A statutorily disqualified individual sells her book of business and it is assigned to a registered stockbroker. So far, so good. The stockbroker's firm tells him it's okay to communicate with the disqualified broker in order to arrange for the smooth and orderly transfer of clients but, beyond that handing off of her biz to you, you draw a thick, red line and don't cross it. She's disqualified. You're not. You don't discuss any private customer information with her. So . . . what could possibly go wrong with that scenario?
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, Andrew L. Denney submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Andrew L. Denney, Respondent (AWC 2015046807002, May 14, 2018).
The AWC asserts that Denney was first registered in 2004 and by 2010 he was dually registered with FINRA member firm Cambridge Investment Research Inc. and as an investment advisor representative with Lawing Financial Inc. (which was also a branch office of Cambridge). The AWC asserts that Denney "does not have any relevant history of discipline."
SD and her Former Customers
The AWC asserts that in early 2014, Lawing Financial, Inc. purchased the business of an individual who was purportedly statutorily disqualified and barred as of May 2014. Lawing Financial assigned a group of the disqualified individual's former customers to Denney. The AWC refers to the statutorily disqualified individual as "SD."
Cambridge had allegedly prohibited SD from discussing securities, from handling paperwork for securities transactions, and after May 2014 from introducing her former customers to Cambridge's associated persons.
Cambridge's written procedures allegedly prohibited Denney from sharing non-public information ("NPI") with SD about her former customers. Finally, Cambridge generally prohibited its registered persons from communicating about their securities business using text messages without prior written approval. The AWC asserts that Denney was aware of all of the above policies.
Sarcastic Side Bar: Not sure if you caught FINRA's cleverness in disguising the statutorily disqualified individual behind the impenetrable code of "SD." Wow, that's quite a bit of high-tech obfuscation -- he says with dripping sarcasm. Please step back lest you get splashed by the acid of Bill Singer's sarcastic droplets.
June 2014 to March 2015
The AWC alleges that on approximately 24 occasions between the nine-month relevant period of June 2014 and March 2015, Denney shared NPI with SD about her former customers, including information about their account balances, securities transactions, and investment strategies. On approximately 20 occasions during that period, Denney assisted SD's efforts to act as an unregistered broker by:
accepting her introductions to customers,
following her suggestions about her former customers' investments, or
obtaining paperwork from her relating to securities transactions.
The AWC cites one occasion during the relevant period when SD gave a former customer's checks to Denney that SD had partly filled out. During the relevant period, the AWC further alleges that Denney sent hundreds of text messages about securities to SD without seeking or receiving Cambridge's prior written approval, thus preventing the firm's supervision of the communications.
FINRA deemed Denney's disclosure of NPI to SD, his involvement in her efforts to act as an unregistered broker, and his improper text messaging her as constituting violations of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Denney a $5,000 fine and a 12-months suspension from associating in any capacity with any member of FINRA
Bill Singer's Comment
At first, I thought that FINRA had done a commendable job with its regulatory settlement with Denney. After I did a bit of research, my second blush wasn't all that favorable -- maybe more a rash than a blush? Maybe contact regulatory dermatitis? Turns out that FINRA wasn't as proactive and aggressive a regulator as I thought. Turns out that FINRA was engaged in what looks like piggyback regulation or piling-on after the whistle. As I see it, the State of Missouri beat FINRA to the old regulatory punch in January 2018 via the state's Consent Order that was published about four months earlier than the self-regulatory-organization's May 2018 AWC settlement. Go figure -- there's not a mention of the Missouri Consent Order in FINRA's AWC!
Denney and the State entered into a Consent Order involving alleged violations of Revised Statutes of Missouri Sections 409.4-402(a) and 409.4-411(b) in that Denney had allegedly assisted an unregistered individual's efforts to
transact business as a broker-dealer agent; and caused the records of a broker-dealer
and/or investment adviser to become inaccurate concerning client communications and
protection of client information. Could that unregistered individual be the same "SD" referenced in FINRA's AWC?
In accordance with the Consent Order and the terms of the settlement, Missouri imposed upon Denney a permanent injunction against further violations of the cited statutes; a Censure, and a $15,000 fine ($5,000 payable within 180 days) plus $6,650 in costs (($1,650 payable within 180 days). If Denney remains compliant with the terms of the Consent Order and is not found to have violated the Missouri Securities Act during the ensuing two years, then his payment of the balances of the fine and costs will be waived. Further, Denney is subject to a firm supervision plan that extends for a period fo two years.
In pertinent part, the Consent Order alleges that:
15. In April 2013, Agent pled guilty to a felony stalking charge in the United States District
Court for the Western District of Tennessee and was sentenced to among other things,
five years' probation in August 2013.
16. As a result of Agent's conviction, Agent would be statutorily disqualified from
participating in the brokerage industry.
17. In January 2014, Denney's then-employer, Lawing Financial, Inc. ("Lawing"), entered
into an agreement with Agent whereby Lawing purchased ownership in Agent's client
relationships and the underlying good will associated with it, along with the files,
documents, and other records of her clients.
18. As part of Lawing and Agent's agreement and for a limited duration and under limited
conditions, Agent was to assist in the transition of clients. Agent's primary function was
to introduce her former clients to their new financial advisors. Lawing assigned Denney
as one of the new advisors.
19. After being assigned by Lawing, Denney began to communicate with Agent on an almost
daily basis via phone, text message, and in-person meetings regarding Agent's former clients.
During that period Lawing generally prohibited its employees from communicating about
their securities business using text messages and Denney was aware of that policy.
20. The contact with Agent involved accepting Agent's introductions to customers, discussing
and receiving Agent's suggestions about her former customers' investments and/or
discussing or receiving paperwork from Agent relating to customer securities transactions.
21. Lawing representatives, including Denney, continued contact with Agent until at least
May 30, 2014 when Agent was barred by FINRA. After May 30, 2014, Denny remained
in contact with Agent on at least a weekly basis, up until December 2014. The contact
continued to involve the discussing of client's accounts and the sharing of nonpublic
22. On or about October 29, 2015, Denney resigned from Lawing and began his own firm.
Online FINRA BrokerCheck records as of May 17, 2018, disclose that Denney voluntarily resigned fro Cambridge on October 29, 2015, based upon allegations that:
RR shared non-public, personal information with an unregistered person in violoation of firm policy and Regulation S-P
Denney's statement in response to his firm's disclosure explained that;
Registered Representative voluntarily terminated his association with his former firm only to later find that the firm had "alleged" the subject violations, though such "allegations" are not pursuant to any formal action, complaint or other proceeding. The "allegations" appear to be an internal accusation made informally and without providing Registered Representative any opportunity or forum to respond to or dispute the same. Registered Representative is now aware, and contests all allegations, of any wrongdoing or "violation" regarding the subject regulation.
You're free to draw your own conclusion but I think that the State of Missouri's Consent Order does a far better job of providing the context and content of Denney's alleged misconduct that FINRA's AWC. Frankly, I find SD's felony stalking charge an exacerbating fact, which should certainly prompt a broker-dealer to have a heightened concern about exposing its clients to such an individual. Yes, I appreciate that the contemplated business relationship between Denney and SD was essentially transitional in nature and not supposed to extend beyond the transfer of accounts. Once the clients had been handed off from SD to Denney, there were requirements that Denney not involve the disqualified agent in further account-related activity. Alas, what was contemplated didn't quite pan out. Now that we are aware of SD's felony stalking plea, we can only imagine what could have happened had she contacted a former client in an unwelcome manner and referenced her ongoing communications with Denney. What a messy lawsuit that could become for Denney and his employers.
Finally, I am discomforted by Denney's posted BrokerCheck statement about his resignation. His online statement seems to assert that the allegations against him are merely an informal, internal accusation and his conduct did not constitute any wrongdoing or violation. When we now factor into the equation Denney's settlements with Missouri and FINRA, I'm sort of wondering whether his statement should be amended or deleted.