FINRA Arbitrators Okay Firing For Failure To Recognize Questionable Activity

July 17, 2017

There are lots and lots of reasons for terminating folks on Wall Street. Ya got yer illegal conduct, ya got yer violations of regulatory and compliance rules, ya even got yer failure to follow in-house stuff like policies and employee handbooks. According to a recently enunciated doctrine, Wall Street employers may now fire employees for failing to "recognize" the "questionable activity" of their peers or managers. Oh my! With all the "questionable activity" that goes on every day in our financial markets, what exactly is it that the industry's men and women should be careful to "recognize?"

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2016, associated person Claimant Bryant asserted that Respondent State Street Global Markets, had defamed him on his Uniform Termination Notice for Securities Industry Registration ("Form U5") as filed on August 12, 2016. Claimant Bryant sought compensatory damages, costs and an expungement of the cited defamatory information. In the Matter of the FINRA Arbitration Between Thomas J. Bryant, Claimant, vs. State Street Global Markets, LLC, Respondent (Stipulated Award, FINRA Arbitration 16-02895, July 3, 2017).

Respondent State Street generally denied the allegations and asserted various affirmative defenses.


In May 2017, the parties settled the case and in lieu of a hearing, entered into a Stipulated Award. In accordance with the Stipulated Award, the "Reason for Termination" on Bryant's Form U5 remained unchanged but the FINRA Arbitration Panel recommended the revision of the "Termination Explanation" as follows:

The individual's employment was terminated due to a determination by State Street that the individual failed to recognize certain questionable activity of his peers and his manager during 2010-11, which management determined is inconsistent with the organization's heightened focus on its corporate culture, although management is not aware of any subsequent or similar failings. The individual has disputed, and continues to dispute, that he was aware of this activity or that he should have been aware of it.

Bill Singer's Comment

I'm going to guess that this FINRA intra-industry arbitration is a pretty good example of a dispute in which all the parties would just as well blow through a whole bunch of details and not offer any more explanation of who allegedly did or didn't do what.  By way of offering just a tad more background, 0nline FINRA BrokerCheck records as of July 17, 2017, disclose that Bryant was registered with State Street Global Markets LLC from December 1996 to August 2016; and was employed with State Street Capital Markets, LLC. From "May 1996 - Present." As such, Claimant was a 20-year-veteran-employee of State Street.

By way of adding further context to this case, I note that in  "State Street Bank to Pay $382 Million to Settle Allegations of Fraudulent Foreign Currency Exchange Practices" (USDOJ Press Release, July 26, 2016) , the United States Department of Justice, the Securities and Exchange Commission, and the Department of Labor announced, in pertinent part, that:

[S]tate Street Bank and Trust Company, a Massachusetts-based financial institution, agreed to pay a total of at least $382.4 million, including $155 million to the Department of Justice, $167.4 million in disgorgement and penalties to the SEC and at least $60 million to ERISA plan clients in an agreement with the DOL, to settle allegations that it deceived some of its custody clients when providing them with indirect foreign currency exchange (FX) services.

As part of the settlement with the Department of Justice, State Street admitted that contrary to its representations to certain custody clients, its State Street Global Markets division (SSGM) generally did not price FX transactions at prevailing interbank market rates.  Instead, State Street admitted that SSGM executed FX transactions by applying a predetermined, uniform mark-up (if the custody client was a FX purchaser) or mark-down (if the custody client was an FX seller) to the prevailing interbank rate for FX. State Street is also alleged to have falsely informed custody clients that it provided "best execution" on FX transactions, that it guaranteed the most competitive rates available on FX transactions and that it priced FX transactions based on a variety of factors when, in fact, prices were largely driven by hidden mark-ups designed to maximize State Street's profits.

. . .

The SEC has approved a separate agreement to settle the SEC's investigation concerning State Street's indirect FX services.  Under the terms of the agreement, the Commission will enter an administrative order against State Street, only after the U.S. District Court gives final approval to State Street's proposed settlement with private plaintiffs in pending securities class action lawsuits concerning its indirect FX pricing service.  The administrative order will find that State Street violated Section 34(b) of the Investment Company Act of 1940 (Investment Company Act) and caused violations of Section 31(a) of the Investment Company Act and Rule 31a-1(b) thereunder, by providing its registered investment company (RIC) clients with trade confirmations and monthly transaction reports that were materially misleading in light of State Street's representations about how it priced FX transactions.  Under the terms of the order, State Street will be required to disgorge $75 million in ill-gotten gains and $17.4 million in prejudgment interest, to be paid to RIC clients, and also pay the SEC a civil penalty of $75 million.

State Street is simultaneously resolving DOL's claims under the Employee Retirement Income Security Act (ERISA) by agreeing to pay at least $60 million to State Street's ERISA plan customers who, DOL found, sustained losses in connection with the conduct alleged above.  This amount will be distributed to ERISA plan customers in conjunction with the settlement of certain private class action lawsuits.  DOL alleges in the settlement that State Street made false or misleading representations concerning certain FX trades, and concealed from its plan customers how it priced those trades.  In the settlement State Street represents that it now makes and will continue to make detailed disclosures to its customers with respect to its FX pricing and that it now refrains and will continue to refrain from making representations regarding its FX pricing that are not accurate.

State Street will pay an additional $147.6 to resolve private class action lawsuits filed by the bank's customers alleging similar misconduct. . .

As history has now been re-written via the Stipulated Award, State Street purportedly terminated Bryant because he "failed to recognize certain questionable activity of his peers and his manager during 2010-11." That's a fascinating basis for discharge. Apparently, folks can now be fired for not recognizing "questionable activity." Not necessarily "illegal" activity, not necessarily activity that constitutes a regulatory or compliance violation. Not even activity that is a possible violation of company policy. No, now we have the interesting grounds for termination involving a failure to recognize questionable activity -- and its set against the canvass of that ever-so-meaningless term "corporate culture." Note that Bryant's alleged failure to recognize was not only extended to "his peers" but also to "his manager." Wow, so he's not only required to be the conscience of those who work with and for him but also for those he works under. Factor into this emerging doctrine of employment law that Bryant "has disputed, and continues to dispute, that he was aware of this activity or that he should have been aware of it."

Assuming that FINRA will adopt as a reasonable basis for industry termination this doctrine of "failure to recognize certain questionable activity," I wonder if FINRA and even the Securities and Exchange Commission, might feel compelled to retroactively fire a whole lotta regulators from their own ranks for, let's see, hmmmm -- oh yeah, how about for failing to recognize certain questionable activity by Bernard Madoff or Allen Stanford or just about everyone and every financial institution that dumped a mass of toxic products and worthless mortgages into our economy. The way I understood what happened leading up to and through the Great Recession, we had a lot of regulators who failed to recognize the questionable activity of Wall Street. 

By way of making my point about regulators failing to recognize questionable activity, consider this quote from the Wikipedia for "Brooksley Born," the Chair of the Commodity Futures Trading Commission from 1996 - 1999:

Born was appointed to the CFTC on April 15, 1994 by President Bill Clinton. Due to litigation against Bankers Trust Company by Procter and Gamble and other corporate clients, Born and her team at the CFTC sought comments on the regulation of over-the-counter derivatives,[4] a first step in the process of writing CFTC regulations to supplement the existing regulations of the Federal Reserve System, the Options Clearing Corporation, and the National Association of Insurance Commissioners. Born was particularly concerned about swaps, financial instruments that are traded over the counter between banks, insurance companies or other funds or companies, and thus have no transparency except to the two counterparties and the counterparties' regulators, if any. CFTC regulation was strenuously opposed by Federal Reserve chairman Alan Greenspan, and by Treasury Secretaries Robert Rubin and Lawrence Summers.[5] On May 7, 1998, former SEC Chairman Arthur Levitt joined Rubin and Greenspan in objecting to the issuance of the CFTC's concept release. Their response dismissed Born's analysis and focused on the hypothetical possibility that CFTC regulation of swaps and other OTC derivative instruments could create a "legal uncertainty" regarding such financial instruments, hypothetically reducing the value of the instruments. They argued that the imposition of regulatory costs would "stifle financial innovation" and encourage financial capital to transfer its transactions offshore.[11] The disagreement between Born and the Executive Office's top economic policy advisors has been described not only as a classic Washington turf war,[9] but also a war of ideologies,[12] insofar as it is possible to argue that Born's actions were consistent with Keynesian and neoclassical economics while Greenspan, Rubin, Levitt, and Summers consistently espoused neoliberal, and neoconservative policies.[citation needed]

In 1998, a trillion-dollar hedge fund called Long Term Capital Management (LTCM) was near collapse. Using mathematical models to calculate debt risk, LTCM used derivatives to leverage $5 billion into more than $1 trillion, doing business with fifteen of Wall Street's largest financial institutions. The derivative transactions were not regulated, nor were investors able to evaluate LTCM's exposures. Born stated, "I thought that LTCM was exactly what I had been worried about". In the last weekend of September 1998, the President's working group was told that the entire American economy hung in the balance. After intervention by the Federal Reserve, the crisis was averted.[6] In congressional hearings into the crisis, Greenspan acknowledged that language had been introduced into an agriculture bill that would prevent CFTC from regulating the derivatives which were at the center of the crisis that threatened the US economy. U.S. Representative Maurice Hinchey (D-NY) asked "How many more failures do you think we'd have to have before some regulation in this area might be appropriate?" In response, Greenspan brushed aside the substance of Born's warnings with the simple assertion that "the degree of supervision of regulation of the over-the-counter derivatives market is quite adequate to maintain a degree of stability in the system".[13] Born's warning was that there wasn't any regulation of them. Born's chief of staff, Michael Greenberger summed up Greenspan's position this way: "Greenspan didn't believe that fraud was something that needed to be enforced, and he assumed she probably did. And of course, she did." Under heavy pressure from the financial lobby, legislation prohibiting regulation of derivatives by Born's agency was passed by the Congress. Born resigned on June 1, 1999.[6]

The derivatives market continued to grow yearly throughout both terms of George W. Bush's administration. On September 15, 2008, the bankruptcy of Lehman Brothers forced a broad recognition of a financial crisis in both the US and world capital markets. As Lehman Brothers' failure temporarily reduced financial capital's confidence, a number of newspaper articles and television programs suggested that the failure's possible causes included the conflict between the CFTC and the other regulators.[5][14]