Some folks learn their lessons. They learn from their mistakes. They move on and do better. Others . . . well, there are just far too many Jacks who go back and do it again. Those folks endlessly spin their wheels, round and round. All of which suggests that Steely Dan would make a great Wall Street regulator. In today's BrokeAndBroker.com Blog we consider one fraudster who seems to have gotten stuck in the mud and, when we come across him, his vehicle is spinning its wheels but no one is going anywhere and doing so fast.
In order to help Santa Claus to decide whether to put a lump of coal in the stocking of this apparent bad boy, we offer him this portion from the SEC Complaint:
12. Cody's history of association with various registered broker-dealers and/or investment advisers is as follows: From March 1997 through December 2000, Cody was a registered representative associated with Merrill Lynch, Pierce, Fenner & Smith, Inc. From September 2000 through November 2001, Cody was a registered representative associated with Salomon Smith Barney, Inc. From December 2001 through May 2005, Cody was a registered representative associated with Leerink Swan & Company, Inc. From May 2005 through March 2010, Cody was a registered representative associated with GunnAllen Financial, Inc. From March 2010 through March 2013, Cody was a registered representative associated with Westminster Financial Securities, Inc. and Westminster Financial Advisory Corporation. From March 2014 through August 2016, Cody was a registered representative associated with Concorde Investment Services, LLC and Concorde Asset Management, LLC (collectively, "Concorde"). From August to September 2016, Cody was a registered representative associated with IFS Securities, Inc. ("IFS"). By the fourth quarter of 2015, Cody managed approximately 100 investment adviser accounts with over $14 million assets under his management. At the end of the fourth quarter of 2015, Cody earned a quarterly investment adviser fee of approximately $44,913 for managing the investment of these accounts.
13. In January 2008, the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA") filed a complaint against Cody alleging, among other things, that he had engaged in unsuitable and excessive trading in his clients' accounts, and that he had sent his clients a series of written statements that were false or misleading because they substantially overstated the value of his clients' accounts and/or listed securities or positions that did not exist. After a hearing and subsequent appeal to a FINRA Appeals Panel, FINRA ultimately found that Cody had committed excessive and unsuitable trading and had also provided his clients misleading monthly statements. FINRA imposed a fine and ordered Cody suspended from association with any FINRA member for a period of one year. His fine and one-year suspension were affirmed by the Commission and subsequently by the United States Court of Appeals for the First Circuit. See Cody v. Securities and Exchange Commission, 693 F.3d 251 (1st Cir. 2012).
14. Following the First Circuit decision, the FINRA one-year suspension of Cody went into effect on January 7, 2013 and expired on January 6, 2014.
NOTE: A civil Complaint merely contains allegations and a respondent is considered innocent unless and until found guilty in a court of law by a preponderance of the evidence.
2008 to 2010 FINRA
My, that's quite a bit of coming and going since 2000 for registered representative Cody.All of which comes off as one helluva five-year itch that Cody starts scratching in 2008 at FINRA, continues to work at through the First Circuit's ("1Cir's") 2012 affirmation, and, thereafter, through a one-year suspension in 2013. Let's go back to some of the source FINRA documents for a better understanding. As set forth in the preamble to the 2010 FINRA National Adjudicatory Council ("NAC") Decision(footnote omitted):
On January 29, 2009, a Hearing Panel found that Richard G. Cody ("Cody") recommended transactions in customer accounts that were quantitatively and qualitatively unsuitable; sent to customers misleading and unapproved account summaries; and failed to update timely his Uniform Application for Securities Industry Registration or Transfer ("Form U4") to disclose two settlements with customers. For the suitability violations, it fined Cody $20,000 and suspended him for three months. For the misleading and unapproved account summaries, it fined Cody $5,000. For the Form U4 violations, it fined Cody $2,500. Pursuant to NASD Rule 9311(a), the Department of Enforcement ("Enforcement") appealed the sanctions, including the Hearing Panel's decision not to award restitution. Cody cross-appealed and challenged the three-month suspension. We affirm in part and reverse in part the liability findings. We increase the suspension to a one-year suspension, and we affirm the $27,500 in fines. We also affirm the Hearing Panel's decision not to award restitution.
Cody's conduct raises serious questions about his commitment to future compliance with the suitability requirements. Given the seriousness of each of Cody's suitability violations, we find that the relatively lenient one-year suspension and $20,000 fine for these violations will protect the public interest by encouraging Cody and others to take the steps necessary to appropriately investigate the investments they recommend, and to tailor recommendations to the objectives and risk tolerances of their customers. Accordingly, we find that these sanctions do not impose an unnecessary or inappropriate burden on competition and are neither excessive nor
After a lengthy period of discovery, a three-member FINRA Hearing Panel conducted a five-day hearing from October 27, 2008, through October 31, 2008. At the hearing, Cody was represented by counsel, both sides presented documentary evidence, both sides called witnesses and cross-examined the other side's witnesses, and Cody himself testified. The panel issued a written decision on January 29, 2009; the panel (unanimously) found
-that in violation of Rule 2310 and Rule 2110 Cody engaged in excessive trading of Lenore DeSimone's and James Bates' IRA accounts by conducting in-and-out trading for risk averse investors in a way that generated substantial commissions for Cody and Leerink;
-that (again citing both rules) the investments in the Credit Suisse Security were unsuitable because Cody did not understand the risks involved in the security [Add. 12-13], and the purchase of non-investment grade bonds for James Bates was unsuitable given James Bates' low risk tolerance; and
-that in violation of Rule 2110 Cody's monthly statements were misleading and he improperly delayed the required reporting of his settlements with his clients.
The Hearing Panel imposed a fine of $20,000 and a three-month suspension for the unsuitable purchases and in-and-out trading (one panel member urged six months), a $5,000 fine for the misleading statements, and a $2,500 fine for the delayed reporting, producing a total fine of $27,500 (along with costs of $7,087.50) and a three-month suspension. Both sides appealed and the Appeals Panel upheld liability (save on one unimportant detail) and affirmed all fines, and increased the suspension to a year, -concluding that a "stronger sanction is needed to remedy Cody's violations."
Pages 8 - 10 of 1Cir Opinion
SIDE BAR: For those of you who have ever wondered, turns out that you can delay the imposition of a FINRA suspension by about five years if you fully exhaust your administrative remedies and appeals from FINRA's Office of Hearing Officers ("OHO") to its NAC, and then to the SEC, and, thereafter, to the federal courts.
That was then.
This is now.
What could possible have gone on between the "then" of the 2008 FINRA Complaint and Cody's ensuing appeals and the "now" of all the years since the 2009 FINRA OHO Decision and the endpoint of the 2012 1Cir Opinion and Cody's 2013 suspension?
Did Cody get smarter? Did he learn his lessons? Or did he spin his wheels, round and round?
2016 SEC Complaint
How did the SEC put it in its 2012 Opinion affirming FINRA's sanctions against Cody? Oh, yes, I remember:
Cody's conduct raises serious questions about his commitment to future compliance with the suitability requirements.
So . . . how did Cody's future compliance play out?
On December 12, 2016, the SEC filed a Complaint against Cody that stated, in its "Preliminary Statement":
1. Cody, an investment adviser and broker representative, defrauded at least three of his clients for years by concealing the fact that their retirement accounts had suffered extensive losses and that the monthly payments they were receiving were exhausting their retirement savings. Cody concealed their substantial losses by making materially misleading statements, leading the clients to believe that their investments were maintaining steady value and that their monthly withdrawals were being financed by investment gains. All the while, Cody concealed the material fact that the clients' account values were actually being rapidly depleted. By mid-2014, two of these clients' accounts had essentially run out of funds.
2. To prevent his clients from detecting his longstanding fraud, Cody continued his scheme by engaging in various deceptive acts aimed at concealing from the clients that their money was gone. These acts included: (1) making wire transfers of monthly deposits to his defrauded clients' bank accounts from sources other than their own retirement accounts so that they would not know their retirement funds had run out; (2) responding to requests from a client for a withdrawal of retirement funds by falsely representing that the client's funds had been invested in an annuity and then sending the client a fraudulent document to create the appearance that a well-known financial firm held an annuity for that client; and (3) sending clients fabricated tax forms which purported to show retirement account distributions and tax withholding in order to disguise the fact that the clients' accounts were essentially empty. As recently as March 2016, Cody lied to a third client by telling a husband and wife that they had $1.28 million remaining in their investment accounts when, in fact, their retirement accounts held only approximately $162,560.
3. Cody's deceptions caused these clients to believe that their retirement savings were secure when, in fact, they were not. The sheer duration of Cody's deception deprived these clients of any opportunity to take measures to decrease or to stop their losses or even to work longer to make up those losses. With their prime working years now well behind them, Cody's deceptive scheme has irreparably damaged their financial security, causing immense anxiety and fear and creating the real possibility that they may suffer further dire consequences.
4. By virtue of Cody's fraudulent conduct, which is detailed further herein, Defendant Cody has engaged and is still engaged in: (i) fraudulent or deceptive conduct upon an advisory client in violation of Sections 206(1) and 206(2) of the Investment Advisors Act of 1940 ("Advisors Act"); and (ii) fraudulent or deceptive conduct in connection with the purchase or sale of securities, in violation of Section 10(b) of the Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder.
5. To halt Defendant Cody's ongoing unlawful conduct, maintain the status quo, and preserve any remaining assets for defrauded clients before entry of a final judgment, the Commission seeks a preliminary injunction to: (a) prohibit the Defendant from continuing to violate the Advisers Act and Exchange Act; (b) freeze the Defendant's and Relief Defendant's assets; (c) prohibit the Defendant from continuing to exercise investment authority over client accounts; (d) require the Defendant to provide an accounting of client assets; (e) prohibit the Defendant from soliciting, accepting or depositing any monies obtained from actual or prospective investors pending the resolution of this action; (f) restrain the Defendant from destroying, concealing or disposing of property or documents related to the misconduct in the complaint; and (g) authorizing the Commission to commence discovery immediately.
6. The Commission also seeks: (a) a permanent injunction prohibiting the Defendant from further violations of the Advisers Act and the Exchange Act; (b) disgorgement of the Defendant's ill-gotten gains, plus prejudgment interest; and (c) civil penalties due to the egregious nature of the Defendant's violations.
The SEC is seeking disgorgement, interest, penalties, and a permanent injunction. Finally, in addition to seeking a temporary restraining order and a detailed accounting of Cody's assets, the SEC has asked DMA to freeze the assets of Cody and Relief Defendant Boston Investment Partners,
Suspension of Disbelief
As to what lessons if any Cody learned during his 2013 time in the regulatory wilderness, the 2016 SEC Complaint offers this:
II. Cody's Violation of FINRA Suspension and Termination from Concorde
63. During the period of Cody's FINRA suspension from January 7, 2013 to January 6, 2014, Cody arranged with his then-wife, Jill Cody to conduct his brokerage and investment adviser business through her access as a broker associated with Concorde.
64. After Jill Cody joined Concorde in January 2013, Cody arranged for her to maintain his clients.
65. During the period of his FINRA suspension, Cody used personal email accounts with Yahoo! and Blackberry to communicate with his clients about their securities accounts. Through his personal email, Cody provided his clients with market updates, investment advice, recommendations and account service and maintenance, which could be implemented through Jill Cody's association with Concorde.
66. Cody orchestrated this arrangement to indirectly provide brokerage services during the period of his suspension from the securities industry in order to, among other things, prevent his clients from learning that he had been disciplined and to avoid any break in his dealings with his clients - which would have revealed his massive deceptions about the value of their retirement accounts.
67. Following the end of his FINRA suspension, Cody joined Concorde in April 2014 as a registered representative of Concorde's broker entity and investment adviser entity. After associating with Concorde, Cody then assumed direct responsibility for clients that he had served during the period of his FINRA suspension (when they were nominally Jill Cody's clients). These clients included investment adviser clients, from whose accounts Cody began receiving compensation for his provision of investment advisory services.
68. In or about July 2016, Concorde became aware of Cody's impermissible securities business communications and activities during the period of his FINRA suspension in 2013.
69. After an internal investigation, Concorde terminated Cody's and Jill Cody's registration with the firm on July 29, 2016.
III. Cody's Fraudulent Transfer of Accounts from Concorde to IFS
70. Within weeks of his termination from Concorde, on August 16, 2016, Cody became a registered representative of IFS. He was associated with IFS for approximately four weeks.
71. After associating with IFS, Cody used a fraudulent means to effect the transfer of accounts for a significant number of clients, including investment adviser clients, from Concorde to IFS, with forged or fake client signatures on the necessary account transfer forms.
72. During the four weeks of Cody's association with IFS, the firm became aware of an incident involving an apparent forgery in one of Cody's client accounts. Thereafter, IFS began inquiries as to whether Cody's clients had actually signed the forms authorizing their recent transfer of client assets.
73. Upon learning of the forged transfer documentation, IFS terminated Cody's registration with the firm.
Pages 19 - 20 of the SEC Complaint
Bill Singer's Comment
Frankly, I'm exhausted by the research for and drafting of this article. It's also quite enervating to realize that after having had this guy in their crosshairs, Wall Street's regulators seem to have lost touch. After having taking their prey down once and pulled him offline for a year, how could FINRA and the SEC have been so oblivious? More to the point, whatever your answers are -- and I will even admit in advance that many of them are likely spot on -- if this is the best that we can do to protect investors, then maybe we need to re-think our entire approach to compliance and regulation. The simple question that I would ask: How the hell could this guy have been hired by another brokerage firm and/or investment adviser and been allowed to engage in the cited misconduct? If Cody is exonerated, so be it. He may well be not guilty as charged. On the other hand, if Cody is guilty, this is also an indictment of Wall Street's regulators.