Who Knows Where The Time Goes With Former JP Morgan Rep's FINRA AWC

November 18, 2020

The expression is "better late than never." Quite often, those words of wisdom prove to be sage advice. When it comes to Wall Street regulation, however, sometimes being late isn't better, particularly if you're the Respondent in a belated FINRA action.

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, David Patrick Beston submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of David Patrick Beston, Respondent (FINRA AWC 2019062357402)

https://www.finra.org/sites/default/files/fda_documents/2019062357402

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The AWC asserts that David Patrick Beston has been registered since 2007, and by October 2012, he was registered with J.P. Morgan Securities LLC, and, in December 2012, he registered with Fidelity Brokerage Services LLC. The AWC asserts that David Patrick Beston "has no relevant disciplinary history."

The 2012 Print-Out

The AWC alleges in part that:

During 2012, Beston printed nonpublic personal information of approximately 500 firm customers from a firm computer database and retained a hard copy at his home, without authorization. The hard copy identified the customers by name and included their account values. In addition, the hard copy contained several customers' account numbers. Some of the customers were serviced by Beston, and the great majority of the customers were serviced by registered representatives that Beston supervised. Beston printed and retained the information in anticipation of departing the firm and serving as a registered representative elsewhere, due to a restructuring that jeopardized Beston's employment with J.P. Morgan.

In November 2012, Beston resigned from J.P. Morgan and continued to retain the nonpublic personal information without authorization. In December 2012, Beston accepted a position at Fidelity.

In February 2013, Beston met with a registered representative from another FINRA member firm who had tried to recruit Beston before he joined Fidelity. Beston sold half of the nonpublic personal information regarding approximately 250 of the J.P. Morgan customers to this registered representative in exchange for $7,500. Beston received the $7,500 payment in March 2013 shortly after delivering the information to the representative. Before delivering the information, Beston redacted the customer account numbers. However, the customers' names and account values were not redacted.

Regulation S-P

Regulation S-P prohibits firms from disclosing "nonpublic personal information" about a customer unless the customer receives proper notice and an opportunity to opt out. Nonpublic personal information generally means any information provided by customers to a broker-dealer to obtain any product or service. It includes, but is not limited to, account numbers, social security numbers, birth dates, and account balances. READ:

FULL-TEXT of Regulation S-P https://www.sec.gov/rules/final/34-42974.htm

Investment Adviser and Broker-Dealer Compliance Issues Related to Regulation S-P - Privacy Notices and Safeguard Policies (Risk Alert; SEC Office of Compliance Inspections and Examinations / April 16, 2019) https://www.sec.gov/files/OCIE%20Risk%20Alert%20-%20Regulation%20S-P.pdf

FINRA Sanctions

In accordance with the terms of the AWC, FINRA found that David Patrick Beston caused J.P. Morgan to violate Regulation S-P, and in so doing, Beston violated FINRA Rule 2010, and additionally, he also engaged in conduct that violated Rule 2010; and the self-regulator imposed upon him a $5,000 fine; a five-month suspension from associating with any FINRA member in any capacity; and ordered him to pay $7,500 disgorgement plus interest.

Bill Singer's Comment

As I always admonish when writing about a FINRA AWC, I don't know what I don't know -- and, as such, my commentary is not intended as a criticism but may take on aspects of a critique. By the time FINRA and a Respondent sign off on an AWC, many allegations that may have been raised by Staff at an earlier time might be dropped or softened in order to achieve a settlement. Consequently, the final draft -- that is, the published AWC -- may present a far different set of facts and findings than what FINRA first alleged upon the completion of its investigation. Ultimately, if a Respondent is happy to enter into a regulatory settlement with FINRA, it's not my place to second guess; and nothing that follows is intended to question Beston's choice -- what follows is merely an academic exercise.

So . . . let's go back to the beginning of Beston's misadventures and put things into some perspective. Given that Beston joined Fidelity in December 2012, we can infer that his alleged misconduct pertaining to his copying activities at J.P. Morgan likely occurred no later than his resignation date from that latter firm in November 2012. As such, let's just agree that the cited copying likely took place about eight years ago from today's date.

Moving along -- after copying nonpublic personal information involving some 500 J.P. Morgan customers, Beston transferred that data to a hard copy version that he retained at his home. Although I might shrug at such conduct if it solely involved Beston's customers, the AWC asserts that the "majority of the customers were serviced by registered representatives that Beston supervised." Even for my forgiving sensibilities, that's a bit over the edge notwithstanding that Beston may have engaged in the copying based upon an expectation that his days were numbered at J.P. Morgan as a result of a "restructuring."

Having resigned from J.P. Morgan and joined Fidelity, in February 2013, Beston sold some of his copied J.P. Morgan data to a rep from another firm (not Fidelity or J.P. Morgan). If we're going to peg this misconduct to a date, we're using March 2013, when Beston received $7,500 for the customer information. Again, that's all a tad too out of bounds for my taste, notwithstanding that I give Beston some credit for redacting the J. P. Morgan account numbers from the customer's records but I also give him some demerits for not redacting those customers' names and account valuations.

If we click the regulatory stop watch as of the November 2020 AWC date, that settlement occurs about eight years from the dates when Beston copied the customer data at issue and about seven years and eight months after he was paid for the sale of some of that data. Which raises the question as to whether the public interest is served by fining and suspending a rep for misconduct that was about eight years old at the time of settlement -- and whether there is any purpose in sanctioning such conduct after so many years have passed.

Does there come a point in time when "belated" regulatory action is so late in coming that it raises questions about Due Process?

Can so much time run off that a "sanction" is not functioning as intended but transformed into a punitive act, a "penalty" as it were?

I defer to your sensibilities on the issue of belated regulation. I am not urging you to say "yes" or "no" but merely to contemplate the impact of such delayed regulation. In a recent FINRA case, the self-regulatory organization tackled that issue. In the Matter of FINRA Department of Enforcement, Complainant, v. Dennis A Mehringer, Jr., Respondent (Decision, National Adjudicatory Council ("NAC"), Complaint No. 2014041868001 / June 15, 2020)

https://www.finra.org/sites/default/files/fda_documents/2014041868001
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As briefly summarized in the NAC Decision:

Dennis A. Mehringer, Jr. appeals an extended Hearing Panel decision issued on April 30, 2018. The Hearing Panel found that Mehringer: (1) engaged in unsuitable short-term trading of mutual funds in a customer's accounts; (2) exercised discretion in the customer's accounts without written authorization or firm approval; (3) breached his fiduciary obligations to a charitable trust; (4) gave his firm false information about the charitable trust; (5) settled a customer's complaint without notifying his firm; and (6) falsely told his firm that he had not settled any customer complaints. For the short-term mutual fund trading, the Hearing Panel barred Mehringer in all capacities, fined him $50,000, and ordered him to disgorge $108,131.21, plus interest. The Hearing Panel declined to impose sanctions for the remaining five causes of action in light of the bar. After an independent review of the record, we modify the Hearing Panel's findings, affirm the bar and order of disgorgement that the Hearing Panel imposed for Mehringer's misconduct, and modify other sanctions as discussed in this decision.

Among Mehringer's arguments on appeal, the NAC Decision notes this:

(6) Federal Statute of Limitations, Fairness, and Laches

Mehringer argues that the Hearing Panel's findings for the short-term mutual fund trades should be reversed based on the five-year federal statute of limitations, fairness, and the doctrine of laches. Mehringer explains that the conduct underlying Enforcement's complaint dates back to July 2010, that Enforcement did not file the complaint until December 2016, that Mehringer was "severely disadvantaged" as a result of this delay, and that it was "inherently unfair to bring an enforcement action against [him] for the transactions that are more than five years old." The precedent in this area renders Mehringer's arguments untenable.

As an initial matter, FINRA, as a self-regulatory organization, is not subject to the federal five-year statute of limitations.²⁸See William D. Hirsh, 54 S.E.C. 1068, 1077 & n.11 (2000) ("We have consistently held that no statute of limitations applies to the disciplinary actions of the [e]xchange or other self-regulatory organizations."); Shamrock Partners, Ltd., 53 S.E.C. 1008, 1015 n.15 (1998) ("The five-year statute of limitations . . . does not apply to NASD proceedings."). As the Commission has explained, applying a limitations period to FINRA actions would "impair [FINRA's] statutory obligations and duty to protect the public and discipline its members." Frederick C. Heller, 51 S.E.C. 275, 280 (1993). We therefore find that the federal five-year statute of limitations does not apply here.²⁹

Mehringer's arguments concerning the fairness of FINRA's proceedings based on the six-year delay between the mutual fund trades and Enforcement's filing of the complaint similarly fails. In assessing the effect of a delay on the fairness of a disciplinary proceeding, there are "not establish[ed] bright line rules about the impact of the length of a delay." Mark H. Love, 57 S.E.C. 315, 323 (2004). The fairness of a proceeding is based on the "entirety of the record," and whether respondent has shown that his "ability to mount an adequate defense was harmed by any delay in the filing of a complaint against him." Id. at 324 (rejecting argument that delay was unfair where respondent failed to show that he was prejudiced). To assess the overall fairness of a disciplinary proceeding when there are questions of delay, the Commission considers the times between the filing of the complaint and: (1) the initial misconduct; (2) the last misconduct; (3) notice of the misconduct to the self-regulatory organization; and (4) the initiation of the investigation. Dep't of Enforcement v. Rooney, Complaint No. 2009019042402, 2015 FINRA Discip. LEXIS 19, at *89 (FINRA NAC July 23, 2015).

In this case, the timeframe between Mehringer's first short-term mutual fund trades (July 2010) and the filing of the complaint (December 2016) was six years and five months. The timeframe between the end of the review period (August 2013) and the filing of the complaint (December 2016) was three years and four months. The timeframe from FINRA's learning about Mehringer's short-term mutual fund trades from ES's filing of the arbitration claim (June 2014),³⁰ FINRA's initiation of the investigation of this matter (June 2014), and the filing of the complaint (December 2016) was two years and six months. Based on the record before us, we find that these timeframes did not deny Mehringer a fair hearing.³¹

Finally, Mehringer requests that we dismiss the allegations against him based on the doctrine of laches. But Mehringer fails to meet the standards for a laches defense. To successfully assert the defense of laches, a respondent bears the burden of proof and "must demonstrate a lack of diligence by [FINRA,] and that he has been prejudiced." Robert Tretiak, 56 S.E.C. 209, 230 (2003). Mehringer has not proven a lack of diligence on the part of Enforcement,³²and he has not proven that he has been prejudiced.³³
Accordingly, we find that Mehringer's statute of limitations, fairness, and laches defenses fail.

= = = = =

Footnote 27: Mehringer states that his "mutual fund transactions were regularly reviewed by Western [International Securities's] management personnel."

Footnote 28: The five-year statute of limitations limits the timeframe for the federal government to commence legal proceedings: Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon. 28 U.S.C. § 2462 (2020).

Footnote 29: Mehringer's arguments concerning the federal five-year statute of limitations applies to 23 sets of Mehringer's short-term mutual fund trades in ES's accounts. That leaves 59 sets of unsuitable short-term mutual fund trades. Even if we found Mehringer's argument concerning the statute of limitations to be valid (we do not), we find that 59 sets of unsuitable short-term mutual fund trades is substantial and establishes a pattern for a presumption of unsuitability. Consequently, Mehringer's argument, even if successful (it is not), would not alter our findings or analysis for this cause of action.

Footnote 30: See Part III.A.1.c.(3) (ES Terminates His Relationship with Mehringer and Western International Securities).

Footnote 31: To support his position, Mehringer points to Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996), Jeffrey Ainley Hayden, 54 S.E.C. 651 (2000), and Department of Enforcement v. Morgan Stanley DW, Inc., Complaint No. CAF000045, 2002 NASD Discip. LEXIS 11, at *1 (NASD NAC July 29, 2002). But the timeframes in these cases are longer (Hayden and Morgan Stanley DW), or at least comparable (Johnson), to the ones presented here. In Johnson, the disciplinary proceeding commenced six years and two months after respondent's misconduct began, five years and four months after the last incident of misconduct, and five years and four months after the began [sic] its investigation. See Johnson, 87 F.3d 484. In Hayden, the NYSE filed a case against Hayden 14 years after the misconduct began, six years after the most recent incident of misconduct, and five years after it had learned of the applicant's misconduct. See Hayden, 54 S.E.C. at 654. In Morgan Stanley DW, FINRA dismissed a complaint that was brought eight years after the misconduct began, seven years after it ended, five years and nine months after Enforcement learned of the misconduct, and four years and nine months after Enforcement began the investigation. See Morgan Stanley DW, 2002 NASD Discip. LEXIS 11, at *15-17.

Footnote 32: Enforcement commenced its investigation in June 2014, as soon as it learned of Mehringer's conduct from ES's arbitration claim against Mehringer and Western International Securities.

Footnote 33: Mehringer claims that the delays in FINRA's disciplinary process prejudiced him because he did not maintain all of his notes of conversations with ES, and his recollection of those conversations was "hazy." But our review of the record, specifically, the hearing transcripts, demonstrates that Mehringer remembered a number of events, particularly those events that exculpated his misconduct. For example, Mehringer recalled details of his trading strategy, his "habit" of trading mutual fund shares, his review of trade confirmations with ES, and the commissions that he (Mehringer) charged for commissions on ES's trades in equity securities.

at Pages 16 - 18 of the Mehringer NAC Decision

As noted in Mehringer's Footnote 31, in:

Johnson, the disciplinary proceeding commenced six years and two months after respondent's misconduct began, five years and four months after the last incident of misconduct, and five years and four months after the start of a regulatory investigation;
Hayden, the NYSE filed a case against Hayden 14 years after the misconduct began, six years after the most recent incident of misconduct, and five years after it had learned of the applicant's misconduct; and
Morgan Stanley DW, FINRA dismissed a complaint that was brought eight years after the misconduct began, seven years after it ended, five years and nine months after Enforcement learned of the misconduct, and four years and nine months after Enforcement began the investigation.

Tallying up the various years in Johnson, Hayden, and Morgan Stanley, we find proceedings commenced about six to 14 years after the beginning of misconduct and about five-plus years after the last act of misconduct. Sort of makes you wonder how Beston would have stacked up if he asserted a laches-like defense by arguing that eight years had passed since his alleged copying and over seven years has passed since the last cited act of misconduct. Given the 2019-handle on the Beston AWC, I'm assuming that FINRA only first began its investigation in 2019 but that may be an erroneous inference.