fully set forth in the
AWC, FINRA alleged 98 instances during the review period in which Deutsche Bank
Securities' published aggregate trade volume substantially exceeded the firm's executed
trade volume for that security. Upon receipt of FINRA's inquiry for this second
round of overstated trade volume, the AWC asserts
that:
That firm's internal investigation and self-reporting earned brownie points with FINRA because the AWC notes that "the mitigated monetary sanction in this matter reflects the actions undertaken by the firm . . ." In the end, the sanction imposed in 2012 upon Deutsche Bank Securities by FINRA in accordance with the terms of the AWC were a Censure, $1,250,000 fine, and an undertaking to revise the firm's supervisory procedures.[T]he firm conducted an internal investigation; provided a written summation of the results of that investigation; and imposed disciplinary actions against some of the traders responsible for a portion of the inflated advertisements. In addition, the firm self-reported the remainder of the violations to the staff prior to FINRA becoming aware of the issues involved. . .
C'mon Bill, you may say with some annoyance, you're cherry picking here and going out of your way to show a recidivist example simply to make a strained point. Okay, you're entitled to your skepticism but consider that FINRA brought yet another AWC against yet another of the 19 over-reporters
Jefferies 2012 AWC
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, Jefferies & Company, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jefferies & Company, Inc., Respondent (AWC #20080136794-01, February 15, 2012).
In the Jefferies AWC, FINRA again notes that this was a firm that had been censured and fined in December 2007 for overstating its trade volume and that the self-regulatory organization had discovered a recurrence of the overstating for the period January 1, 2008 through August 31, 2008. Specifically, the Jeferries AWC notes that:
[I]n 248 separate instances involving 135 individual securities, the firm's aggregate trade volume advertised in AutEx, Bloomberg and/or Reuters substantially exceeded the firm's executed trade volume. . .
And just as consistently, FINRA makes allowances for the recurrence of misconduct by noting that the member firm had conducted an internal investigation; provided a written summation of the results of that investigation; allowed the staff access to related documentation; and imposed significant disciplinary actions against three traders responsible for the inflated advertisements and their designated supervisor.
In accordance with the terms of the AWC, FINRA imposed upon Jefferies a Censure and $550,000 fine.
A Tale of Two Wall Streets
The big fish get caught a second time by FINRA but are adorned by the regulator with the wreath of "extraordinary cooperation" and allowed to pay for a repeat offense with a fine. It's hard to reconcile that outcome with the uncomfortable example of Jensen, whose misconduct seems nearly the same as that of the larger firms -- in fact, he only did it once and was not a recidivist -- but he got barred.
Then again, as I recall in Dickens' "A Tale of Two Cities," Charles Darnay is saved but Sydney Carton is guillotined.