GUEST BLOG: FINRA Chokes on a Smoking Ear by Aegis Frumento Esq

May 23, 2019

FINRA Chokes on a Smoking Ear

by Aegis J. Frumento, Partner, Stern Tannenbaum & Bell

Early in every trial lawyer's training they encounter one or both of the following chestnuts of cross-examination. The first goes like this: 

Q: Did you see my client bite off that man's ear? 

A: No. 

Q: Then how are you so sure he bit it off? 

A: I saw him spit it out. 

The second is in the same vein: 

Q: Did you see my client shoot the decedent? 

A: No. 

Q: Then how do you know he did? 

A: I saw him holding a smoking gun. 

The "smoking gun" made it into the vernacular instead of the "spat-out ear," which I think is too bad. But then, I suppose Sean Hannity and Rachel Maddow would sound silly yelling "there it is, ladies and gentlemen: the spat-out ear!" Even sillier than they do already. 

In days of old, business transactions were conducted in person or by phone. There might be odd clues in the record -- an appointment diary here, a lunch receipt there, a telegram, a faded carbon copy of a letter, a cryptic memo of a phone call -- but we needed to read a lot between the lines to figure out what happened. To prove a legal case required stringing such random evidence together so that your theory of the case was the only one that reasonably could account for all of them. It was hard but creative work. But it resulted in fewer lawsuits. 

And of course, smart folks understood instinctively that the fewer such clues available, the harder it would be to prove anything. I once attended a deposition of Bear Stearns' famed chairman Alan C. "Ace" Greenberg. The examining lawyer was trying to figure out where a particular document had gone. Everyone knew it had existed; everyone knew that Ace once had it; but now no one had a copy. Finally exasperated, the lawyer asked Ace why he didn't keep a copy. 

"Because," Ace patiently responded, "no good ever comes from keeping a document you don't need." Truer words were never spoken. 

But then, some idiot invented email. 

Now, every minute of our lives is memorialized in some electronic communication that can't be gotten rid of. We've gone from having too few clues to having too many. This made the task of the trial lawyer a bit less glamorous. Once we were Indiana Jones puzzling our way to the Lost Ark; now we're the warehouse clerk scrounging for the crate they stashed it in. 

One consequence of this devolution is that many lawyers have forgotten (or never had to learn) how to try a purely circumstantial case, where the only evidence is the spat-out ear or the smoking gun. The absence of that ever-present email trail of breadcrumbs leaves them flat-footed and they often don't even know it. This was illustrated dramatically last week by a refreshingly cogent set of decisions in a FINRA enforcement matter. 

The point to keep in mind here is that the strength of circumstantial evidence depends entirely on context. A spat-out ear proves nothing if the spitter is not facing someone spouting blood from a missing ear. Likewise, a smoking gun at a shooting range is meaningless. You need a body with a bullet in it. Time and distance weaken the link between the circumstantial evidence and what you really need to prove until eventually the proof fails. Yes, I know modern DNA evidence and bullet tracings allow more weight to ears and guns -- to the point they no longer need to be spat out or smoking -- but forget that for now. 

The time is September 2016, and the place is Spiro, Oklahoma (population about 2,000). There's a broker, Austin Wayne Morton, and a customer, GK. Morton is associated with an office of Edward Jones in Sallislaw (population about 8,500) about 30 minutes away. The closest city, Tulsa, is 2 hours away. This is as small-town a drama as it gets. 

The full story was laid out in Securities Industry Commentator. See second item at I only want to hit the highlights of the main FINRA charge, and the only one that was appealed. 

GK was 82 years old. He had been friends with Morton's grandfather, and had known Morton since Morton was a child. GK was diagnosed with memory loss and dementia in 2012. However, GK's daughter didn't tell Edward Jones about it until September 2, 2016. Morton didn't find out about that report until late October. Morton testified he didn't think there was anything wrong with GK and GK's daughter testified that GK's wife didn't think so either. 

Morton made about $100,000 a year as a broker. He was also a habitual gambler, betting small on the ponies, winning about a $100,000 a year and losing a little more. In 2016, he had a net loss of about $4,000. He had no major debts and no credit cards, but was habitually overdrawn at the bank. Maybe for that reason, he disliked banks, preferring to keep cash in his home safe. He seemed to live paycheck to paycheck. At the time, he had a tax levy against his house of about $4,000. 

On September 13, GK closed his Edward Jones account, resulting in just a little over $22,000 being wired to his bank account. The same day, GK and Morton went to the bank, where GK withdrew $22,000 in cash. GK's daughter noticed the withdrawal a month later. By then, GK didn't remember it. GK's daughter looked for the cash but never found it. 

Meanwhile, between September 13 and 30, a total of about $14,000 in cash was deposited into Morton's bank account. Those deposits, according to FINRA staff, were the spat-out ears that proved Morton converted GK's cash. So FINRA staff brought enforcement charges against Morton, and went to trial on it. 

And lost. The Hearing Panel (over one dissent) ruled that the FINRA staff failed to prove Morton stole the cash.
. On appeal, the NAC looked at the same evidence and affirmed.
Both the Panel and the NAC made it clear that, although Morton couldn't be declared innocent, the FINRA staff did not prove him guilty. 

They didn't, and they never could have. GK didn't testify, so only Morton could say what happened on their trip to the bank. Had GK testified, it would have been "he said/she said," but without him it was only "he said." Morton testified that he never touched the money, that GK took it home with him. As to the deposits, Morton testified that some came from his father's safe and the rest from his own safe, and no one contradicted him. What's missing is any emails or other modern documentary evidence to color that testimony. Morton being the only witness, and with no way to show he was lying, his testimony had to carry the day. The cash deposits, explained away by Morton's uncontested testimony, could prove nothing. The only mystery here is why the staff would ever think they could. 

And that's the lesson here for all of us who ply these waters. Regulatory staff often overplay their hands. They so often win by bluffing that they habitually overrate their cases. A competent trial lawyer can often see when adversaries don't have the winning hands they've deluded themselves into thinking they do. Here, Morton's lawyer, Jon-Jorge Aras, smartly called FINRA's bluff, forced them to trial, and watched them get their heads handed to them twice. Good for him. A regulator's "I don't believe you" should never be enough to drag someone through an enforcement action like Morton was. 

Morton was fired for later taking a loan from GK. Of $22,000. It must be a lucky number or something. It certainly has been for Morton, whose gamble with FINRA proved to be a hot hand all the way the NAC. Now, he may need to stretch that into a more profitable gambling career than he's enjoyed so far. Good luck to him. And I hope he remembers what FINRA staff learned the hard way, that when you're hot, you're hot, but when your not . . . . 


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.