Word has it that there's been a surge in initial public offerings. I'm not going to swear by that but I have heard some Wall Street types tell me that there are still companies looking to go public these days. Of course that was before those two 1,000 point drops in the Dow Jones but, who knows, another day, another 1,000 point move higher or lower and Bitcoin will triple in value and then halve. Be that as it may, today's BrokeAndBroker.com Blog analyzes a recent Financial Industry Regulatory Authority settlement involving a stockbroker, his away account, and his so-so results in buying and selling IPOs.
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, lan Blanc Meierdiercks submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of lan Blanc Meierdiercks, Respondent (AWC 2014043594201, February 1, 2018).
The AWC asserts that Meierdiercks entered the securities industry in March 1999, and by October 2003, he was registered with FINRA member firm Sterne Agee Financial Services, Inc. The AWC states that Meierdiercks has no relevant disciplinary history.
The AWC alleges that while registered with Sterne Agee, Meierdiercks opened a brokerage account at FINRA member firm Berthel,Fisher & Company Financial Services, Inc. As set forth in part in the AWC, Mieierdiercks::
entrusted the handling of the account entirely to Berthel representative FK. Meierdiercks and FK were friends and worked together at another F1NRA member firm and at Sterne Agee. The Berthel brokerage account was fully disclosed to Sterne Agee.
Okay, so far so good, and, you might ask, what could possibly go wrong with a fully-disclosed "away" account? Great question! I thought you were a pretty sharp lookin' In any event, let's take a look at the introductory portion of a fairly long FINRA Rule:
FINRA Rule 5130: Restrictions on the Purchase and Sale of Initial Equity Public Offerings
(a) General Prohibitions
(1) A member or a person associated with a member may not sell, or cause to be sold, a new issue to any account in which a restricted person has a beneficial interest, except as otherwise permitted herein.
(2) A member or a person associated with a member may not purchase a new issue in any account in which such member or person associated with a member has a beneficial interest, except as otherwise permitted herein.
(3) A member may not continue to hold new issues acquired by the member as an underwriter, selling group member or otherwise, except as otherwise permitted herein. . .
. . .
(9) "New issue" means any initial public offering of an equity security as defined in Section 3(a)(11) of the Exchange Act, made pursuant to a registration statement or offering circular. New issue shall not include: . . .
Frankly, not a lot of wiggle room in FINRA Rule 5130. An associated person can't buy, sell, or continue to hold a new issue except as permitted in the rule. So . . . during the relevant period from December 2010 through November 2014, the AWC alleges that 33 initial public were "purchased and sold in Meierdiercks' Berthel account based solely on FK's recommendations." The cited IPO trades yielded $19,540.09 in profits. In listing the 33 IPO trades, the AWC starts with a purchase on December 15, 2010, and ends with a sale on November 3, 2014. Let's call that about four years of trading, or 33 divided by 4, which is about 8.25 IPOs per year, or dividing that by 12, about .69 IPOs a month for four years.
FINRA deemed that Meierdiercks conduct constituted violations of FINRA Rules 5130 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Meierdiercks a $7,500 fine, a $19,540.09 disgorgement plus interest from December 15, 2010 until the date of the AWC, and a 10-business-day suspensions
Bill Singer's Comment
For starters, and a snarky one at that, the best that FINRA could come up with was "FK?" Oh well, at least it wasn't "FU."
A footnote in the AWC says that Meierdiercks realized $19,540.09 in profits but that "This calculation does not account for Meierdiercks' losses on IPO transactions as detailed below." With the football season over, I have a lot of time on my hands. As such, I added up all the profits and losses (plus two $0 events) and came up with the following:
If you net out the profits and losses for Meierdiercks' IPO trades, he wound up with $305.74 in net profits. Consequently, FINRA's fine and disgorgement totaling $27,040.09 offset the $305.74 net profit for a total net loss of $26,735.25.
There are aspects of this AWC that unsatisfactory for their non-disclosure of important facts. For starters, the AWC states that:
The Berthel brokerage account was fully disclosed to Sterne Agee.
What exactly was "fully" disclosed to Sterne Agee -- and did the firm receive ongoing duplicate confirmations of Meierdiercks' trading?
Also, did FK and Meierdiercks disclose to Berthel that the latter was registered with another FINRA member firm?
Assuming that Sterne Agee was informed of Meierdiercks' Away Account at Berthel, what steps, if any, did the firm take to review its employee's trading?
Ultimately, this is a very puzzling case. You got two FINRA member firms. You got two FINRA reps in Meierdiercks and FK. You got 33 IPOs that an associated person is not supposed to be trading. You got some 48 months over which the 33 trades take place. Those 48 months started in December 2010, and ended in November 2014. Those 33 trades started over 7 years ago and ended over 3 years ago.
How's that all possible?
How could no one have spotted nothing for so long?
How is it that no one even spotted Meierdiercks' IPO trades during some four years?
Then there's the 800 pound regulatory gorilla sitting on the old couch: How come it's February 2018 and FINRA is only now getting around to settling violations that took place as early as 2010 but no later than 2014?