They would like you to believe that there is some super-duper, state-of-the-art regulatory oversight keeping an eye on Wall Street. In case you were wondering, there ain't no such vigilance. The industry sure as hell doesn't want it. The regulators sure seem more interested in self-serving publicity and the appearance of regulation rather than the substance. In the end, the regulation of Wall Street is more about what the public investor is willing to believe. Frankly, don't believe too much. If you pull the curtain back, there's no mighty wizard.
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, Eric Edward Nicolassy submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Eric Edward Nicolassy was first registered in 2014 and by September 2016, he was registered with FINRA member firm Woodstock Financial Group until December 2019.
In the Matter of Eric Edward Nicolassy, Respondent (FINRA AWC 2019063382401)
Between August 2018 and July 2019, while associated with Woodstock Financial Group, Nicolassy engaged in excessive and unsuitable trading in the account of Customer A, an 83 year old retired real estate broker. During the relevant period, Nicolassy recommended that Customer A place 137 trades in his account and Customer A accepted Nicolassy's recommendations. Although Customer A's account had an average month-end equity of $106,293, Nicolassy executed purchases with a total principal value of $5,138,740 which resulted in an annualized turnover ratio of more than 23. Collectively, the trades Nicolassy executed caused Customer A to pay $71,409.09 in commissions and $10,410 in trade costs and margin interest, which resulted in an annualized cost-to-equity ratio in excess of 76 percent-meaning Customer A's account would have had to grow by more than 76 percent annually just to break even. As a result of Nicolassy's unsuitable recommendations, Customer A suffered more than $125,000 in losses.
Nicolassy's recommended securities transactions in the account of Customer A were excessive and unsuitable. Therefore, Nicolassy violated FINRA Rules 2111 and 2020.
. . .
From May 29, 2019 to July 16, 2019, Nicolassy exercised discretion on at least 18 occasions in four customer accounts, including in the account of Customer A. None of the customers provided prior written authorization for Nicolassy to exercise discretion in their accounts.
Therefore, Nicolassy violated FINRA Rules 3260(b) and 2010.
In accordance with the terms of the AWC, FINRA imposed on Nicolassy a "partial restitution" of $32,134.09 and a four-month suspension from associating with any FINRA member in all capacities. The AWC states that "Respondent has submitted a statement of financial condition and demonstrated a limited ability to pay. In light of Respondent's financial status, the sanctions do not include a monetary fine."
As of March 28, 2022, there are three disclosures on Nicolassy's online FINRA BrokerCheck report. Under the heading "Customer Dispute - Pending," Woodstock Financial Group, Inc. disclosed a pending FINRA arbitration (service noted as October 4, 2021) alleging "Suitability, Excessive Trading, Unauthorized Trading, Breach of Fiduciary Duty" and alleging $103,056.69 in damages. As set forth under the "Broker Statement" for this item:
I strongly deny the allegations set forth by or on behalf of the customer; I intend to defend the case vigorously and establish the clearly erroneous nature and/or falsehood of the allegations.
Under the BrokerCheck heading "Judgment/Lien," it is disclosed that Nicolassy has an outstanding:
$20,819 IRS tax lien filed on August 22, 2019, and of which Nicolassy only first learned about on February 8, 2021; and
$5,946 New York State tax lien filed on November 8,. 2018, and of which Nicolassy only first learned about on February 8, 2021
Bill Singer's Comment
How does FINRA present itself to the public? Well, for starters, let's visit the "About FINRA" page on the self-regulatory-organization's website at https://www.finra.org/about, where we are told in various parts that:
FINRA is dedicated to protecting investors and safeguarding market integrity in a manner that facilitates vibrant capital markets.
. . .
We Play a Big Role
FINRA is authorized by Congress to protect America's investors by making sure the broker-dealer industry operates fairly and honestly. We oversee more than 624,000 brokers across the country-and analyze billions of daily market events.
We use innovative AI and machine learning technologies to keep a close eye on the market and provide essential support to investors, regulators, policymakers and other stakeholders.
Dedication to protecting investors? Safeguarding market integrity? Y'all see any proof of that in FINRA's settlement with Nicolassy? As alleged in the Nicolassy AWC -- and don't accuse me of spinning anything here because I'm quoting directly from FINRA's published settlement document:
Between August 2018 and July 2019, while associated with Woodstock Financial Group,
Nicolassy engaged in excessive and unsuitable trading
in the account of Customer A, an
83 year old retired real estate broker.
During the relevant period, Nicolassy recommended
that Customer A place 137 trades in his account and Customer A accepted Nicolassy's
Although Customer A's account had an average month-end equity of
$106,293, Nicolassy executed purchases with a total principal value of $5,138,740 which
resulted in an annualized turnover ratio of more than 23.
Collectively, the trades
Nicolassy executed caused Customer A to pay $71,409.09 in commissions and $10,410
in trade costs and margin interest,
which resulted in an annualized cost-to-equity ratio in
excess of 76 percent-meaning Customer A's account would have had to grow by more
than 76 percent annually just to break even.
As a result of Nicolassy's unsuitable
recommendations, Customer A suffered more than $125,000 in losses.
Let's work our way through the above seven enumerated allegations.
In Point #1, FINRA alleges that Nicolassy's excessive/unsuitable trading occurred from August 2018 to July 2019, which is about 11 months. First off, where the hell was Woodstock's Compliance Department? After all, FINRA alleged not 11 hours or 11 days or 11 weeks of improper trading but 11 months. Clearly, the FINRA member firm's Compliance Department was not as vigilant as one would have hoped; on the other hand, where the hell was the industry's self-regulatory-organization? How does one stockbroker at one FINRA member firm engage in nearly a year of excessive/unsuitable trading, and none of that came up on FINRA's radar? You know, the radar that is supposedly helping FINRA "analyze billions of daily market events," which, go figure, just didn't seem to include the just-shy of one year of Nicolassy's cited trades. And, of course, despite FINRA's boast that it uses "innovative AI and machine learning technologies to keep a close eye on the market," it seems that the AI's close eye was closed.
In addition to Nicolassy's 11-months of cited trades; Point #2 adds the troubling fact that the victimized customer was 83 years old and retired. Hardly a day goes buy when FINRA isn't touting its leading role in elder fraud. What happened to FINRA's elder-fraud-AI during the eleven months of Nicolassy's apparent rampage? How the hell does FINRA and its member firm's compliance department not generate an exception report for such an account?
Point #3 exacerbates things by noting that we're talking about 137 trades that FINRA alleged were excessive/unsuitable. If you divide 137 by 11 months, you got about 13 trades a month, and with 20 trading days a month, that about .65 trades a day -- not sure what to make of .65 trades a day but let's agree that there's like one troubling trade every two business days for each of the 11 months that FINRA cited in the Nicolassy AWC. An elderly retiree was victimized by one trade every other trading day for 11 months and the member firm's compliance department didn't do jack and FINRA, with all its high-tech and regulatory zeal, was in the dark?
In Point #4, we learn that the average month-end equity in the elderly, retired customer's account was $106,293. In jaw-droppin' fashion, the Nicolassay AWC drolly informs us that "Nicolassy executed purchases with a total principal value of $5,138,740 which resulted in an annualized turnover ratio of more than 23." Just compare those two key dollar amounts. $106,293 in month-ending equity. $5,138,740 in purchases -- not purchases and sales but just purchases. Over an 11 month period, the customer's account was turned over on 23 times annualized basis. Shocking! And yet, no one seems to have been alerted. Not the member firm's compliance department. Not Wall Street's premier self-regulatory-organization.
Point #5 forces us to consider that the elderly retiree paid $71,409.09 in commissions and $10,410 in trade costs/margin interest. Yet again, all of that goes on for 11 months without popping up on a member firm's exception reports? All of that goes on without FINRA having any indication?
Moving on to Point #6, we come across one of the most basic metrics used to gauge the "soundness" of investment advice: The old Break-Even. FINRA didn't have much trouble pointing an accusatory finger at Nicolassy when it calculated that the annualized cost-to-equity ratio in the elderly customer's account was a whopping 76%: "meaning Customer A's account would have had to grow by more than 76 percent annually just to break even." At what point did Nicolassy's compliance department notice that nearly insurmountable break-even point? And again, given FINRA's on-the-ramparts role protecting you, me, and all vulnerable investors, where was the self-regulator's arsenal of AI and its 3,000-plus employees?
Finally, as Point #7 painfully demonstrates, the cost to the elderly retiree was more than $125,000 in losses. How is that even possible in this day of supposed enhanced in-house compliance and state-of-the-art industry regulation?
Fingers of Blame
The alleged misconduct charge by FINRA against Nicolassay should never have been allowed to progress over nearly a year. Not with an 83-year-old customer. Not with a retired customer. Not when every goddamn red light and alarm should have been ringing if oversight actually has any meaning. Ultimately, FINRA blames Nicolassay. He should be blamed. But so should his firm's compliance department. And so should FINRA.
Even more troubling is when we consider that during the relevant period cited by FINRA in the Nicolassay AWC between August 2018 and July 2019, Nicolassay was the subject of a $5,946 New York State tax lien filed on November 8, 2018 -- perhaps that should have raised some heightened oversight by the compliance department. The AWC says that Nicolassay only first learned about the NYS Tax Lien on February 8, 2021, but that doesn't mean that his handling of the elderly customer's account should not have prompted a more assertive inquiry by his compliance department, which, who knows, might have stumbled over the NYS Tax Lien before February 2021 and may have even uncovered the IRS Tax Lien sooner rather than.
Sadly, the facts in the Nicolassay AWC are far too common on Wall Street.
Compliance departments are not doing their jobs -- in come cases, those departments are tasked with impossible workloads and/or lacking the necessary financial and staffing support. Making matters worse, lately, Wall Streets regulators seem far too involved with filming videos, publishing half-assed studies, attempting to overhaul entire rulebooks overnight, and, well, just take a look at the endless stream of public relations spewing out of the SEC and FINRA. And then take a look at the Nicolassay AWC:
11 months of improper trading.
An elderly customer.
A retired customer.
An impossible break-even given the recommended trades.
Reading toe-tags in the morgue isn't effective compliance or regulation. Something has to change. Someone has to fix it. Don't expect anything from FINRA's lackluster Board of Governors. That's not their concern, as their disinterest makes apparent. Don't expect anything from the SEC. Retail antifraud is just not a sexy enough topic at the federal regulator in these days of ESG and climate change and crypto. Oh no, Wall Street's regulators don't have the time and won't allocate the resources to what I have long argued is their most important mission: Investor Protection.
At the SEC, whistleblowers cool their heels awaiting the untimely payment of their justly earned Awards, and the federal regulator's docket fills up with alarming numbers of new rule proposals and old rule revisions and lots of proposed studies and public comments and, well, everything and anything other than boots-on-the-ground enforcement against fraudsters. At FINRA, well, we got lots of videos and notices and seminars but it all tends to look more like speed traps designed to generate fines. Sadly, there is no all-powerful Wizard of Wall Street.
Come back tomorrow.
Do not arouse the wrath of the great and powerful SEC and FINRA.