FINRA Bars Stockbroker After RBC Makes $1 Million Pricing Error

August 28, 2019

RBC Capital Markets mis-priced the value of some shares in a customer's account. The error prompted the payment of proceeds that were about $1 million higher than the fair market value. The lucky recipient of this screw-up was an RBC stockbroker -- go figure, right? Ultimately, RBC recovered every penny of its mistake. Unfortunately, FINRA barred the stockbroker. How did that happen?  Ahhhh . . . that's the fascinating tale we tell in today's blog.

Case In Point

I could put the underlying fact pattern into my own words but I don't quite think you would necessarily believe me. More to the point, given my penchant for embellishing a story to make it even more entertaining, you might arch an eyebrow and say, there goes Singer again. As such, consider the "Introduction" from FINRA Department of Enforcement, Complainant, v. Thomas Lee Johnson, Respondent (FINRA Office of Hearing Officers Hearing Panel Decision, Disc. Proc. No. 2018056848101)

The Department of Enforcement filed a two-cause Complaint against Respondent Thomas Lee Johnson ("Johnson" or "Respondent") on January 22, 2019. Cause one charges Johnson with converting $1,059,544.98 from his employer, FINRA member firm RBC Capital Markets, LLC ("RBC" or the "Firm"), after the Firm incorrectly priced sales of his holdings in Doosan Heavy Industries & Construction Co. ("Doosan"), a South Korean company whose securities trade on the Korean stock exchange. RBC incorrectly priced the sales in U.S. dollars instead of South Korean won. Because of a system error, Johnson received $1,059,544.98 in his RBC securities account from the sales, but he was entitled to less than $1,000. Eight days after RBC's error, Johnson moved the money to a personal bank account. Johnson later returned the funds to his RBC account when he saw that the Firm had corrected its error and reversed the credit, causing the account to have a negative balance. The Complaint alleges that this misconduct violated FINRA Rule 2010. 

Cause two alleges that twice during Enforcement's investigation Johnson provided FINRA staff with false information about the mistaken credit in his account-in a written statement to the staff and during on-the-record testimony ("OTR"). The Complaint alleges that Johnson's misconduct violated FINRA Rules 8210 and 2010. 

Johnson filed an Answer to the Complaint in which he denied that his conduct constituted conversion and that he provided FINRA staff with false information during Enforcement's investigation. 

The Hearing Panel finds that, as alleged in cause one, Respondent converted $1,059,544.98 from RBC, in violation of FINRA Rule 2010, and bars him from associating with any member firm in any capacity. The Panel dismisses cause two because Enforcement failed to prove that Johnson violated FINRA Rules 8210 and 2010.

Doosan Doozy

In November 2016, Johnson inherited 60 shares of Doosan from his father. Although Johnson handled his father's purchase of the inherited shares, the stockbroker claimed that he knew "nothing" or "zero" about Doosan's business. When the 60 shares were transferred into Johnson's RBC account on December 14, 2016, they were priced at $22.673 per share for a 60-share total value of $1,360.36. Thereafter, the market value of the Doosan position was noted on Johnson's monthly account statement, and when he tried to sell those shares in February and March 2017, he found that there was no market being made in the United States. On September 18, 2017, 10 Doosan warrants (purportedly a spin-off of the 60 shares) were deposited in Johnson's account and priced at $27.21. 

By August 2017 (when the Doosan shares were valued at $1,010.37), RBC had notified Johnson that it was switching transfer agents and the new one would not hold Doosan shares. RBC offered Johnson three options: liquidate the position, transfer the securities to another custodian, or write-off the position -- regardless of Johnson's decision, RBC warned that it would liquidate the position at its discretion by late October 2017 if the shares remained in the account. Johnson failed to choose either of the three options by November 2017, and on [Ed: footnotes omitted]:

[N]ovember 14, 2017, RBC liquidated Johnson's 60 Doosan shares and ten warrants. Because of a system error, RBC priced the securities in U.S. dollars instead of South Korean won. As a result, according to the trade confirmations, the Firm priced the Doosan stock at $17,184.58 per share (instead of 17,184 South Korean won per share). RBC reported the value of the liquidation of the stock, after deducting fees and other charges, as $1,031,074.80 (instead of 1,031,074.80 South Korean won). It was actually $939.30.  

The same system error occurred with the liquidation of the ten Doosan warrants. RBC recorded that it sold each warrant for $2,849 (instead of 2,849 South Korean won), or $28,494.The true value of all ten the warrants at the time was less than $30.41 

As a result of the system error, on November 14, 2017, RBC deposited $1,059,544.98 in Johnson's account as the net proceeds from the sale of the 60 Doosan shares and ten warrants.

Pages 6 of the FINRA OHO Decisio

Surprise, Surprise, Surprise!

On November 22, 2017, Johnson wrote a check for $1,059,544.98 against his RBC account and deposited it into a JPMorgan Chase Bank joint account that he held with his wife. As to what he was thinking when he did what he did, in part Johnson testified that [Ed:footnotes omitted]:

[H]e was "surprised" when he saw the extra million dollars in his account. He initially thought it was a mistake. "My initial reaction was yes, it was a mistake, and RBC would fix it over night [sic] if - I don't know if mistake is the right word. It was probably not correct, if that's the same as a mistake, but I worked for 35 years [in the securities industry]. I've seen things priced incorrectly. They get reversed immediately." According to Johnson, at no point did he think there was a currency conversion error.  

When the transactions were not immediately reversed, Johnson testified that he thought that his father "who's a very smart man, had hit another home run." According to Johnson, the fact that RBC did not immediately correct the trade gave him confidence. "The longer it went on with - you know, the next day the fact is if I have $1 million that's not supposed to be mine, someone is short $1 million. That gets corrected immediately." Johnson reiterated in his hearing testimony that when RBC did not correct the transactions after settlement date and the money was still in his account, he thought his father had "had another one of his big winners." As a result of the supposed unexpected windfall in Doosan, Johnson considered distributing the after-tax proceeds from the liquidations to himself and his four siblings.  

Johnson explained that he did not contact RBC's trading desk about the pricing of the transactions because he had not initiated the trade: "You know, if I had made a trade and they priced it wrong, yes. But I had nothing to do with the trade itself." Instead, Johnson said that he assumed that RBC would fix the transactions the next day, as it had when the Firm on a different occasion mistakenly credited his sister's brokerage account with $666 million. As more time passed during which RBC did not correct the transactions, Johnson testified that he "started to believe that it was accurate." According to Johnson, "I mean, it's not like someone deposited $1 million by mistake. It's not like someone - I had a wire transfer in my account that I knew wasn't mine RBC liquidated a position at $17,000 a share." "It was a good thing," Johnson testified, that he got $17,000 per share for stock that was worth $15 per share a few weeks previously. 

Pages 8 - 9 of the FINRA OHO Decisio

The Round-Trip

Somewhat lost in the comedy of errors is that at the heart of FINRA's case is what I find to be an important fact; namely, that [Ed: footnotes omitted]

The morning of November 28, 2017, RBC canceled the liquidations of Johnson's Doosan shares and warrants and rebilled the transactions, pricing the Doosan stock at $15.8102 per share and the warrants at $2.6215 per warrant. After deducting fees, Johnson received $924.79 from the rebilled sale of the Doosan shares and $26.22 from the rebilled sale of the warrants. The rebilling of the two transactions immediately generated a negative balance in the account exceeding $1 million because Johnson had transferred that money to his bank account a week earlier.  

Johnson immediately saw that RBC reversed the Doosan transactions because he was looking at his RBC account on his work computer when it occurred. Johnson went to Chase Bank the same day, obtained a cashier's check for $1,060,000, and deposited it into his RBC account the next morning, November 29.

Pages 11 - 12 of the FINRA OHO Decision

Out of Sight. Out of Mind.

While all the mispricing and withdrawals and cancellations and rebillings and deposits were going on, it's not like RBC had much, if any, of a clue as to the cascade of problems the firm's system error had prompted. Consider this [Ed; footnotes omitted]:

RBC was not immediately aware that Johnson had withdrawn over $1 million from his account on November 22. But depositing the $1,060,000 check into the RBC account on November 29 generated an exception report. That report prompted the Firm's operations manager to ask Johnson's supervisor to talk to Johnson about the business purpose and source of the funds. 

Soon after Johnson returned the money, RBC concluded that Johnson had transferred the funds even though he had to have known that the Doosan stock was not worth $1 million. On December 1, 2017, as part of the Firm's investigation, four managers interviewed Johnson about what happened. He acknowledged to them that even though he knew there might have been a pricing error, he removed the money from his RBC account because he "felt more comfortable getting it out of RBC."

Page 12 of the FINRA OHO Decision

Elements of Conversion (One Version)

In finding that Johnson's conduct constituted conversion, the OHO Heaing Panel offered this analysis in part [Ed: footnotes omitted]:

Enforcement has satisfied each of the elements needed to show that Johnson engaged in conversion. The act of conversion was complete when Johnson transferred the money on November 22, 2017. First, his transfer of the money from the RBC account to the Chase Bank account was intentional. Second, Johnson's transfer was not authorized because the money was not his. RBC credited the money to his account in error, and Johnson knew it. Third, by placing the money in the Chase Bank account, Johnson exercised ownership over the money and deprived RBC of it. Johnson knew he did not own the money and was therefore not entitled to possess it. 

Page 20 of the FINRA OHO Decision

Also consider FINRA's "Sanction Guidelines" under the heading "Conversion or Improper Use of Funds or Securities"
Sanctions_Guidelines.pdf, where the self-regulatory-organization offers this definition of "conversion":

Conversion generally is an intentional and unauthorized taking of and/or exercise of ownership over property by one who neither owns the property nor is entitled to possess it.

Page 36 of FINRA's Sanction Guidelines

Ownership of the Property

The Doosan shares were not technically "owned" by RBC but by Johnson. Similarly, the proceeds of the sale of Johnson's Doosan shares would also be his property. Johnson did nothing whatsoever to cause RBC's systems error, which  mis-priced the Doosan shares. Similarly, he did nothing to deposit $1.06 million into his RBC account. The simple truth is that it was RBC and RBC alone that generated a pricing error and then deposited about $1,058,000 more in Johnson's account than the sold shares were apparently worth.  Let's remember that the OHO Panel itself characterized Enforcement's allegations in part thus:

[B]ecause of a system error, Johnson received $1,059,544.98 in his RBC securities account from the sales, but he was entitled to less than $1,000. Eight days after RBC's error, Johnson moved the money to a personal bank account. 

Johnson's misconduct, if any, was pertaining to his removal of the proceeds deposited into his account by RBC to his Chase Bank account.When Johnson transferred the proceeds out of his RBC account and into his Chase Bank account, did that, in and of itself, rise to the level of an intentional/unauthorized taking of RBC's property? Keep in mind that because some of the transferred funds included bona fide proceeds (a minuscule amount under $1,000) both Johnson and RBC owned portions of the proceeds and were both entitled to possess same. 

Yes, you're right, Johnson's conduct strongly suggests that he knew or should have known that there was a colossal error in his favor. To that extent, that is the weakness Johnson's defense and explanations. I am not going to pretend otherwise. This is an analysis of a case and not a fantasy. All of which brings me to a critical element: How was RBC was deprived of the erroneous proceeds that it deposited into Johnson's account without any wrongdoing whatsoever by him to the extent of the firm's miscalculation? That the proceeds came to repose in Johnson's JP Morgan Chase Bank account did not deprive RBC of said funds because RBC had yet to figure out that it's screw-up had even created any error. If I don't know that I'm missing $1 million, then it's tough to argue that you're depriving me of that sum. 

Damaged How?

Another interesting question:  How was RBC damaged by Johnson's conduct in light of his subsequent deposit of $1,060,000 from his Chase Bank account and into his RBC account? According to the narrative in the OHO Decision, the deposit by Johnson back into his RBC account was undertaken before any demand by RBC for repatriation of the funds. In fact, it was Johnson's re-deposit that generated the RBC exception report that prompted a mere inquiry by his supervisor about the funds [Ed: footnotes omitted]:

RBC was not immediately aware that Johnson had withdrawn over $1 million from his account on November 22. But depositing the $1,060,000 check into the RBC account on November 29 generated an exception report. That report prompted the Firm's operations manager to ask Johnson's supervisor to talk to Johnson about the business purpose and source of the funds.
Page 12 of the FINRA OHO Decision

In support of imposing a Bar, the OHO Panel offered this rationale in part [Ed; footnotes omitted]:

No mitigating circumstances exist that would warrant any sanction less than a bar. Instead, the Panel is disturbed by multiple aggravating factors. Johnson took a large sum of money. Johnson did not bring the obvious pricing error to RBC's attention, but chose instead to hope the Firm would never detect the mistake. He also has not acknowledged his misconduct. Instead, he blamed RBC for incorrectly pricing the securities and not quickly correcting the error, which he used to rationalize transferring the funds to an outside bank account eight days after the error. He minimized the wrongdoing, stating that he did not think he did anything wrong. Johnson acknowledged that he would have kept the money had RBC never caught the error. The Panel therefore finds that Johnson intended to permanently deprive RBC of its funds and that he acted knowingly when he took possession of the money and transferred it to his bank account.

Pages 23 - 24 of the FINRA OHO Decision

Nor does the Panel find it mitigating that Johnson returned the money to RBC. Johnson argues that in fashioning appropriate sanctions the Panel "should consider that [he] acted voluntarily, without any request from RBC, to return" the proceeds from the Doosan transactions to his brokerage account. Under the Guidelines, an effort to remedy misconduct is mitigating only when a respondent takes action before detection and intervention. Johnson returned the money only when RBC corrected its pricing error on November 28, 2017. The Panel finds that he did not act voluntarily, as the correction generated a deficit in his RBC account and quickly would have triggered a margin call had Johnson not returned the funds immediately. As he testified, Johnson would not have returned the money on his own had RBC not caught its error. Johnson's misconduct demonstrates to the Panel that he lacks the "commitment to the high fiduciary standards demanded by the securities industry."

Pages 24 -25 of the FINRA OHO Decvision

As I see it, Johnson didn't so much take a large sum of money as it was erroneously given to him by RBC. Clearly, Johnson had hoped that RBC wouldn't detect its mistake and that he could keep the funds. Although he did transfer the funds to his JPMorgan Chase Bank account on November 22nd, Johnson returned the funds to RBC on November 29th. 

Mind Reading

The OHO Panel seems to have done lot of mind reading, and, to some extent, found that Johnson had committed what comes off as thought crimes:

[J]ohnson acknowledged that he would have kept the money had RBC never caught the error. The Panel therefore finds that Johnson intended to permanently deprive RBC of its funds and that he acted knowingly when he took possession of the money and transferred it to his bank account.

In essence, FINRA didn't so much bar Johnson for what he did but for his acknowledgment that if his aunt had been a man, she would have been his uncle. If RBC never caught the error, I would have kept it, but, in fact, I actually returned the funds before the firm caught the error and the firm recouped every penny of its mistaken transfer! What an absurd result! Johnson is barred not so much for what he did but for his musing as to what he would have done in a scenario that did not actually occur!

The No-Spin Zone

I'm not going to spin the facts or the truth in order to make Johnson sympathetic. His conduct speaks for itself. As such, I won't say that Johnson acted ethically or morally when he transferred the proceeds out of his RBC account. Frankly, I suspect that that Johnson might have kept the cash if RBC had not discovered its error -- and, frankly, I'm not quite sure if a lot of folks wouldn't have mused about doing the same. That everyone chooses to do wrong, however, doesn't make it right, and I will not be painted into that corner. 

Johnson returned every penny of the proceeds. He didn't buy a ticket to Brazil and disappear to his hidden mansion. He didn't withdraw every cent from his bank account and gamble it away at a casino. At worst, he crossed his finger, kept the funds safe, and prayed that no one would discover RBC's blunder. That does not make Johnson a saint. I'm just not persuaded that it makes him a converter. In the end, I can only judge Johnson by his conduct -- not his thoughts or intentions. Which is what the OHO Panel should have done. Let me offer a hypothetical to better explain my concerns:

I'm walking on the street and see a wallet on the sidewalk. I pick it up and see that it is filled with debit and credit cards, contains about $1,000 in $20 bills, and has its owner's name and address on several forms of ID. Not wanting to leave the wallet on the sidewalk, I take it home. For about a week, I look at the wallet, which is sitting on a desk in my apartment, and I wonder whether I should post a "wallet found" poster on the street, call the police, call the owner, or just keep the lost-and-found property. I debate whether I should keep the cash and return everything else. For whatever reason, I telephone the wallet's owner, who is thankful that I found his property, and he comes over and picks up the wallet with all of its contents untouched. Yes, I hesitated. I thought about keeping the wallet. I thought about removing the cash. In the end, my better angel won and I did the right thing. I wish that I had made the call to the wallet's owner the day that I had found it. On the other hand, at least I finally did the right thing. It took me a week to do the right thing. Better late than never. Perhaps.

SIDE BAR: For an interesting study, read: "What Dropping 17,000 Wallets Around The Globe Can Teach Us About Honesty" ( / June 20, 2019)

In that above lost wallet scenario, I don't think that I engaged in conversion. I don't think that the person who lost the wallet was damaged by my delayed return. 

Consequently, I don't feel that FINRA should have imposed a Bar upon Johnson. I don't think he earned a medal either. Maybe fine him $5,000. Maybe suspend him for 30 days. A Bar? Sorry, I just don't see it given that actual facts and circumstances. 

Perhaps, Johnson will appeal.

FINRA EVP of Office of Fraud Detection and Market Intelligence Cameron Funkhouser Announces Retirement (FINRA Release)

FINRA Bars Stockbroker After RBC Makes $1 Million Pricing Error
( Blog)

FBI Arrests Manhattan Beach Man Facing Federal Charges Related to Movie Investment Scam that Cost Victims $14 Million (DOJ Release)

Former Financial Adviser Arrested on Fraud Charge for Allegedly Swindling Millions from Clients (DOJ Release)

SEC Charges Chicago-Based Investment Professional with Stealing Client Fund (SEC Release)

South Carolina Man Indicted for Running $1.1 Million Foreign Currency Ponzi Scheme (DOJ Release)

Philadelphia Woman Arrested in $100 Million Securities Fraud Scheme (DOJ Release)

SEC Obtains Emergency Asset Freeze, Charges Pennsylvania Investment Adviser with $100 Million Fraud (SEC Release)

SEC Charges Real Estate Company and its Founder with $8.75 Million Offering Fraud (SEC Release)

SEC Charges Brixmor Property Group Inc. and Former Senior Executives with Accounting Fraud  (SEC Release)

FINRA Bars Allstate Insurance Agency Owner Over IRA Witholdings. In the Matter of Kari Ann Buckles, Respondent (FINRA AWC)