Stockbroker Plays Hide And Seek With FINRA

November 30, 2018

Today's featured FINRA regulatory settlement involves a stockbroker charged with multiple transgressions involving hidden electronic communications, a customer complaint, and a settlement. All of which becomes a game of stockbroker hides and FINRA seeks -- and then FINRA fines and suspends. I would not recommend the home version of this game to anyone. Be that as it may, when you're done digesting this matter, you're likely to figure that either FINRA went overboard in loading up the underlying fact pattern in a way that made the case seem far worse than it really was; or, in the alternative, the respondent was represented by a very savvy industry lawyer.

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, Raymond John Pirrello, Jr., , submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Raymond John Pirrello, Jr.,, Respondent (AWC 2017053436101, November 20, 2018).

The AWC asserts that Pirrello entered the securities industry in 1996, and by 2008, he was registered with FINRA member firm Garden State Securities, Inc. The AWC states that "Pirrello has no disciplinary history with the Securities and Exchange Commission, any state securities regulator, FINRA, or any other self-regulatory organization."

Text Messages and Emails

Frequently, I translate FINRA's regulator-speak into more comprehensible language; however, I have opted to reprint the following section of the AWC and note my comments immediately thereafter:

Books and Records 

FINRA Rule 4511 requires each member to make and preserve books and records in conformity with FINRA rules, the Securities Exchange Act of 1934 ("Exchange Act") and rules promulgated thereunder1. Exchange Act Rule 17a-4(b)(4) requires each member to preserve for a period of three years the originals of all communications received and copies of all communications sent by the member relating to its business. A registered representative who causes his or her member firm to fail to comply with its recordkeeping obligations under the Exchange Act and Exchange Act and FINRA rules violates FINRA Rules 4511 and 2010. 

Between 2008 and 2015, Pirrello sent and received hundreds of text messages using his personal cell phone and emails using his personal email account to engage in Firm-related business with his customer at Garden State, TA. These communications included a written complaint by TA alleging that Pirrello failed to follow TA's instructions regarding liquidating a position in his account. Garden State's written supervisory procedures did not permit use of text messages or personal email for business communications with customers. Pirrello took no steps to retain or provide to Garden State any of the text messages or emails he exchanged with TA, all of which were deleted. Pirrello further hid his use of text messages and personal email by signing Garden State compliance attestations between 2011 and 2015 falsely attesting that he used only Firm-sanctioned electronic communication methods to communicate with Firm customers. 

Pirrello's use of text messaging and his personal email account to engage in business-related communications with TA caused Garden State to fail to comply with its recordkeeping obligations under the Exchange Act and Exchange Act and FINRA rules. 

By virtue of the foregoing, Pirrello violated NASD Rule 3110(a) and FINRA Rules 4511 and 2010.

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1 FINRA Rule 4511 replaced NASD Rule 3310(a) effective December 5, 2011. NASD Rule 3110(a) likewise required members to make and preserve books and records in conformity with the Exchange Act and Exchange Act Rules 17a-3 and 17a-4.  

Bill Singer's Footnote 1 Comment: FINRA Rule 4511 addresses member firms' books and records obligations. The "Footnote 1" in the AWC states that in 2011, FINRA Rule 4511 replaced NASD Rule 3310(a). The footnote's second sentence then references NASD Rule 3110(a). So . . . which is it? NASD Rule 3310 or NASD Rule 3110? Former NASD Rule 3310: Publication of Transactions and Quotations was superseded by FINRA Rule 5210. Former NASD Rule 3110: Books and Records was superseded by FINRA Rule 4510 with the exception that NASD Rule 3110(i) was superseded by FINRA Rule 3150. And, no, I didn't make a typo: there is a FINRA Rule 4510: Books and Records Requirements and a FINRA Rule 4511: General Requirements. The quirky part of FINRA's rulebook is that the only content under its Rule 4510 is the title of the rule! In fairness to FINRA, the AWC notes in the last sentence in the extract above that Pirrello violated NASD Rule 3110(a) -- so this is likely nothing more than someone inadvertently replacing a "1" with a "3." More to the point, I too have typos and mistakes in my first-run published content. That being said, I appreciate when my readers warn me of my errors and I hope FINRA will revise the apparent error in the footnote.

Bill Singer's Deleted Comment: Next . . . we come upon this sentence:

Pirrello took no steps to retain or provide to Garden State any of the text messages or emails he exchanged with TA, all of which were deleted. 

Messages and emails are often automatically deleted after the passage of a period of time. I'm not sure whether the AWC is asserting that Pirrello affirmatively deleted the cited messages/email, or, in contradistinction, that by not taking steps to archive said communications, he allowed them to be automatically deleted by his service provider. Obviously, there's a significant difference between intentionally spoliating records versus allowing them to lapse into pre-determined destruction.

That's the end of my two Comments and I now return you to my brilliant analysis of the AWC that will include a bonus third "Bill Singer Comment" at the end.


The AWC alleges that in response to a FINRA Rule 8210 demand, Perello testified at a January 2012 on-the-record interview with FINRA Staff and stated that he did not send text messages to his customers. Taking issue with that assertion, the AWC notes that:

[I]n fact, Pirrello sent hundreds of text messages to his customers, and was actively engaging in Firm-related business by text message in 2011 and 2012.2  

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2 In considering the appropriate sanction for Pirrello's misleading on-the-record testimony, FINRA considered that during subsequent on-the-record testimony, Pirrello clarified his prior testimony and admitted that he did send text messages to his customers in 2012.

Willful Failure to Disclose Customer Complaint on Form U4

In 2011, a customer of Pirrello's identified as "TA" sent an email  to the stockbroker alleging $300,000 in damages caused by Pirrello's misconduct, including failure to follow TA's instructions. The AWC asserts that FINRA By-Law Article V, Section 2(c), FINRA Rule 1122, and Question 14(3) of the Uniform Application for Securities Industry Registration or Transfer ("Form U4") required Pirrello to timely disclose the customer's complaint. 

SIDE BAR: Question 14I of FINRA's Form U4:

(3) Within the past twenty four (24) months, have you been the subject of an investment-related, consumer-initiated, written complaint, not otherwise reported under question 14I(2) above, which: 

(a) alleged that you were involved in one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more (if no damage amount is alleged, the complaint must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or;

(b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities?

The AWC asserts that within 30 days of his receipt of TA's complaint, Pirrello should have amended his Form U4 to disclose the customer's complaint. Further, the AWC further asserts that during the 24 months following customer TA's complaint, Pirrello:
  • signed five incomplete and misleading Form U4 amendments that did not disclose TA's complaint; and
  • hid TA's complaint from Garden State by signing compliance attestations between 2011 and 2015 falsely attesting that he had complied with his Form Ut update obligation and had reported to the firm all customer complaints..
Undisclosed Settlements

The AWC alleges that:

In November 2011, Pirrello paid his customer TA $50,000 by check in an attempt to settle TA's complaints regarding his account at Garden State. Pirrello did not tell Garden State about TA's complaints or his payment to TA. 

Additionally, between 2009 and 2015, Pirrello paid $388,000 to JV, another customer at Garden State, in an attempt to resolve JV's complaints. Pirrello did not tell Garden State about JV's complaints or the payments to JV. 

In an apparent effort to hide the above settlement payments, Pirrello allegedly falsely denied having settled any customer complaints on Garden State compliance attestations between 2011 and 2015.

FINRA Sanctions

In accordance with the terms of the AWC, FINRA imposed upon Pirrello a $20,000 fine and an 18-month suspension from association with any FINRA member firm in any capacity.

Bill Singer's Comment

I had Pirrello pegged as a goner -- as I read through the AWC, I was certain he was going to get hit with a Bar. I was shocked to see that the time in the penalty box was only 18-months. Although the AWC acknowledges that Pirrello's clarification of his prior testimony disclosed the 2012 text messaging, that, in and of itself, should not have deflected the imposition of a Bar given all the other alleged misconduct. I'm guessing that there are two other likely answers as to why this respondent emerged from FINRA's regulatory process with a fine and 18-month suspension. One, FINRA gilded the lily and the underlying facts/events are not as extreme as the AWC presents them. Two, Pirrello got his goddamn money's worth in terms of legal counsel by J. Christopher Albanese, Esq. of Gusrae Kaplan Nusbaum PLLC.

In closing, let me note that I'm at a loss to explain why FINRA is only first settling in late November 2018, alleged misconduct that began in 2008. Even if I am most generous with FINRA and allow that Pirrello may have hidden the subject communications for several years, it's hard to ignore the fact that FINRA conducted a January 2012 OTR but somehow took nearly 7 years to fish or cut bait.

READ the Blog "Undisclosed Settlement" Archive