FINRA Suitability Settlement Involves Five Elderly Retired Morgan Stanley Customers

November 27, 2017

Today's Blog considers a recent regulatory settlement imposed upon a former stockbroker by the Financial Industry Regulatory Authority. Our publisher Bill Singer accepts that allegations as true but is troubled by the lack of effective compliance oversight, which amounts to little more than reading toe tags in the morgue. Bill asks what is the value of the self-regulation of Wall Street when FINRA announces in November 2017 that it has fined and suspended an individual who retired from the industry in April 2015 after he had allegedly engaged in misconduct throughout 2014 that caused nearly $1 million in losses during in the accounts of elderly, retired customers? 

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 Thomas Gibbons submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Timothy Thomas Gibbons, Respondent (AWC 2015047910601, November 17, 2017).  

Gibbons entered the securities industry in 1973 and by June 2009 was registered with FINRA member firm Morgan Stanley Smith Barney until he purportedly retired in 2015. The AWC asserts that The AWC asserts that he has no "prior relevant disciplinary history."

Unsuitable Recommendations

The AWC asserts that between January and December 2014, Gibbons recommended that five retired customers (aged 72 to 90) invest 65% to 79% of their account values in a single high-risk energy sector  security. Gibbons' investment recommendations resulted in realized and unrealized losses of over $960,000 in the five customers' accounts. FINRA deemed that the cited investment recommendations were unsuitable for each customer based on the customer's age, risk tolerance, investment objectives, and financial circumstances. 

Form U5

The AWC asserts that:

On April 22, 2015, Morgan Stanley filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") terminating Gibbons association with the firm and his registrations with FINRA on that same date. On November 19, 2015, Morgan Stanley filed a Form U5 Amendment disclosing a customer lawsuit against Gibbons. . .


FINRA deemed Gibbons' conduct to constitute violations of FINRA Rules 2111(a) and 2010. In accordance with the terms of the AWC, FINRA imposed upon Gibbons a $20,000 fine; an 18-month suspension from association with any FINRA member firm in any capacity; and ordered him to pay partial restitution in the amount of $716,749.78.

In imposing sanctions, the AWC further states the following:

The fine shall be due and payable either immediately upon reassociation with a member firm, or prior to any application or request for relief from any statutory disqualification resulting from this or any other event or proceeding, whichever is earlier.

Respondent specifically and voluntarily waives any right to claim that he is unable to pay, now or at any time hereafter, the monetary sanctions imposed in this matter.

An order to pay partial restitution to customers EC, AH, CGJ, and GS, listed on Attachment A hereto in the total amount of $716,749.78, plus interest at the rate set forth in Section 6621(a)(2) of the Internal Revenue Code, 26 U.S.C. 6621(a)(2), from December 2014, until the date of payment. Restitution amounts ordered, pursuant to this disciplinary action, are due and payable immediately upon reassociation with a member firm, or prior to any application or request for relief from any statutory disqualification resulting from this or any other event or proceeding, whichever is earlier. The imposition of a restitution order or any other monetary sanction herein, and the timing of such ordered payments, does not preclude customers from pursuing their own actions to obtain restitution or other remedies. If for any reason Respondent cannot locate any customer identified in Attachment A after reasonable and documented efforts within such period, or such additional period agreed to by the staff, Respondent shall forward any undistributed restitution and interest to the appropriate escheat, unclaimed property, or abandoned property fund for the state in which the customer is last known to have resided.  

Letter of Acceptance, Wavier and Consent













Bill Singer's Comment

As noted on FINRA's online BrokerCheck files as of November 27, 2017, Gibbons had "42 Years of Experience / 4 Firms" and during that time, he incurred two disclosures, one of which is the AWC at issue. The only other disclosure is found under the BrokerCheck heading "Customer Dispute - Pending," which asserts that Morgan Stanley was served on November 12, 2015, with Complaint filed in Louisiana state court that alleged:

Claimant alleges, inter alia, that beginning in May 2014 the FA invested in stocks that were not appropriate for her investment objectives.

Let's recap the time-frame at issue here:

During the twelve months from January to December 2014, FINRA alleges that Gibbons engaged in unsuitable recommendations to five elderly clients.

Gibbons apparently resigned from Morgan Stanley in April 2015.

Morgan Stanley first learns of alleged unsuitable recommendations by Gibbons in November 2015 when it receives a customer Complaint filed in Louisiana state court.

FINRA fines and suspends Gibbons in November 2017.

Ummm . . . where the hell was Morgan Stanley's Compliance Department during the entire year of 2014?  I mean, you know, if Gibbons' recommended trades were so obviously "unsuitable," how is that Gibbons' employer didn't uncover these outrageous investments -- particularly since they involved five elderly, retired customers? And let's also note that the purportedly unsuitable trades produced nearly $1 million in losses.

The Gibbons AWC asks us to accept that five elderly retired customers were placed into a single high-risk energy sector security and that those customers wound up with between 65% and 79% of their accounts' valuation in that single security. Fine . . . let's all bite on that same baited hook. Let's all agree that to any reasonable third-party, it would seem very obvious that each of the cited investments were unsuitable. On top of that, let's all agree that Gibbons was wrong in positioning the clients' portfolios in such an over-concentrated manner.  For purposes of this commentary, it should be very clear that I am NOT defending Gibbons conduct and will accept that he is guilty as charged and pursuant to a settlement that he signed off on.  Given those assumptions, let's consider the following three questions:

  1. Didn't there have to be a point in time when each of the five customers' accounts should have hit an "exception run" on Morgan Stanley's Compliance Department's computers?
  2. Did Morgan Stanley conclude that the five customers had been placed into a single unsuitable security, and if so, how and when was that finding conveyed to the customers and to Gibbons?
  3. Assuming that this glaring over-concentration in one security set off alarms at Morgan Stanley in 2014, how is it that Gibbons was still employed until April 2015?
It would seem to me that any sensible Wall Street compliance program should assume that stockbrokers are crooks and desperate for cash and intent upon ripping off elderly clients and hoping that they all drop dead before the nefarious deeds are discovered. You shouldn't set up a supervisory system believing that those under scrutiny are law-abiding and honest; to the contrary, you set up such oversight with the premise that those under supervision are up to no good. After all, we don't install devices to confirm that the air is still clear: We install smoke and fire alarms.

Given that we harbor the worst of opinions about the hundreds of thousands of Wall Street's registered men and women, how is it that the industry's compliance structure never quite seems to catch unsuitable recommendations on a contemporaneous basis? Didn't it seem odd to Morgan Stanley's Compliance Department that five elderly, retired clients were all invested in a single stock and had exposure to that stock in a concentration that was in excess of 2/3rd of their account's valuation? According to the Gibbons AWC, the stockbroker engaged in a year's worth of horrific unsuitable recommendations involving the accounts of five vulnerable customers and not a single trade was noted until months after the registered rep left the employ of the firm. Is Morgan Stanley's oversight of Gibbons the best that we can expect from one of FINRA's largest member firms?

Given the facts and dates in the Gibbons AWC, you tell me: What's the point of having a Compliance Department on Wall Street? Which should then prompt us to ask what's the point of having FINRA?