A lot of what passes for misconduct on Wall Street is a matter of interpretation. You say that you did or didn't do something. Your firm's compliance department or FINRA says what you did or didn't do was a violation. Sometimes you're right, sometimes they're right, sometimes everyone's right -- and sometimes, no one is right. Unfortunately, you can be right, they can be wrong, but, still, you're getting fined and suspended. In three FINRA matters, we consider the importance of understanding the inferences and implications of words such as "complaint" and "settlement," and how the disputed definitions of such terms can negatively impact a registered rep's career.
2012: Binstock FINRA OHO
We start today's blog by making a quick trip to the past
-- to 2012, where we come upon FINRA Department of
Enforcement, Complainant, v. Michael J. Binstock, Respondent (FINRA
Office of Hearing Officers Hearing Panel Decision, Disciplinary
Proceeding No. 2009018377601 / November 19, 2012) (the "2012 FINRA Binstock OHO Decision"
As noted in the 2012 FINRA Binstock OHO Decision "Syllabus":
For falsifying customer account documents, in
violation of NASD Rule 2110 and FINRA Rule 2010, and causing his firm to have
inaccurate records, in violation of NASD Rules 3110 and 2110 and FINRA Rule
2010, Respondent is suspended for four months and fined $25,000. For settling a
customer claim away from his former firm, in violation of NASD Rule 2110 and
FINRA Rule 2010, Respondent is fined $5,000. In addition, Respondent is ordered
to pay the costs of this proceeding. The unauthorized transaction charge,
alleging a violation of NASD Rule 2110 and FINRA Rule 2010, is
In reviewing Binstock, the focus of
our interest falls on the portion of his case involving allegations that he
settled a customer claim away from his former employer, Thrivent Investment
Management, Inc., where he was employed from March 1996 to June 2009:
E. Facts Relating to the Settling Away
The facts pertaining to this
allegation are undisputed. In April 2009, customers ET and GT asked Respondent
to deposit $10,000 from a maturing CD into GT's fixed universal life policy.
The $10,000 deposit resulted in a $500 premium load to the customers. The
customers complained and requested reimbursement of the $500 fee plus
On September 21, 2009, after
Respondent had resigned from the Firm, he deposited $515.76, his commission
plus interest, into the customers' checking account without the Firm's
knowledge. Respondent testified that he did so because he did not realize that
the $10,000 deposit into the insurance policy would result in a fee to ET and
GT or a commission to him. Tr. 337. Because he did not disclose the charge to
his customers, he believed that paying the commission back to the customers was
the right thing to do. Tr. 490, 377. Because he was no longer at the Firm, he
did not consider that he was settling away. Tr.
at Page 7 of the 2012 FINRA Binstock OHO Decision
In adjudicating the Settling Away
allegations against Binstock, the OHO Panel noted in part:
It is a violation of NASD Rule
2110 and FINRA Rule 2010 for a registered representative to settle a customer
complaint without his firm's knowledge or approval. Here, Respondent refunded a
fee to a customer without any notice to, or acquiescence by, his Firm that he
was doing so. Although Respondent was no longer with the Firm at the time that he
paid the customer, this does not excuse his obligation to inform the Firm of
Respondent's failure to notify
the Firm of the settlement was unethical, and violated NASD Rule 2110 and FINRA
Rule 2010 because the information was important to the Firm and investors. The
Firm had a continuing obligation to update Respondent's Form U5 to reflect the
settlement of a customer complaint, but Respondent's actions thwarted the
Firm's ability to comply with its obligation. The information could also be
important to the investing public and to future employers. Accordingly, the
Hearing Panel finds that Respondent violated NASD Rule 2110 and FINRA Rule
at Pages 8 - 9 of the 2012 FINRA Binstock OHO Decision
Having found that Binstock settled away, the OHO imposed
the following sanctions:
For settling customer complaints
away from the firm, the Guidelines recommend a fine of $2,500 to $50,000, and consideration
of a suspension for up to two years, or a bar for egregious cases. Guidelines
Here, the Hearing Panel considered
that Respondent was no longer with the Firm at the time he made the payment to
the customer, and he was motivated by a desire to compensate the customer.
Moreover, the Firm was aware of the customer complaint. The Hearing Panel
concluded that a $5,000 fine was appropriate for this
at Page 10 of the 2012 FINRA Binstock OHO Decision
See Principal Considerations in
1. Whether the respondent
provided the employer with verbal notice of settlement and the
employer acquiesced, or whether the respondent deceived his
2. Whether the actions delayed or
obviated the filing of required Forms U-4 or U-5 or FINRA Rule 4530
Fine of $2,500 to $77,000.
Suspension, Bar or Other
Consider suspending the
respondent in any or all capacities for up to two years. In egregious
cases, consider barring
at Page 34 of the "FINRA Sanctions
As presented in the 2012 FINRA Binstock OHO Decision, FINRA has a
regulatory regimen whereby customer complaints are required to be disclosed and
settlements attendant to those complaints are also required to be disclosed. In the absence of compliance with a member firm's in-house policies and
FINRA's rules, there are further regulatory sanctions that come into play for
settling away. Plugging the various Binstock components into the compliance/regulatory scheme, we would naturally highlight these assertions in the 2012 FINRA Binstock OHO
It is a violation of NASD Rule 2110 and
FINRA Rule 2010 for a registered representative to settle a customer complaint
without his firm's knowledge or
The customers complained and requested
reimbursement of the $500 fee plus
On September 21, 2009, after Respondent
had resigned from the Firm, he deposited $515.76, his commission plus interest,
into the customers' checking account without the Firm's knowledge.
The 2012 FINRA Binstock OHO Decision states that it is a violation "for
a registered representative to settle a customer complaint without his
firm's knowledge or approval." Okay -- that's fairly straightforward. In support
of the Panel's finding that Binstock engaged in settling away, the Decision
notes that "the customers complained" and that Binstock responded to
the "requested reimbursement' by depositing $515.76 into the customers'
checking account "without the Firm's knowledge." Check. Check. and
2017: The Burris Order Accepting Offer of Settlement
In response to the filing of a Complaint on September 15,
2016, by the Financial Industry Regulatory Authority's ("FINRA's")
Department of Enforcement, Respondent Johnny E. Burris submitted an Offer of
Settlement dated April 6, 2017, which the regulator accepted. Under
the terms of the Offer of Settlement, without admitting or denying the
allegations in the Complaint, Respondent Burris consented to the entry of
findings and violations and to the imposition of the
Department of Enforcement, Complainant, v. Johnny E. Burris,
Respondent (FINRA Office of Hearing Officers Order Accepting Offer of
Settlement, Disciplinary Proceeding No. 2015044921601 /
April 7, 2017) (the "2017 FINRA Burris OHO Settlement Order")
As to how or why Burris purportedly came onto FINRA's
radar, here's what the "FACTS" portion of the 2017 FINRA Burris OHO
Settlement Order allege:
In early April 2012, the customers instructed Burris to liquidate one of their
securities holdings to fund a tax payment to the
2. Specifically, they requested that Burris sell sufficient
shares of a Franklin Templeton mutual fund (FAZIX) to generate proceeds of
3. Burris failed to execute the
4. As a result, the customers' tax payment of almost
$24,000 was rejected.
5. On April 17, 2012, JPMorgan
Chase Bank sent a letter to the customers informing them that their tax payment
had been rejected because of "insufficient funds in [their]
6. On April 19, 2012, the IRS
sent the customers a letter informing them that their electronic payment had
been rejected and that they could be subject to ??interest and penalty
charges" for failure to pay their taxes on
7. On April 23, 2012, the
customers went to Burris's office at the firm's Sun City West branch and
informed him that their tax payment bad been rejected for insufficient
8. During Burris's conversation
with the customers on April 23, 2012, Burris acknowledged his error in not
executing the trade they had ordered, and told the customers that he would 'take care of' their issue.
9. Burris requested of personnel
of JPMorgan Chase Bank that the customers' nonsufficient funds fee imposed by
said bank be removed from the customers' bank account. Bank personnel
thereafter removed said
10. With authority from the
customers, Burris executed a new trade, selling approximately 2,356 shares
of FAZ1X, resulting in proceeds of $26,772, which was sufficient to pay the
customers' tax liability.
11. At the customers' request,
Burris then assisted the customers in transferring $26,500 into their account
at JPMorgan Chase Bank, obtaining a cashier's check, and sending the check to
the IRS "via overnight
12. On April 27, 2012, Burris wrote a letter to the
customers stating, ''I want to apologize for the error that has caused your tax
payment to be rejected. That has since been remedied with the copy of the
enclosed cashier's check dated April 27th, 2012. . . . You can be assured,
if there are any tax penalties and/or interest, please bring
them to my attention. I will have those remedied."
13. On May 4, 2012, Burris sent a
letter to the IRS, on what appeared to be official CISC letterhead, claiming
that the insufficient funds issue was a result of "an error on the part of
the bank" and requested that the IRS forgive the fees and interest as
14. Burris did not, at any time,
inform anyone at CISC of his failure to execute the customers' trade, or his
independent efforts to resolve their complaint, including his oral
conversations with the customers regarding their complaint, his April 17, 2012
letter to the customers, or his May 4, 2012 letter to the
15. Burris also did not obtain supervisory review or
approval for either of the two outgoing letters described above nor did he keep
copies of the letters in firm outgoing correspondence files or in the
16. Burris's supervisor learned
of the customers' complaint when they came to the Sun City West branch office
on September 14, 2012 to advise Burris of the final amount the tax penalties
and interest charges assessed by the IRS, which was about $50 less than it
17. Because Burris was on
vacation, the customers spoke with an assistant in the office who escalated
their complaint to Burris's
18. The firm compensated the customers $623.56 for their
tax penalties and
For the purposes of today's blog, we're going to focus on
FINRA's allegations that Burris settled
Settling a Customer Complaint Away from the Firm (FINRA
23. A registered representative
violates Rule 2010 by settling or attempting to settle a customer complaint
without notifying the representative's member
24. The customers' notification
to Burris that their tax payment failed because of Burris's failure to execute
their ordered trade was a customer complaint, and therefore, Burris's actions
described above were an effort by him to resolve the customers' complaint
himself, without informing his supervisor at the
25. As alleged above,
a. verbally informed the
customers on April 23,2012 that he would 'take care of' their
b. executed a new
c. had a cashier' s check drafted
and sent that check to the IRS to satisfy the customers' remaining tax
d. sent the customers a letter on
April 27, 2012 apologizing for his error and assuring them he would remedy any
fees or penalties that may have resulted from his error; and
e. sent the IRS a letter on May
4, 2012 requesting that the IRS forgive the customers' fees and
26. By not informing his firm of
the existence of the customers' complaint and of his efforts to settle the
customers' complaint, Burris violated Rule
In accordance with the terms of the 2017 FINRA
Burris OHO Settlement Order, FINRA imposed upon Burris a $5,000 fine
and suspended him from association with any FINRA member in any capacity for a
period of five business days.
The Lap Dog Barks
Without question, Burris failed to
execute a trade. As a human being, Burris demonstrated the inescapable essence
of homo sapiens: We make mistakes.
Unfortunately, mistakes have consequences, and in Burris' case,
his failure to sell stock left his customers' with insufficient funds to cover
a $24,000 tax payment to the Internal Revenue
Service. JPMorgan Chase Bank notified the customers about the insufficient funds in their account, and, the IRS also notified the customers that their electronic payment was rejected and they would now be subject to interest and penalty charges for the untimely payment of taxes.
Note that there is NO hint, suggestion, or assertion in the first 7 enumerated paragraphs of the 2017 FINRA Burris OHO Settlement Order that the customers had "complained." In fact, what FINRA wrote in paragraph 7 was that the "the customers went to Burris's office at the firm's Sun City West branch and informed him that their tax payment bad been rejected for insufficient funds." I didn't write that. Burris didn't write that. FINRA wrote that -- the customer "informed" Burris of the rejected tax payment. Argue as you will but that does not necessarily rise to the level of a complaint. It is more in the nature of a query: What happened?
To Burris' credit, he did what we should expect of any professional -- immediately, he owned up to his error, didn't make any excuses, and promised the customers that he would take care of the mess that he had created. Working with JPMorgan Chase Bank and with the customers, Burris did, indeed, set things right. Notably, the 2017 FINRA Burris OHO Settlement Order sets forth in paragraphs 12 and 13 that Burris wrote a letter of apology to the customers, noted the steps that he implemented to ensure that a new check was sent to the IRS covering the initial tax payment, and he assured his customers that "if there are any tax penalties and/or interest, please bring them to my attention. I will have those remedied." Further, going to extraordinary lengths to take personal ownership of his error, Burris wrote to the IRS advising that the NSF issue was an error made by the bank (in contradistinction to the customers) and asked that any additional fees/interest be waived as a professional courtesy.
In referencing the 2017 FINRA Burris OHO Settlement Order, I often hold it up as an example of the worst examples of FINRA's failure as a regulator. Pointedly, FINRA's regulatory case against Burris only served to convince me of my long-held belief that the self-regulatory-organization is little more than a lapdog for its Large Member Firms and engages in disparate regulation when addressing the alleged misconduct of its smaller firms and the industry's hundreds of thousands of associated persons.
FINRA says that a rep can't settle a complaint away from the member firm. In order to run afoul of that proscription, however, there first had to be a predicate "complaint," and, thereafter, a "settlement" of that complaint. As I would have argued on Burris' behalf, not every customer communication is a "complaint." Some communications are queries. Some are inquiries. I'm not quite buying either JPMorgan's or FINRA's inference that the customers actually "complained." How did FINRA view Burris' conduct? The 2017 FINRA Burris OHO Settlement Order notes that when the customers visited the branch office to advise Burris of the penalties/interest charges imposed by IRS, he was on vacation. At this point, for the first time, the 2017 FINRA Burris OHO Settlement Order characterizes the status as a customer complaint (in paragraph 16). If anything, it appears that the intent of Burris' efforts was to prevent a complaint by promptly disclosing to the customers his error and, thereafter, assuring the customers that he would do everything possible to get the IRS to accept the belated payment, including covering any potential late charges. Notably, Burris never, ever paid a penny of settlement to the customers out of his own pocket, as noted in paragraph 18 of the 2017 FINRA Burris OHO Settlement Order: "The firm compensated the customers $623.56 for their tax penalties and interest." Which begs the question as to just "how" Burris actually engaged in a settlement if he didn't pay a cent to the customers.
I never asked FINRA to reward Burris' conduct. All that I had asked was for the self-regulatory-organization to put things into context and, at worst, admonish Burris not to do this again. A suspension and fine, no matter how minimal, were unnecessary and cynical. Oh how I wish that Burris had not settled his case and went to the mat against FINRA -- and then moved on from there to the SEC and, if necessary, to the federal courts. On the other hand, I have enormous respect for Burris and am all too familiar with his struggle against his former employer and his battles with FINRA. At some point, enough is enough. The legal costs become daunting. You see that the light at the end of the tunnel is an oncoming train. Like I said, small wonder that Burris signed on the dotted line and settled FINRA's half-assed case against him.
Which leads me, yet again, to muse as
to how it is that FINRA routinely suspends its member firms' associated men and
women, yet FINRA's big boys, it's large member firms, simply get fined, and
then shift the cost of their misconduct into the pockets of their public
shareholders. For those of you who are serious Wall Street participants or interested in justice, I would urge that you read the two files below to fully understand the context of Burris' employment with JP Morgan and FINRA questionable role in turning the conduct at issue into a purported "regulatory" matter:
We end today's blog by departing from the past and returning to the present. In a FINRA Arbitration Statement of Claim filed in September 2020, associated person Claimant Nessim "asserted a claim seeking expungement of customer dispute information from registration records maintained by the Central Registration Depository ("CRD")." Respondent Josephthal did not file an Answer and did not appear at the hearing. In
the Matter of the Arbitration
Between Michael Haskel Nessim, Claimant, v. Josephthal & Co., Inc., Respondent (FINRA Arbitration Award 20-03173 / April 7, 2021) (the "2017 FINRA Nessim Arbitration Award") https://www.finra.org/sites/default/files/aao_documents/20-03173.pdf
As stated in pertinent part in the 2017 FINRA Nessim Arbitration Award:
On March 16, 2021, Claimant advised of his attempts in February 2021 to serve the Statement
of Claim and notice of the date and time of the expungement hearing upon the customer in
Occurrence Number 248970 ("Customer"). Since Respondent was unable to provide Claimant
with the Customer's address, Claimant's counsel sent notice to all 18 of the potential addresses
he was able to identify for the Customer. Three of the deliveries were confirmed to be delivered
by the USPS electronic tracking system.
The Arbitrator conducted a recorded, telephonic hearing on April 5, 2021, so the parties could
present oral argument and evidence on Claimant's request for expungement.
Neither the Customer nor Respondent participated in the expungement hearing.
. . .
Claimant acknowledged paying settlement proceeds to the Customer out of his own pocket in order to preserve the client relationship, but no settlement documents were signed. Therefore, there was no settlement agreement for the Arbitrator to review.
at Page 2 of the 2017 FINRA Nessim Arbitration Award
In recommending expungement, sole Public Arbitrator Robert E. Anderson did an excellent job presenting his rationale. Preliminarily, Arbitrator Anderson made a FINRA Rule 2080 finding that the customer's claim, allegation, or information is factually
impossible or clearly erroneous, and false. In reaching that conclusion, there is no mentions whatsoever of the word "complaint" in the entire 2017 FINRA Nessim Arbitration Award! To the Arbitrator's credit, he painstakingly referred to the. customer's communication as "dispute information," "Occurrence Number 248970," "claim, allegation, or information." In providing us a better understanding of the cited occurrence, Arbitrator Anderson explains:
The Customer, concerned about possible market loss, instructed Claimant to place a stop
loss order on his account to be triggered at a certain dollar amount. Claimant did so. Due to
market volatility/poor trading execution, the order was executed but the account declined in
value. In order to preserve the account relationship and at the direction of his branch
manager, Claimant contributed an amount equal to the decline in value into the Customer's
account from Claimant's commissions. There was no settlement paperwork. Claimant also
testified as to the adverse impact this disclosure has had on his business marketing efforts.
Online FINRA BrokerCheck records as of April 9, 2021, disclose that Nessim was first registered in 1994 and was registered with Respondent Josephthal from October 1995 to August 1998. The customer dispute at issue in the 2017 FINRA Nessim Arbitration Award appears to have been filed in 1996 and settled by Josephthal for $30,000 but without any individual contribution from Nessim. The underlying dispute was purportedly a request by the customer to liquidate his portfolio if it depreciated to $100,000; however, after that threshold was met and the orders enter, only $70,000 was realized. As set forth on BrokerCheck, the "order" takes on the hue of a Stop Loss Order that is triggered on the way down. Unfortunately, a Stop Loss Order is merely a tripwire, and once triggered, you are left at the mercy of the market as to where your "market" orders get filled. If the market is selling off in an orderly manner, you may well achieve prices at or near the trigger price; however, if the markets are in free-fall, say a prayer.
Was there an actual customer complaint in Nessim? I would think so but what was the nature of the complaint? Apparently, that Josephthal and/or Nessim did as instructed -- namely, get me the hell out of the market if my portfolio falls to $100,000. In fact, that seems to be what happened. Unfortunately, by the time the tripwire was triggered, the best that the firm and/or rep could realize via liquidation was $70,000. All of which prompts two questions:
If a customer "complains" that you did something that you were supposed to do, is that truly a "complaint?"
If the firm and/or rep decide that for business reasons it's best to wipe out the diminution in value of $30,000 through crediting the account, is that a "settlement" of a "complaint," or is that merely a sound business decision to avoid the uncertainty of litigation?
As Binstock, Burris, and Nessim demonstrate, just because someone infers that an event occurred doesn't mean that it did or that the interpretation isn't open to reasonable debate. I would hope that FINRA would consider some of the issues presented in the cases analyzed in today's blog and pursue a more enlightened regulatory protocol.