FINRA Fines And Suspends Merrill Lynch Rep for Check Kiting

May 29, 2018

FINRA is on the Wall Street beach again watching high flyin' kites -- or, put in more formal terms, we got another FINRA regulatory settlement involving a former Merrill Lynch registered rep accused of check kiting. In today's installment of FINRA seeking out the industry's NSF checks and calling those to atone, we got five checks spread out over three months. No . . . Blog publisher Bill Singer ain't comin' to the defense of the rep. It looks like the Respondent tried to do what he was accused of. That being said, Bill still finds himself in another one of his foamy lathers as he wonders why FINRA is so ready to play the collection agent for its member firms -- or the local tough-guy enforcer -- yet FINRA doesn't seem as quick to enter the fray when an affiliate bank of its larger member firms engages in similar misconduct albeit on a larger scale and involving many more zeros following the dollar sign. 

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, 
Fuad Habba submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Fuad HabbaRespondent (AWC . 2016049826001, May 21, 2018).

The AWC  asserts that Habba entered the securities industry in 2004, and by 2012, he was registered with FINRA member firm Merrill Lynch, Pierce, Fenner & Smith Incorporated. The AWC asserts that Habba "has no prior relevant disciplinary history in the securities industry."

3 Months; 5 Checks

The AWC asserts that during the relevant period in January to March 2016, Habba deposited five checks totaling $2,765 into his personal checking account, which the AWC characterizes as "at the Firm." Apparently, the five checks were drawn against other bank checking accounts that had been closed years earlier.. The AWC alleges that Habba: 

knew, or was reckless in not knowing, that the accounts from which he wrote the checks were closed and that there were insufficient funds to cover the checks that he had written. Following each of the deposits of these checks, Respondent withdrew funds from his Firm checking account. In one instance, Respondent would have had insufficient funds in his Firm checking account to cover the withdrawals without the deposit of the bad check. The Firm initially credited the funds to Respondent's account but subsequently rejected the deposits. 

FINRA deemed that Habba's conduct resulted in his obtaining unauthorized loans from Merrill Lynch and constituted "check kiting" in violation of FINRA Rule 2010.  

2016 Resignation

FINRA BrokerCheck records as of May 29, 2018, disclose that Habba voluntarily resigned From Merrill Lynch on April 15, 2016 based upon allegations of:

Conduct inconsistent with Firm policy related to personal bank accounts.

FINRA Sanctions

In accordance with the terms of the AWC, FINRA imposed upon Habba a $5,000 fine and a three-month suspension from association with any FINRA member in any capacity.

Bill Singer's Comment

Online FINRA BrokerCheck records disclose under the heading "Judgment / Lien" that on April 27, 2017,  the Internal Revenue Service filed a $136,114.01 tax lien for tax years 2005, 2006, 2007, 2008, and 2011 against Habba. Draw whatever inferences you wish about the tax lien in terms of possible motivation for Habba's check activities.

I have repeatedly noted my objections about FINRA pursuing check-kiting matters as a "regulatory" issue, which I feel too often casts the self-regulatory-organization in the role of a collection agent for its member firms. In today's case, would FINRA have even become involved if Habba had deposited the same five checks in a non-member firm's checking account? Moreover, did Habba deposit the five checks in a Merrill Lynch checking account or in a Bank of America checking account? 

If an associated person engages in check kiting, I have no qualms whatsoever should a FINRA member firm refer the matter to a criminal prosecutor -- and if a conviction or plea results, FINRA is within its rights to act on such criminal occurrences. Note that in Habba's case, it does not appear that Merrill Lynch sustained any loss because the AWC asserts that in only "one instance" he had insufficient funds to cover his withdrawals and, more critically, the firm "subsequently rejected the deposits."  No . . .  Habba doesn't gets the benefit of the doubt. He didn't deposit a check from a third-party, then write his checks against what he thought would be a good deposit of cleared funds, and then find out that the third-party's check bounced. Keep in mind that the AWC cited five allegedly kited checks over a three month period. Like I said, I'm not defending anything Habba did. 

If a FINRA member firm desires to terminate the employment of an individual involved in check-kiting, have at it. Beyond that, I'm not satisfied that allegations of check-kiting absent more are the proper grist for FINRA's mill.  My discomfort with FINRA's regulatory intervention in check-kiting matters is that the regulator shows no similar regulatory zeal when it comes to sanctioning its larger member firms whose banking affiliates engage in predatory or discriminatory banking practices that harm the public. Similarly, when FINRA member firms fail to timely or accurately pay their employees, I don't see the same righteous indignation from the self-regulatory-organization. See some of my prior check-kiting commentary below: