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FINRA Fines and Suspends LPL Rep For Paying Commissions to an Unregistered Person
June 10, 2021
In a recent FINRA OHO Decision, we have a former LPL rep who paid commissions to a former colleague. Sometimes that's okay. Not this time, or at least that's LPL's and FINRA's position. For reasons that are not disclosed, when confronted with FINRA's allegations of misconduct, the rep opted to have his day in court (or hearing) and offer explanations for his actions. I'm guessing that the settlement offer made by FINRA Staff was much higher than what the FINRA OHO Panel imposed. Not saying that's right. May not be. Just offering my best guess.
Case In Point
On June 12, 2020, the Financial Industry Regulatory Authority ("FINRA")/ Department of Enforcement filed a Complaint against Adam James Makkai alleging that he violated FINRA Rules 2040 and 2010 by paying $27,037 in commissions to an unregistered person between December 2017 and March 2018.
In the Matter of Adam James Makkai, Respondent (FINRA Office of Hearing Officers ("OHO") Panel Decision, Discip. Proc. No. 2018058924502 / June 3, 2021)
https://www.finra.org/sites/default/files/fda_documents/2018058924502
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The OHO Decision asserts that Makkai entered the industry in 1999, and that he was registered in 2009 with LPL Financial LLC and also with Western Wealth Management LLC. The Decision further states that Makkai is a licensed insurance agent and "has taught business and finance at a local Denver university since 2002."
Makkai's Colleague "SM"
The OHO Decision alleges that in early 2017, a stockbroker referenced only as "SM" was associated with LPL, and that Makkai was paid about $1,500 per month to manage accounts for some of SM's clients. Previously, SM had approached Makkai about buying the the former's book of business.
LPL Terminates SM
The OHO Decision alleges that on October 5, 2017, LPL terminated the employment of "SM," who in violation of firm polices had borrowed money from a client without prior notice to the firm and was a joint bank-accountholder with a client. The Decision alleges that Makkai was a "colleague" of SM and "knew at the time why SM had been terminated . . ."
FINRA Sanctions SM
The OHO Decision asserts that SM was associated in 2013 with LPL and in 2016 with Western Wealth, and was terminated by both firms in October 2017. Without admitting or denying FINRA's findings in an AWC, SM was found to have "borrowed $108,360 from a customer without providing LPL prior notice. SM repaid the customer in full with interest." Effective July 2019, the AWC imposed a $5,000 fine and a four-month suspension on SM. In a separate action, FINRA imposed a Bar on SM in June 2020 based upon his alleged failure to provide information during an investigation.
No Way, No How
Following SM's termination by LPL, Makkai agreed in principle to buy the former's book of business of about 100 to 150 customers. In early 2017, after SM's termination, LPL transferred his brokerage and advisory accounts to Makkai. On October 10, 2017, Makkai tried to have LPL employ SM as an unregistered relationship manager, who would be paid by Western Wealth, but the firm rejected the proposal outright.
The Announcement
In early November 2017, SM emailed a former client announcing the merger of his practice with Makkai's, and both men were identified as dually registered with LPL and Western Wealth -- SM copied Makkai on the email. SM purportedly informed the client that the merger was in anticipation of his eventual retirement but that he would remain the "point of contact for the next 5 years or so." Moreover, the OHO Decision alleges that [Ed: footnotes omitted]:
After being terminated, SM continued to meet with his former brokerage and advisory clients. Gerhardt E. Buenning ("Buenning"), the owner of Western Wealth and the LPL branch, who was also Makkai's supervisor beginning November 1, 2017, permitted SM to continue to use an office there. All of SM's former brokerage and advisory customers had insurance business with SM. According to Buenning, the "understanding" with SM was to let him continue to use an office to service the insurance business but that SM "could not go over any of their investment accounts."Buenning knew that Makkai's schedule did not allow him to join all of SM's meetings with former customers. But because Buenning did not work out of the Greenwood Village office, he acknowledge that he was not "totally" sure that SM did not discuss investment matters with former customers.
at Page 6 of the OHO Decision
Payment of Commissions
While Makkai and SM continued negotiating the terms of the sale of the book of business during the end of November 2017, SM asked Makkai to pay him brokerage commissions and advisory fees on the accounts. The OHO Decision alleges that [Ed: footnotes omitted]:
[M]akkai agreed to this arrangement. In a written statement to FINRA during the investigation, Makkai explained that he felt "uncomfortable" and "a bit uneasy" keeping all the revenue from activity in the accounts. As Makkai put it, if he held on to the money, he would have received the benefit of SM's many years servicing the customers. Makkai wrote that he believed that keeping the commissions would also give him an "unfair advantage" in the negotiations to buy SM's book of business. As a gesture of goodwill" Makkai agreed to pay SM all the revenue generated by his former customers while they continued to negotiate an ultimate sale price and other terms for the book of business. SM agreed that Makkai could pay himself $1,000 per month ($4,000 over four months) from the commissions and fees.
at Pages 6 - 7 of the OHO Decision
The Deal Implodes
In what proves to be a bit of misdirection, where we thought things would go they didn't. The negotiations between Makkai and SM apparently broke down [Ed: footnotes omitted]:
Makkai and SM could not agree on terms for the sale of SM's book of business. In November 2017, LPL personnel told Makkai and SM that SM's business was worth between $520,000 and $696,000. In late February 2018, SM sent Makkai a draft agreement with a proposed purchase price of $780,000. The contract SM had drafted also contained a promissory note obligating Makkai to make periodic payments. Makkai objected to signing a promissory note. Makkai testified that because he had his own existing clients and had recently purchased the business of another former registered representative, he was "at capacity," and "couldn't do everything that [he] needed to do to service everybody the way that they needed to be." He was also concerned that he could not sustain the high management fees that SM had been charging some of his more important clients, which reduced the attractiveness of the business to Makkai.After deciding he no longer was interested in SM's business, Makkai backed out of the negotiations by the end of March 2018. By this time, Makkai had made seven commission payments to SM totaling $27,037. Makkai did not ask SM to return any of the commissions that he had paid him.During this same time period, in early 2018, Makkai completed LPL's annual compliance questionnaire. In it, he certified that he had read LPL's WSPs and, specifically, that he understood that he was prohibited from "paying or otherwise directing transaction based compensation to another person without prior LPL approval." At the hearing, Makkai explained that he did not believe he was violating the firm's proscription because he was paying SM for his business, and did not think of the payments as constituting payments of commissions.
at Pages 7 - 8 of the OHO Decision
The Whistleblower's Tip
The OHO Decision asserts that [Ed: footnotes omitted]:
[L]PL conducted an examination of the Greenwood Village branch in April 2018. During the examination, it learned from a whistleblower that Makkai was sharing commissions with an unregistered person. LPL then initiated an investigation to review Makkai's business practices and email communication
at Page 2 of the OHO Decision
SIDE BAR: FINRA Rule 2040: Payments to Unregistered Persons
(a) GeneralNo member or associated person shall, directly or indirectly, pay any compensation, fees, concessions, discounts, commissions or other allowances to:(1) any person that is not registered as a broker-dealer under Section 15(a) of the Exchange Act but, by reason of receipt of any such payments and the activities related thereto, is required to be so registered under applicable federal securities laws and SEA rules and regulations; or(2) any appropriately registered associated person unless such payment complies with all applicable federal securities laws, FINRA rules and SEA rules and regulations.
(b) Retiring Representatives(1) A member may pay continuing commissions to a retiring registered representative of the member, after he or she ceases to be associated with such member, that are derived from accounts held for continuing customers of the retiring registered representative regardless of whether customer funds or securities are added to the accounts during the period of retirement, provided that:(A) a bona fide contract between the member and the retiring registered representative providing for the payments was entered into in good faith while the person was a registered representative of the member and such contract, among other things, prohibits the retiring registered representative from soliciting new business, opening new accounts, or servicing the accounts generating the continuing commission payments; and(B) the arrangement complies with applicable federal securities laws, SEA rules and regulations.(2) The term "retiring registered representative," as used in this Rule shall mean an individual who retires from a member (including as a result of a total disability) and leaves the securities industry. In the case of death of the retiring registered representative, the retiring registered representative's beneficiary designated in the written contract or the retiring registered representative's estate if no beneficiary is so designated may be the beneficiary of the respective member's agreement with the deceased representative. . . .
Terminations
Online FINRA BrokerCheck records disclose as of June 10, 2021, that on June 4, 2018, Makkai was "discharged" by both Western Wealth Management LLC and LPL Financial LLC based upon allegations of "Sharing commissions and fees with an unregistered person." In response to those disclosures, Makkai offered this "Broker Statement":
Mr. Makkai agreed, in principle, to purchase the "book of business" of a terminated LPL Financial employee. However, at the time of the seller's termination, all of the seller's client relationships were transferred by LPL Financial to Mr. Makkai prior to a written agreement being signed by the parties. This created a drastic imbalance of negotiating power between the seller and Mr. Makkai. In an effort to address this imbalance, Mr. Makkai agreed to provide payments to the seller that were based on the revenue generated by the seller's "book of business". LPL Financial determined that these payments were "sharing of commissions and advisory fees with an unregistered person," whereas Mr. Makkai viewed them as part of the purchase of the seller's "book of business," which LPL Financial was aware of and helped support.
Sanctions
The OHO Panel appears to have gone to considerable lengths to place Makkai's misconduct in an appropriate context:
Under the circumstances of this case, and after considering Makkai's testimony and all the evidence before us, the Panel finds that LPL's termination of Makkai materially reduces the likelihood of further misconduct and mitigates the sanctions the Panel imposes. The Panel carefully considered Makkai's demeanor and his testimony concerning his decision to pay SM commissions. We find Makkai's explanations credible and mitigating-that he did not believe he was paying commissions per se but using his LPL compensation for the limited purpose of buying SM's business. We also credit Makkai's statements that he did not feel he was fairly entitled to keep the commissions so long as he and SM were still negotiating the terms of the contract
The Guidelines provide that a sanction must be remedial, not punitive. Enforcement seeks a $5,000 fine and a five-month suspension in all capacities. The Panel finds that a sanction at the lower end of the sanctions range is properly remedial and anything greater would be be disproportionate and excessive in this case. The Panel applied the relevant Principal Considerations as set forth in the Guidelines. We considered that Makkai's misconduct spanned about four months and involved seven payments to SM totaling $27,037 in commissions. But we do not find the duration of the misconduct or the amount of the commissions paid to be significantly aggravating, as Enforcement argues. The Panel notes that certain aggravating factors are not present here. In particular, there is no evidence that Makkai's conduct caused injury to customers.
The Panel notes, however, that as a seasoned and experienced broker, Makkai should have known that sharing commissions with an unregistered person would violate of FINRA's rules. But the Panel disagrees with Enforcement that Makkai acted intentionally, in the sense that he knew he was engaged in improper conduct. We find it credible that Makkai believed he was simply using his compensation, which he received in the form of commissions, to pay for the book of business. The totality of the evidence before the Panel suggests that Makkai acted negligently, not recklessly or intentionally. We also disagree with Enforcement's characterization that Makkai failed to accept responsibility for his misconduct. The Panel finds that, consistent with a respondent's right to put on a defense, Makkai testified forthrightly about what he did, which under the circumstances prevailing in this case does not rise to the level of denying responsibility.
at Pages 14 - 15 of the OHO Decision
Bill Singer's Comment
The OHO Decision discharges its role to provide content and context sufficient to render its findings and sanctions credible -- and this Decision does so in excellent fashion. Compliments to FINRA on a job well done!
Compliments to Makkai's legal team for counseling him to conduct himself in a credible and forthright manner, which, ultimately, seems to have carried the day in earning the Panel's respect: Dochtor D. Kennedy, Esq. https://advisorlawllc.com/executives/#doc and Joshua Miller, Esq. https://advisorlawllc.com/executives/#joshua
It may be that Makkai and his lawyers file an appeal to FINRA's National Adjudicatory Council and further argue the Respondent's innocence or seek to obtain a reduction of sanctions. That remains to be seen. For now, there isn't much to criticize when it comes to FINRA's presentation of its case or Makkai's defense. This is how regulation should look. This is what defense lawyers should do.