FINRA Pulls Over JP Morgan Broker In Luxury Car Biz

August 9, 2016

There's lots wrong with Wall Street. There are lots of things for Wall Street's regulators to be focusing their time and energy on. On the other hand, there's lots wrong with life in general and, as such, there are also lots of things for regulators and prosecutors to do all over the world. Given all that needs to be done and the limited resources to do it, sometimes you just have to wonder whether anyone in charge understands the need to triage so that we aren't diddling around with nonsense while some truly bad crooks are wreaking havoc. In a recent Wall Street regulatory settlement, we are presented with the case of a JP Morgan registered representative who managed to get himself fined and suspended for his role in the purchase and shipment of cars from the U.S.A. to China.  

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, Michael Fang submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Michael Fang, Respondent (AWC 2015046902101, August 1, 2016).

Fang was first registered in 2010 and by September 2013, he was associated with FINRA member firm J.P. Morgan Securities LLC ("JPM"). The AWC asserts that Fang had no prior disciplinary history.

High-End Cars

The AWC asserts that during the relevant period between May 2015 and August 2015:

[F]ang participated in an undisclosed outside business activity with a customer of JPM to purchase high-end cars in the United States and export them to China. Respondent's role was to bring prospective customers to car dealerships to make purchases and then to assist with delivering those cars to United States ports for transport to China. Respondent was not compensated from this business during the Relevant Period but he entered the business arrangement with the expectation that he would receive approximately $250.00 to $400.00 for each car delivered. Respondent failed to notify his firm about his participation in the car exporting business.

Online FINRA BrokerCheck records as of August 9, 2016, disclose that JPMorgan Chase Bank "Discharged" Fang on August 18, 2015, based upon these allegations:


FINRA deemed Fang's conduct to have constituted an outside business activity in violation of FINRA Rules 3270 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Fang a $5,000 fine and a 60-day suspension from associating with any FINRA member in any capacity.

Bill Singer's Comment

Pro Se

Fang's signature line on the AWC does not reflect that he was represented by a lawyer and, as such, I will infer from that absence that he handled this settlement pro se.

BrokerCheck versus AWC

Did you catch the BrokerCheck explanation as to why JPM discharged Fang? According to that online document, he entered purportedly inaccurate information about the "entity type" of a cusgtomer's bank account. Okay, I'll bite: What the hell is the inaccurate entering of an entity type and how do you get fired for something like that? Did Fang enter "LLC" instead of "Corporation" or did he indicate "Sole Proprietorship" instead of "LLP?" Notably absent from the BrokerCheck allegation is the assertion that the cited entry was intentional -- it may have been, it may not have been; regardless, it ain't spelled out.

Then there's that whole other thing about Fang continuing to "facilitate transactions" after he allegedly became associated with "the business." Yet again, I'll bite. Just what does "facilitate transactions" mean, particularly to the extent that you get fired for such conduct?

I raise questions about the reasons-for-discharge explanations on Fang's BrokerCheck because they don't cleanly pair-up with the AWC's focus on improper Outside Business Activities ("OBA"). I am not saying that Fang didn't engage in improper OBA but you would sort of think that JPM would have more pointedly cited that issue when it explained why it had discharged its registered person rep.

The OBA Rule

Speaking of OBA, many registered persons engage in other professions and careers; and such OBA typically require prior written notice to your employer and obtaining the firm's approval. Consider the following:

FINRA Conduct Rule 3270: Outside Business Activities of Registered Persons

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.

*** Supplementary Material ***

01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers or (2) be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member's review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).

Getting an Assist

Plugging the facts of FINRA's allegations against Fang into the OBA Rule, we should note the following salient aspects. Fang's role in the purported OBA was:

to bring prospective customers to car dealerships to make purchases and then to assist with delivering those cars to United States ports for transport to China.

Taking into consideration Fang's Chinese surname, I'm guessing -- and that's all it is folks, a guess -- that he was introducing mainly Chinese individuals to car dealerships. Why am I making that guess?  Well, the cars were ultimately headed for "transport to China."  The AWC asserts that Fang was also "to assist with delivering those cars to United States ports," but that's a pretty open-ended allegation. Assist as in getting behind the wheel and driving the car to the U.S. port or simply helping to translate something from English to Chinese and back?

Not Compensated

For those of you who may have missed it, let me underscore the concession in the AWC that Fang:

was not compensated from this business during the Relevant Period but he entered the business arrangement with the expectation that he would receive approximately $250.00 to $400.00 for each car delivered.

Once more with gusto: Fang was NOT compensated -- regardless of his expectation, which apparently proved false or someone reneged.  All of which prompts me to wonder just how FINRA learned that Fang had the "expectation" of receiving a per-car-delivered fee. Assuming that Fang didn't have a formal role with the dealerships and taking as a given that he was never paid, that "expectation" thing takes on added meaning -- as does the fact that Fang may not have had the benefit of legal counsel before communicating with FINRA.

On A Role

FINRA Rule 3270 (the "OBA Rule") prohibits a registered person from serving in various capacities. At the time of Fang's alleged OBA violation, was he associated with any car dealership as an:
  • employee,
  • independent contractor,
  • sole proprietor,
  • officer,
  • director, or
  • partner of another person
The only allegation set forth in the AWC concerning Fang's purported role was that he would "bring" potential clients to the dealerships and "assist" in delivering the purchased cars to a U.S. port. If, in fact, Fang's involvement put him in the role of an employee, independent contractor, sole proprietor, officer, director, or partner of the car dealerships, then for godsakes, why the hell doesn't FINRA at least make that assertion in the AWC? The "role" that a registered person plays in furtherance of engaging in an OBA is the most basic element of the violation.

Great Expectations

In addition to failing to assert the alleged role that gave rise to Fang's alleged OBA violation, the AWC could have pointed to additional language in the OBA Rule that imposes the prior written notice obligation for activities where the associated person is "compensated" or has the "reasonable expectation of compensation" from an outside source.

Going to the actual AWC language and the pertinent point in time, the only facts we find are that Fang received no compensation. There is a clear assertion in the AWC, however, that he had an expectation of compensation. As best I can tell, it was that state-of-mind that proved to be Fang's undoing when it came to the OBA and FINRA's alleged jurisdiction of his conduct.

READ: "FINRA Conduct Rule 3270: Outside Business Activities of Registered Persons (the "OBA Rule")" / Analysis by Bill Singer, Blog