The 93 Year Old Customer with Dementia, The Guardian, The Stockbroker, and the Compliance Officer

July 30, 2018

Today's Blog offers a chilling a tale about misconduct on Wall Street. We got a 93-year-old retiree with dementia and a court-appointed guardian. During a four-year period, we got a stockbroker who racks up 3,500 transactions, $723,000 in trading losses, and $735,000 in commissions and markups. We got a $470,000 settlement and the stockbroker gets barred from the industry. Did anyone at the broker-dealer notice the activity in the elderly client's accounts? Did anyone at the broker-dealer do anything about it?

Case In Point: Kaplan AWC

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, Mark Kaplan submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Mark Kaplan, Respondent (AWC 201504598400, March 7 2018).

The Elderly, Retired Customer

The Kaplan AWC asserts that Kaplan was first registered in 1989, and by March 2011, he was registered with Vanderbilt Securities.

The Kaplan AWC alleges that [Ed: the "Relevant Period" is March 2011 to March 2015]:

Customer BP, a 93-year-old retired clothing salesman, opened accounts at Vanderbilt with Kaplan during March 2011. As of Match 31, 2011, the value ot Customer BP's accounts was approximately $507,544.64. Social Security was Customer BP's only source of income during the Relevant Period.

During the Relevant Period, Kaplan exercised de facto control over BP's amounts. Customer BP relied on Kaplan to direct investment decisions in his accounts, contacting Kaplan frequently. In addition, Customer BP was experiencing a decline in his mental health. In April 2015, the Court granted an application by BP's nephew to act as his legal guardian and manage Customer BP's financial affairs after he was diagnosed with dementia during January 2014.

During the Relevant Period, Kaplan effected more than 3,500 transactions in Customer BP's accounts, which resulted in approximately $723,000 in trading losses and generated approximately $735,000 in commissions and markups for Kaplan and the Firm.

Kaplan never discussed with Customer BP the extent of his total losses or the aggregate amount he paid in sales charges and commissions.

As detailed in the Kaplan AWC, BP's two primary accounts produced the following metrics:
  • average annualized cost-to-equity ratios (the percentage return on the customer's average net equity needed to pay sales charges ) were allegedly 31.7% and 301.6%;
  • annual cost-to-equity ratios from 16.50% to 814.41%; and
  • annual turnover rates (the rates at which the securities were sold and replaced) ranged from 2.34 to 118.65.
Settlement and Resignation

The Kaplan AWC states that on April 4, 2016, Vanderbilt Securities and Kaplan made a $470,000 settlement payment to the guardian for BP's accounts. The Kaplan AWC asserts that Kaplan "voluntarily resigned" from Vanderbilt on February 22, 2018.

FINRA Sanctions

FINRA deemed Kaplan's conduct during the relevant period to have constituted churning and unsuitable excessive trading in BP's accounts, in willful violation of Section 10(b) of t he Securities Exchange Act of 1934  Rule l0b-5 there under; and in violation of NASD Rule 2310 (for conduct before July 9, 2012), FINRA Rules 2010, 2011, and 2020.  In accordance with the terms of the Kaplan AWC, FINRA imposed upon Kaplan a Bar from associating with any FINRA member in any capacity.

Bill Singer's Comment

FINRA online BrokerCheck records as of July 30, 2018, disclose that Kaplan was employed in the brokerage industry for 28 years at 6 firms. Under the BrokerCheck heading "Employment Separation After Allegations," it is disclosed that Kaplan was "discharged" on March 11, 2011, by Morgan Stanley Smith Barney based upon allegations that:


Under the BrokerCheck heading "Customer Dispute-Pending," is a disclosure indicating that a customer filed a FINRA Arbitration Statement of Claim on March 26, 2018, alleging "unsuitable investments" and seeking $100,000 in damages.

Under the BrokerCheck heading "Customer Dispute-Settled," are 7 disclosures of customer complaints from 2007 through 2018 and involving Kaplan's tenure at Vanderbilt, and at previous employers Morgan Stanley and Citigroup Global Markets.

Case In Point: Vanderbilt Securities and Champney

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, Vanderbilt Securities, LLC, and Barry Champney submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Vanderbilt Securities, LLC and Barry Champney, Respondents (AWC 2015045984002, July 26, 2018).

The AWC asserts that Vanderbilt Securities has been a FINRA member firm since 1965 and employs about 150 registered individuals in approximately 37 branch offices. Further, Champney is characterized in the AWC as having first become registered in 1981 and associated with Vanderbilt in May 2005 and became that firm's Chief Compliance Officer in July 2007. The AWC asserts that "Respondents do not have any relevant disciplinary history with the Securities and Exchange Commission, FINRA, any other self-regulatory organization, or any state securities regulator."

In virtually verbatim fashion, the Vanderbilt/Champney AWC re-states the various facts and circumstances set forth in the Kaplan AWC pertaining to BP and Kaplan's alleged churning and excessive trading of his account.

SIDE BAR: Given BP's age, his dementia, the court-appointed guardianship, and the alleged churning and excessive trading, we were left to wonder at the conclusion of the Kaplan AWC whether any compliance-related issues arose at Vanderbilt Securities that prompted supervisory intervention. In plain terms: what did Vanderbilt Securities know, when did it know it, and what did the firm do about it?

The Activity Report

In the Vanderbilt/Champney AWC, FINRA states in pertinent part that:

Vanderbilt did not systemically track the turnover rates and cost-to-equity ratios in customer accounts. The Firm performed these calculations manually, on an ad-hoc basis, generally when a customer complained. Accordingly, the Firm had no reasonable system to detect unsuitable excessive trading based on turnover rates or cost-to-equity ratios.

Rather, the Firm prepared a monthly report ("Activity Report") that identified accounts in which there were more than 40 trades in that particular month. The Firm's written supervisory procedures did not address the Activity Report or provide any guidance about how to use it. In addition, the Activity Report did not capture patterns of activity across multiple months.

During the Relevant Period, Champney reviewed the monthly Activity Report and determined, in his discretion, whether the appearance of a customer account on the report warranted action.' The Firm's WSPs did not provide any guidance about how to determine whether further action was warranted. The Firm's procedures did not require that any action be taken when a customer's account appeared on the Activity Report.

In certain instances, Champney had the Firm send customers a "Satisfaction Letter" when their accounts appeared on the Activity Report. However, this form letter did not contain any information about the level of trading in the account or any losses or commissions associated with those transactions. Additionally, the Firm's WSPs did not provide guidance about whether any steps should be taken if a customer did not acknowledge a Satisfaction Letter, even though the letter requested that customers acknowledge receipt.

What They Knew and When

The AWC alleges that when Kaplan joined Vanderbilt in 2011,  Champney participated in the hiring process and the compliance officer was aware that:

at least two customers at Kaplan's prior firm had alleged that he traded excessively in their accounts. Champney was also aware that Kaplan had been terminated by that firm because of a client complaint and other concerns about the activity in his customers' accounts.

A CCO Stumbles

In fairly chilling detail, the AWC then offers this troubling picture:

Kaplan effected numerous trades in BP's accounts from the outset, effecting 43 trades in April 2011, 34 in May 2011, and 66 in June 2011. In September 2011, approximately six months after BP opened his accounts with the Firm, Champney sent Customer BP a Satisfaction Letter. The letter did not include any information about the level of activity in BP's accounts or the losses or commissions associated with that activity. At that point, BP's accounts had experienced a net loss of approximately $167,000 and generated commissions of almost $63,000. Champney did not discuss the activity, commissions, or losses with BP or take steps, as Kaplan's supervisor, to ensure that Kaplan did so.

As Kaplan's supervisor, Champney subsequently became aware of continued trading, losses, and commissions in Customer BP's accounts. Champney observed that Customer BP's accounts appeared on the Finn's Activity Report 23 out of 30 months of the Relevant Period and BP experienced heavy losses and paid significant commissions throughout the Relevant Period. During these four years, Champney met with Customer BP once, in July 2013, with BP's son, after BP misplaced his debit card. During this meeting, neither Kaplan nor Champney raised with Customer BP the extensive losses and commissions associated with the trading in his accounts. One day later, Champney sent a second Satisfaction Letter to Customer BP. Champney did not include any information about the level of activity in Customer BP's accounts or the losses or commissions associated with that activity in this letter or in any other communication with Customer BP during the Relevant Period.

As Kaplan's supervisor, Champney knew that Customer BP called Kaplan nearly every day, often multiple times a day, and he knew that BP relied on Kaplan for information about his accounts. Champney was also aware of an email that Customer BP's son, who lived with Customer BP, sent to Kaplan in February 2013, after Customer BP had sustained substantial losses, acknowledging the depth of his father's interest in the markets and in seeing his money grow, and urging him to be careful with his father's accounts. Neither Kaplan nor Champney followed up with Customer BP in response to his son's email.

FINRA Sanction

FINRA deemed that Vanderbilt violated NASD Rule 3010(a) and (b) (for conduct before December 1, 2014), FINRA Rule 3110 (a) and (b) (for conduct on and after December 1, 2014), and FINRA Rule 2010; and that Vanderbilt and Champney violated NASD Rule 3010(a) (for conduct before December 1, 2014), FINRA Rule 3110 (a) (for conduct on and after December 1, 2014), and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon:
  • Vanderbilt: a Censure and $100,000 fine
  • Champney: a $5,000 fine, three-month suspension from association with any FINRA member firm in any capacity, and a requirement that Champney re-qualify as a principal by passing the requisite examination or examinations before acting in any principal capacity with any FINRA member.
Bill Singer's Comment

Compliments to FINRA on an excellent bit of regulation and a superior effort in communicating the underlying facts in both AWCs. FINRA is clearly putting its member firms and their supervisory stafff on notice that going through the motions when it comes to the implementation of compliance protocols and effective supervision is not going to cut it. 

Ultimately, the combined Kaplan AWC and the Vanderbilt/Champney AWC present a troubling picture of what happens when a compliance regime is predicated upon the false-appearance of effective in-house supervisory policies. Yes, there were policies in place at Vanderbilt Securities. But no amount of policies are of any value if they are not designed to take that critical steps beyond prompting alarms, bells, whistles, and flares. For all the noise and commotion that even the best-drafted WSP may set off, those same policies are worthless if they don't provide for the all-important responses:
  • What do you do when the alarms ring? 
  • Who is designated to handle the developing problem when the bells and whistles sound? 
  • How should a firm evaluate its ongoing supervisory reaction while under the glare of burning warning flares?