September 26, 2018
The path of least resistance does not always take those who journey on it along a straight and narrow route. Sometimes, what's quickest and most expedient is wrong. In a recent FINRA regulatory settlement, we come across a stockbroker who seems to have found it easier to simply write out a check for his customers' alleged losses. But that it was all that simple. It ain't. In the end, after the check was cashed and the money spent, the customers still sued and the stockbroker was fined and suspended by FINRA.
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, Ian Greenblatt a/k/a "Eric Green" submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Ian Greenblatt a/k/a "Eric Green", Respondent (AWC 2017055701001,September 21, 2018).
The AWC asserts that Greenblatt was first registered in 1992 and by October 2012, was registered with FINRA member firm Capitol Securities Management, Inc. ("CSMI"). The AWC asserts that "Greenblatt has no relevant formal disciplinary history with the Securities and
Exchange Commission, FINRA, any other self-regulatory organization, or any
state securities regulator."
Checks and Balances
The AWC alleges that for about eight years, Greenblatt serviced two customers who were a married couple (referenced only as "AF" and "BF"), but in 2015 and 2016, their account had declined over $170,000 -- which, in March 2016, prompted AF to verbally complain to Greenblatt about his account management.
The AWC asserts that Greenblatt did not
report AF's complaint. In response to AF's verbal complaint, on March 25, 2016, Greenblatt allegedly met with the couple at their home, where he gave the couple $4,000 in cash and also wrote a $46,000 personal check payable to the couple's son (referenced only as "FF"), who was not a customer of either Greenblatt's or of CSMI. The AWC asserts that check was "in settlement of AF's complaint;" oddly, there is no such explanation for the $4,000 cash payment. As to what transpired during the meeting and in furtherance of whatever was discussed, the AWC offers this:
During the meeting, Greenblatt, AF, and BF agreed that Greenblatt would attempt
to generate trading profits to recoup the losses suffered by AF and BE in their
brokerage account. Accordingly, AF wrote a $46,000 check payable to CSMI's
clearing firm. Greenblatt, AF, and BF further agreed that once the $46,000 check
from Greenblatt to FF cleared, the proceeds would be deposited into AF and BF's
checking account, and then the check written by AF would be deposited into AF
and BF's brokerage account via the clearing firm. Although Greenblatt deposited
AF's $46,000 check into AF and BF's brokerage account, as agreed, Greenblatt
was unable to recover the losses that AF and BF had suffered, and AF and BF
filed an arbitration against Greenblatt in August 2017.
The AWC asserts that it is a violation of FINRA Rule 2010 to settle a customer complaint without the knowledge or approval of a registered representative's employer member firm. In accordance with the terms of the AWC, FINRA imposed upon Greenblatt a $10,000 fine and a 30-calendar-day suspension from association with any FINRA member in any and all capacities.
Bill Singer's Comment
It is critical for both in-house compliance and industry regulation that registered representatives fully and timely disclose all customer settlements. Not sure that I can more clearly state my support for sanctioning these "settling away" cases. Having made my compliance and regulatory views clear, now let me turn to some aspects of FINRA's AWC that trouble me.
The AWC's "Background" sections discloses Greenblatt's registration history, which notes that he "is currently registered in the above-mentioned capacities through CSMI," which is confirmed by FINRA's online BrokerCheck records as of September 26, 2018. As such, notwithstanding the customers' complaints, Greenblatt's undisclosed settlements, and FINRA's AWC, CSMI stood by its man. Some would applaud that. Others would not.
As to CSMI's getting Greenblatt's back, under the BrokerCheck heading "Investigation," we are informed that on July 18, 2018, CSMI initiated an investigation concerning Greenblatt:
Representative is under investigation for settling a customer complaint away from the firm.
Given that this is now almost 2 1/2 months since CSMI's July 2018 in-house investigation began, has the member firm finished its inquiry? Has CSMI reached any conclusions? Has the AWC influenced CSMI's deliberations? Has CSMI imposed any in-house sanctions on Greenblatt? Nothing is so stated in the AWC or on BrokerCheck.
Turning yet again to FINRA's online BrokerCheck records, we find under the heading "Customer Dispute -- Pending," that on August 21, 2017, CSMI was served with a FINRA arbitration Statement of Claim (Docket #17-02214) seeking $500,000 in alleged damages and alleging:
Clients allege unsuitable recommendations, for elder abuse, for breach of fiduciary duty, negligence, supervision and breach of contract.
It's sort of idiotic that FINRA's AWC only minimally references AF and DF's FINRA arbitration -- after all, the self-regulatory-organization sanctioned Greenblatt for entering into an undisclosed settlement with the couple. What was alleged in the follow-on FINRA arbitration? What were the damages sought? Why didn't the AWC disclose some of the substance of the arbitration, which, after all, seems to have sprung from the same allegations that prompted Greenblatt's undisclosed settlement?
The AWC doesn't quite get into the whole host of alleged sales practices violations asserted by the customers. To the contrary, the AWC sort of provides a sanitized cover depicting Greenblatt as not having engaged in any particular wrongdoing other than, perhaps, recommending some lousy stocks and, to give the guy some credit, he dipped into his own pocket in a misguided effort to make his customers whole. Not saying that's the case. Just saying that the AWC sort of gives that impression.
One last thing, consider Greenblatt's "Broker Statement" on BrokerCheck in response to the "Customer Dispute-Pending" disclosure:
RR denies this complaint-Customer directed and/or authorized all transactions and at all times was aware of the trading in his account and the account balances. He continued to take regular withdrawals and margin loans to the extent of nearly 1,000,000 (1 million) dollars to support his life style; he repeatedly ignored the advice of the RR.
Given that Greenblatt still registered with CSMI and that member firm conducted an internal investigation of the stockbroker's settling away and the firm opted to retain the employee's registration, I'm not satisfied with the AWC's failure to offer more content and context about the ensuing FINRA Arbitration. Following CSMI's initiation of its in-house investigation, AF and BF's complaints blossomed into a $500,000 FINRA arbitration asserting a number of serious lapses, including elder abuse and supervision. It's difficult to reconcile the arbitration's allegations with the fairly benign AWC presentation of the underlying customer issue as mere "mismanagement" by Greenblatt in the neighborhood of some $170,000 in alleged losses, all of which he tried to quietly settle.