A Case That Gets Curiouser and Curiouser

March 25, 2009

One reader of BrokeAndBroker.com writes the following in response to yesterday's Blog "No Margin of Error":


Look up Brochu on Broker Check-you'll find a few more details. Looks like two errors-one in income; one in expenses-netted an overstatement of year-end cash to the tune of $500,000, or 1.4%. 

Also, Brochu and Schlesinger are not just little RR's-they're principals and corporate officers (Brochu is Pres/CEO; Schesinger is VP/Director) who seem to run the joint. The firm's corporate structure looks like a spiderweb-lots of layered ownership levels and many affiliates under common control. And their BD does not show PP's as an approved business…. so maybe the FINRA folks weren't wrong in coming down on these guys. The accused had the authority to change the projections and re-do the PPM, and they certainly should have known that even if the net # was off only 1.4%, mistakes of $11 or $12 million dollars should be fixed-or at least made known to potential investors. And if this shop is not in the business of doing PP's, perhaps this finding will remind them that it's not the same as peddling mutual funds. 

Just my thoughts… for what they're worth.

That's an impressive bit of investigative work and I take my hat off to the writer.  However, let me note the following comment I made in the analysis:

Do I know this for certain? No. Why not?  Well, for one thing, FINRA doesn't tell us any of that; and for another thing, because FINRA doesn't tell us.  FINRA doesn't set forth the precise nature of the inaccuracy, and doesn't inform us what, if anything, management did with Brochu's findings. Okay, I'll make that a bit clearer: I made it up because FINRA thought such facts were apparently immaterial to our understanding of this case. Maybe, in retrospect, the regulator made a mistake in judgment and should have told us more. You know, sort of like what I think Brochu did.

For many years I have been digesting thousands of New York Stock Exchange, NASD, and SEC cases, and now add to that mix the reports from FINRA.  I have often complimented the NYSE and SEC on the comprehensive nature of their reports and cases, even if I disagree with their conclusions.  That has not been the case with the former NASD's monthly disciplinary reports or, more recently, FINRA's.  Far too often, NASD/FINRA published too little information about important cases.  That deprives the industry of context, which further waters down the valuable lessons that many disciplinary cases teach.  

The NYSE has had a long and commendable history of embedding the full settlement decision into their online squib reports.  That convenience permits readers to click on the underlying NYSE Stipulation of Fact and Consent to Penalty decision, which fully describes the parties, the facts, the findings, and the sanction.  There is no guessing game.  There is no obligation upon the industry or the public to contact NYSE to find out what's missing or glossed over, or how they can read the full case.

Such is not the case at FINRA--you have to ask to be sent an Acceptance, Waiver and Consent document.  AWCs are not embedded as a clickable link in the online monthly reports.  I have raised this issue directly with NASD and FINRA on many occasions, and am perplexed as to why the regulator continues to play this unseemly game of hide-and-seek.  Perhaps FINRA thinks it's only a minor inconvenience to require the public and industry to telephone or email the self-regulator and request a copy of an explanatory AWC.  I don't think that in this day and age regulators should be making anyone jump through hoops to get more information about industry misconduct.

The writer of the above email has inadvertently made my case far better than I could.  If we merely read FINRA's published report about Brochu and Schlesinger, we find that there are two different inferences.  One, which FINRA publicized in its monthly report, sets forth facts that could easily be inferred as not that serious and perhaps not warranting the sanctions imposed.  A second set of facts, which our intrepid subscriber to BrokeAndBroker.com seems to have uncovered, suggests a far different version of events and casts the case in a more troubling light. 

All of which raises the most troubling of all questions: Who does FINRA think it is supposed to be protecting?

I'll say it again.  FINRA's monthly cases are often useless because they do not embed the full, underlying decision (which is readily available on both NYSE's and SEC's website for similar dispositions).  In the Brochu/Schlesinger case (as clearly demonstrated by our intrepid investigative subscriber), FINRA did not "set forth the precise nature of the inaccuracy." Further, FINRA did no explain "what, if anything, management did with Brochu's findings." Perhaps, FINRA thinks these details are immaterial.  If that's the case, this is yet another example of why self regulation is a failure.  To publish one flimsy case description that gives rise to two dramatically different impressions is of no service to the public or industry. 

Here is the full, verbatim FINRA version of its March 2009 digest of the Brochu/Schlesinger case.  You can confirm the accuracy at Page 11 at http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinaryactions/p118153.pdf

David Francis Brochu (CRD #1164857, Registered Principal, East Greenwich, Rhode Island) and Jill Schlesinger (CRD #2587365, Registered Principal, New York, New York) submitted a Letter of Acceptance, Waiver and Consent in which Brochu was fined $20,000 and suspended from association with any FINRA member in any capacity for 15 business days. Schlesinger was censured and fined $10,000.Without admitting or denying the findings, Brochu and Schlesinger consented to the described sanctions and to the entry of findings that they sold Class B units pursuant to a private placement memorandum containing inaccurate financial projections. The findings stated that both Brochu and Schlesinger worked on the private placement memorandum, and that Brochu supervised registered representatives who worked on the memorandum's financial projections. The findings also stated that Brochu discovered inaccuracies in the financial projections contained in the memorandum and reported them to firm managers, but incorrectly determined that the inaccuracies were not material and did not disclose them to customers who had purchased the securities. The findings also included that Schlesinger accepted the determination that the inaccuracies were not material and should not be disclosed. FINRA found that Brochu and Schlesinger continued to use the inaccurate private placement memorandum to sell additional units. FINRA also found that a member firm, acting through Brochu, failed to establish, maintain and enforce a reasonably designed supervisory system and written procedures regarding its registered representatives' private securities transactions.

Brochu's suspension was in effect from February 17, 2009, through March 9, 2009. (FINRA Case #2006005242501)