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FINRA Enters Into Fair Settlement Involving Customer Loans and Outside Business Activities
April 20, 2021
There are times when FINRA gets it right. The self-regulatory-organization conducts a diligent investigation and finds a violation of its rules. Thereafter, FINRA presents its compelling case to a respondent, but also accepts a fair settlement. That's how it should work. But for the fact that it doesn't always work like that and but for the fact that it doesn't work like that as often as it should. But, okay, let's just stand back for a moment and offer a round of applause to encourage FINRA to do more of the same as demonstrated in a recent settlement involving loans from customers and outside business activities.
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, Steven Patrick Melen submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of Steven Patrick Melen, Respondent (FINRA AWC 2019062323801)
In the Matter of Steven Patrick Melen, Respondent (FINRA AWC 2019062323801)
https://www.finra.org/sites/default/files/fda_documents/2019062323801
%20Steven%20Patrick%20Melen%20CRD%202357251%20AWC%20%20va.pdf
The AWC alleges that Steven Patrick Melen was first registered in 1994, and from 2007 until April 2019, he was registered with Morgan Stanley. The AWC asserts that Melen "has no relevant disciplinary history."
Four Loans from Two Customers
As alleged in the AWC's "Overview":
From September 2016 through August 2018, Steven Melen accepted four loans from two customers totaling $307,000 without disclosing them to his firm. As a result, Melen violated FINRA Rules 3240 and 2010. Melen also failed to disclose his ownership of a rental property to his firm in violation of FINRA Rules 3270 and 2010.
If you just go by the brief synopsis in the "Overview," Melen's conduct doesn't seem particularly troubling; however, that's one of the problems with going only by summaries. Consider these more extensive extracts from the AWC:
In September 2016, while undergoing medical treatments, Melen borrowed $150,000 from a friend and brokerage customer, who was 87 years old at the time. The loan was interest-free and not memorialized in writing. Melen repaid the loan in full in January 2017. In September 20, 2017, Melen borrowed an additional $110,000 from the same customer. Again, the loan was not memorialized but this time Melen agreed to pay interest. Melen repaid the loan with interest in January 2018In January 2018, Melen also borrowed $25,000 from a second customer of his, with whom he had a close personal relationship. This loan was not memorialized in writing, but Melen agreed to pay interest. Melen made partial repayments in April and May 2018. In August 2018, Melen borrowed an additional $22,000 from the same customer. The loan was not memorialized in a writing, but Melen agreed to pay interest. In August 2018, Melen repaid the second loan with interest plus the balance due on the first loanNeither customer complained.. . .In October 2013, Melen purchased beach-front property in Panama, originally as avacation property, and then a year later he later decided to rent it out for income. Melen employed a property-management company to handle ongoing maintenance and rentals. From October 2013 to April 2019, Melen received approximately $200,000 in compensation from the property.Melen did not disclose the Panama rental property to Morgan Stanley in writing. He also failed to identify it on his annual attestations and, in 2017, affirmatively stated to the firm that he did not participate in any outside business activities that required disclosure. Melen did disclose the outside business activity to his current member firm.
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Mele an $7,500 fine and a four-month suspension from associating with any FINRA member in all capacities.
Bill Singer's Comment: Compliments to FINRA on publishing a very balanced AWC, which went to appropriate lengths to offer some significant mitigating facts about Melen's conduct.
Likely the first fact that caught your attention was that Melen borrowed $150,000 from an elderly customer, an 87-year-old. Making matters worse, the loan was without interest and there was no written document memorializing the terms or even the loan's existence. Those facts place Melen in an unflattering light and raise troubling questions about possible predatory conduct; however, further reflection suggests a far different reality and one that comes off as more benign.
First, the AWC asserts that at the time of the 2016 borrowing by Melen, he was undergoing medical treatment. Second, the AWC asserts that the 87-year-old customer was not merely a customer but a "friend." Third, Melen fully repaid the $150,000 September 2016 loan by January 2017, a mere four months. In September 2017, Melen enters into a new $110,000 loan arrangement with the elderly friend/customer; and, again, fully repays the loan with interest in four months by January 2018.
The two loans noted above present compliance/regulatory issues of non-disclosure by Melen to his employer, Morgan Stanley. Notwithstanding the disclosure misconduct, Melen doesn't appear to have engaged in any predatory conduct involving the elderly customer. As such, our worst fears are never realized for these loans.
In January 2018, Melen borrows $25,000 and in August 2018, he borrows an additional $22,000 from another customer, who is not characterized as elderly in the AWC but described as involving a "close personal relationship"). In April and May 2018, Melen made partial payments against the January loan, and, thereafter, fully repaid the two loans in August 2018.
What are we to make of Melen's borrowing from the two customers?
Frankly, the overwhelming issue here is non-disclosure of the loans to Morgan Stanley. That is not intended to downplay Melen's alleged misconduct but to place it in perspective. Nothing in the AWC's fact pattern suggests anything predatory or anything involving elder fraud. Notably, the AWC asserts that "neither customer complained."
As to the outside business activity, Melen purchased the beach property 8 years ago in 2014 and first rented it for income that same year. During the roughly seven-year rental history, Melen realized about $200,000 or $25,000 per annum. Does renting out a vacation property constitute a disclosable outside business activity? I think that's arguable but, even if I concede the point, I acknowledge that FINRA too seems to have weighed the facts and not gone overboard with the sanctions.
Overall, this AWC presents the underlying facts in as fair a fashion as could be expected from FINRA. Further, the fine and suspension are imposed in a manner that suggests the self-regulatory-organization didn't submit Melen to a one-size-fits-all sanction but gave the respondent's situation appropriate consideration. All of which earns FINRA a tip of the hat and "job well done!"
Finally, compliments to Melen's lawyer, Katherine S. Bowles of Shustak Reynolds & Partners, P.C. https://www.shufirm.com/katherine-s.-bowles for a deft bit of legal representation! I suspect that her advocacy persuaded FINRA to consider the mitigating factors, which may well have fostered a more tempered set of sanctions.