Customer Complaints and Away Settlements -- Matters of Interpretation?

April 9, 2021

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 Decision

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 dismissed. 

Settling Away

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 Allegation 

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 interest. 

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. 377

at Page 7 of the 2012 FINRA Binstock OHO Decision

In adjudicating the Settling Away allegations against Binstock, the OHO Panel noted in part:

B. Settling Away 

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 his payment. 

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 2010.

at Pages 8 - 9 of the 2012 FINRA Binstock OHO Decision

Having found that Binstock settled away, the OHO imposed the following sanctions:

B. Settling Away 

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 at 34. 

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 violation.

at Page 10 of the 2012 FINRA Binstock OHO Decision

As to FINRA's "Sanctions Guidelines" they offer the following guidance:

Settling Customer Complaints Away From the Firm
FINRA Rule 2010

Principal Considerations in Determining Sanctions
See Principal Considerations in Introductory Section
1. Whether the respondent provided the employer with verbal notice of settlement and the employer acquiesced, or whether the respondent deceived his employer.

2. Whether the actions delayed or obviated the filing of required Forms U-4 or U-5 or FINRA Rule 4530 filings.

Monetary Sanction
Fine of $2,500 to $77,000.

Suspension, Bar or Other Sanctions
Consider suspending the respondent in any or all capacities for up to two years. In egregious cases, consider barring respondent.

at Page 34 of the "FINRA Sanctions Guidelines"

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 Decision:

  • 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.

  • The customers complained and requested reimbursement of the $500 fee plus interest. 

  • 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 Checkmate.

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 sanctions.
FINRA 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:

1. In early April 2012, the customers instructed Burris to liquidate one of their securities holdings to fund a tax payment to the IRS.
2. Specifically, they requested that Burris sell sufficient shares of a Franklin Templeton mutual fund (FAZIX) to generate proceeds of approximately $26,500. 
3. Burris failed to execute the trade. 
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] account." 
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 time. 
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 funds. 
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 fee. 
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 mail."
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 "a professional courtesy." 
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 IRS. 
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 customers' file. 
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 originally invoiced. 
17. Because Burris was on vacation, the customers spoke with an assistant in the office who escalated their complaint to Burris's manager. 
18. The firm compensated the customers $623.56 for their tax penalties and interest. 

For the purposes of today's blog, we're going to focus on FINRA's allegations that Burris settled away: 

Settling a Customer Complaint Away from the Firm (FINRA Rule 2010)

23. A registered representative violates Rule 2010 by settling or attempting to settle a customer complaint without notifying the representative's member firm. 

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 firm. 

25. As alleged above, Burris: 

a. verbally informed the customers on April 23,2012 that he would 'take care of' their issue; 
b. executed a new trade; 
c. had a cashier' s check drafted and sent that check to the IRS to satisfy the customers' remaining tax liability; 
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 penalties.

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 2010

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:

2021: Nessim FINRA Arbitration Expungement

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") 

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

Expungement Recommended 

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.