In today's featured FINRA regulatory settlement, a former employee of an unnamed bank is barred because of her alleged misconduct at that unnamed bank, and, well, odd, but, Wall Street's fearless self-regulatory-organization seems fearful to name the bank by name. All of which conjures up the frightening visage of Lord Voldemort -- he who must not be named! Has the Dark Lord infiltrated the American banking system? Is FINRA cowering under his spell? Where is Harry Potter when Wall Street needs him?
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, Elizabeth Marie Garcia submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Elizabeth Marie Garcia, Respondent (FINRA AWC 22017052216701, January 14, 2019).
The AWC asserts that Garcia entered the industry in a non-registered capacity in August 2014 with FINRA member firm Merrill Lynch, Pierce, Fenner & Smith Inc.; and that she also was employed as a Customer Service Sales Specialist by an affiliated bank. The AWC goes to painstaking lengths to NOT identify the name of the bank that is affiliated with FINRA member firm Merrill Lynch, Pierce, Fenner & Smith Incorporated. After initially identifying Merrill Lynch by its full FINRA member firm name, the AWC then refers to that broker-dealer as the "Firm;" in contradistinction to the unnamed bank, which is only referenced in the AWC as the "Bank." An example of this tortured regulatory nomenclature is presented in this portion of the Garcia AWC:
[W]hile associated with the Firm, Garcia was also employed by a bank affiliated with the Firm (the "Bank") as a Customer Service Sales Specialist. In that position, Garcia handled customer calls related to Bank accounts and other Bank products, and referred Bank customers to the Firm where appropriate. . . .
In her associated capacity with FINRA member firm Merrill Lynch, Garcia had access to the brokerage customers' profile, account information, and other data.The AWC asserts that in November 2016, Garcia became registered as a General Securities Representative with Merrill Lynch.
$9,015 In Childcare Reimbursement
The AWC asserts that during the relevant period from January 1, 2016, through January 31, 2017, the unnamed bank affiliated with FINRA member firm Merrill Lynch offered eligible employees reimbursement for certain childcare expenses via direct payment to the childcare provider. As alleged in the AWC in part:
During the Relevant Period, Garcia submitted approximately ten reimbursement requests to the Bank for childcare expenses she did not incur. In each reimbursement request, Garcia falsely stated that she had paid a daycare facility
for childcare services on particular dates. She also falsified signed certifications
and fabricated signed receipts purporting to be from the daycare facility.
Additionally, in each reimbursement request, Garcia signed a certification in
which she falsely represented that the information provided therein was accurate
and that she had obtained original signatures from the childcare provider verifying
receipt of her payment. When asked about her reimbursement requests during the Bank's investigation of the matter, Garcia further misled the Bank by falsely stating that her claimed childcare expenses were legitimate.
In total, during the Relevant Period, the Bank reimbursed Garcia approximately $9,015 for childcare expenses that she did not incur. Thus, Garcia converted the Bank's funds in violation of FINRA Rule 2010.
The AWC alleges that:
[O]n March 30, 2017, the Firm filed a
Uniform Termination Notice for Securities Industry Registration ("Form U5")
reporting that Garcia had voluntarily terminated her association with the Firm
effective February 28, 2017, and that an internal investigation commenced prior to Garcia's termination revealed that she had received $9,015 in reimbursements for childcare expenses that were not incurred. Garcia also resigned her employment with the Bank on February 28, 2017.
In accordance with the terms of the AWC, FINRA imposed upon Garcia a Bar from association with any FINRA member in any capacity.
Bill Singer's Comment
Bank On It
Lost in the old regulatory-settlement-shuffle is an important fact: namely, that the childcare reimbursement program was provided by the Bank and not FINRA member firm Merrill Lynch. No . . . I am certainly not excusing or defending Garcia's apparent fraud. She entered into the settlement and accepted a Bar, so I'm inferring that there's truth to FINRA's allegations of conversion. Be that as it may, it is important to highlight that FINRA is NOT barring her for any conduct that took place at its member firm or that involved any securities products or that harmed any brokerage customers. Again, I'm not even remotely attempting to mitigate Garcia's misconduct but merely placing the issues in proper context. Frankly, I agree with FINRA's imposition of a Bar given the totality of the circumstances.
The only point that I am highlighting is that Garcia did not engage in cited misconduct at FINRA member firm Merrill Lynch. For that matter, she could have wrongfully converted funds while working part-time as a waiter, or driving an Uber on weekends, or shoplifting at a store. The distinction between misconduct at a non-member-firm versus at a member-firm is also noted in online FINRA BrokerCheck records as of February 13, 2019, under the heading "Employment Separation After Allegations," where Merrill Lynch disclosed that Garcia had voluntarily resigned from the broker-dealer on February 28, 2017, based upon allegations of:
Conduct involving submission of inaccurate personal child care reimbursement request forms. This conduct did not involve customers or customer accounts of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The Bank Whose Name Must Not Be Named!!!
Normally, I understand why the self-regulatory-organization would be sensitive about disclosing the name of a non-member-firm in an AWC. On the other hand, c'mon, Garcia is being barred by FINRA because of converting money from the Bank -- not because of any misconduct at member firm Merrill Lynch. Note that Garcia wasn't even fired by Merrill Lynch but, in fact, she voluntarily resigned from that firm. Not sure why such allegations and assertions don't merit the disclosure of the Bank's name. Unless . . . perhaps . . . uh oh . . . gasp . . . could it be the Bank of Voldemort?
There are gazillions of banks out there and if the Wall Street's self-regulatory-organization doesn't want to disclose the name of that affiliated-bank-whose-name-must-not-be-named, I'm guessing that I lack the resources to uncover that name. Then again, I'm an obstinate fellow who's always up for a challenge.
I went back to FINRA's BrokerCheck and entered "Merrill Lynch, Pierce, Fenner & Smith," and was directed to that firm's report. Given that I tend to be a dull fellow lacking in imagination, I simply did a search of Merrill Lynch's BrokerCheck page using the simple one-word term: "Bank." My results yielded 290 hits. The first iteration of "Bank" is found on Page 8 of Merrill Lynch's report under the heading "Indirect Owners." More to the point, the very first "Legal Name" listed under the Indirect Owners heading is "BANK OF AMERICA CORPORATION," which is characterized as owning "75% or more" of FINRA member firm Merrill Lynch.
Upon refining my search from "Bank" to "Bank of America," I prompted 76 results. Looking through those iterations, I noted that they tended to be Merrill Lynch affiliates frequently characterized as "WHOLLY/MAJORITY OWNED INDIRECT SUBSIDIARY OF BANK OF AMERICA CORPORATION, ULTIMATE PARENT OF APPLICANT."
Bank of America, the name that must not be named by FINRA, has been named!
$9,015 in Converted Childcare Versus $16.66 Billion in Lending Fraud
Attorney General Eric Holder and Associate Attorney General Tony West announced today that the Department of Justice has reached a $16.65 billion settlement with Bank of America Corporation - the largest civil settlement with a single entity in American history -- to resolve federal and state claims against Bank of America and its former and current subsidiaries, including Countrywide Financial Corporation and Merrill Lynch. As part of this global resolution, the bank has agreed to pay a $5 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) -- the largest FIRREA penalty ever -- and provide billions of dollars of relief to struggling homeowners, including funds that will help defray tax liability as a result of mortgage modification, forbearance or forgiveness. The settlement does not release individuals from civil charges, nor does it absolve Bank of America, its current or former subsidiaries and affiliates or any individuals from potential criminal prosecution.
. . .
The Justice Department and the bank settled several of the department's ongoing civil investigations related to the packaging, marketing, sale, arrangement, structuring and issuance of RMBS, collateralized debt obligations (CDOs), and the bank's practices concerning the underwriting and origination of mortgage loans. The settlement includes a statement of facts, in which the bank has acknowledged that it sold billions of dollars of RMBS without disclosing to investors key facts about the quality of the securitized loans. When the RMBS collapsed, investors, including federally insured financial institutions, suffered billions of dollars in losses. The bank has also conceded that it originated risky mortgage loans and made misrepresentations about the quality of those loans to Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). . . .
I've read and re-read the 2014 DOJ Release and spent a bit of time doing some further online research and, I dunno, maybe it's me, but I'm not finding anything about any Bank of America executives being barred by FINRA or by any other regulator for that matter. If any of you readers have the names and dates of those Bars, please let me know. After all, you certainly wouldn't expect that FINRA would Bar little old Ms. Garcia for a measly $9,000 in fraudulent childcare expenses but not go hammer-and-tong after anyone involved in what DOJ called "the largest FIRREA penalty ever." Not that it's an excuse but FINRA's online BrokerCheck discloses under the heading "Financial -- Final" that Garcia was granted a Chapter 7 bankruptcy discharge on December 30, 2014. You know, 2014, as in the year of DOJ's epic $16.65 billion settlement with Bank of America. Maybe Garcia was one of those "struggling homeowners?"
$9,015 in Converted Childcare Versus $1.22 Million in Office Redecorating Expenses
When John Thain became Merrill Lynch's CEO in early 2008, he hired Michael S. Smith Design to revamp his office suite, spending approximately $1.22 million according to documents.
Additionally, documents showed that Thain signed off on the purchases personally, and that he used over $30,000 to pay the expenses Smith incurred in doing the work.
The following is a list of the items in his suite:
Area Rug $87,784
Mahogany Pedestal Table $25,713
19th Century Credenza $68,179
Pendant Light Furniture $19,751
4 Pairs of Curtains $28,091
Pair of Guest Chairs $87,784
George IV Chair $18,468
6 Wall Sconces $2,741
Parchment Waste Can $1,405
Roman Shade Fabric $10,967
Roman Shades $7,315
Coffee Table $5,852
Commode on Legs $35,115
As Thain himself explained, in part, in his final memo to Merrill Lynch's employees on January 26, 2019: "Thain's Memo To Merrill Lynch Employees" (CNBC.com, January 26, 2009) https://www.cnbc.com/id/28854764:
It has been an honor to lead this company over the last very difficult year. The decisions that I made were always with the best interests of our shareholders and employees above all. I believe that the decision to sell to Bank of America was the right one for our company and our clients. While the execution has been difficult, I still believe in the strategic rationale of the transaction and I wish you all the best for the future of the combined companies.
. . .
The final topic is the expenses related to my office. The $1.2 million reported in the press was for the renovation of my office, two conference rooms and a reception area. The expenses were incurred over a year ago in a very different environment. Nonetheless, they were a mistake in the light of the world we live in today. I will therefore reimburse the company for all of the costs incurred. . . .
Gee, Thain went right ahead and named the name of Bank of America, the name that FINRA will not name. Pretty gutsy to risk the wrath of Voldemort. Sort of makes FINRA look wimpy. As to those office renovation costs that he incurred:
MARIA BARTIROMO: John, I want to ask you more about the environment that we're in, but I've gotta ask you first about the office. You spent more than $1 million renovating your office. Is this true?
JOHN THAIN: Well, first of all, it is true. This was a year ago, actually a little bit more than a year ago, in a very different economic environment and a very different outlook for Merrill and the financial services industry. It was my office. It was two conference rooms and it was a reception area. But it is clear to me in today's world that it was a mistake. I apologize for spending that money on those things, and I will make it right. I will reimburse the company for all of those costs.
BARTIROMO: Why did you need to renovate the office? What was wrong with Stan O'Neil's office?
THAIN: Well, his office was very different than the general decor of Merrill's offices. It really would have been very difficult for me to use it in the form that it was in. And,you know, it needed to be renovated no matter what. It would have been better for me to simply --I should have -- simply paid for it myself at the time.
Commode versus Childcare
Now, I don't want to be too cynical here. After all, Thain did explain that the $1.2 million in questioned expenses wasn't just for his office but included two conference rooms and a reception area. Given that explanation, we really should not have been so hasty in condemning the expenditures because it wasn't like the world was melting down during the onset of the Great Recession. The inappropriate use of public shareholders' money for over-priced corporate renovations should never, ever be equated with the conversion of childcare expenses by a lowly employee of an unnamed affiliate bank, right? You can't expect a C-Suiter to work in a tawdry C-Suite or sit in a shabby conference room or walk on the worn carpet of a reception area. Bankrupt mother Garcia seeking reimbursement of bogus childcare expenses is a moral outrage of exponential proportions compared to what Thain did.
Frankly, Garcia might have been better advised to charge Bank of America for a $35,115 "Commode on Legs." for use in her cubicle or at her teller station I wonder if FINRA would have barred her if she then sold the commode on eBay and used the proceeds for childcare or whatever. In that situation, maybe FINRA would treat Thain and Garcia similarly and impose the very same fines and sanctions upon Garcia as it did upon Thain, which, as best I can tell, was zippo.