by Bill Singer
If You Like Sausage, Don't Read This
August 14, 2008
By Bill Singer,
William Donald Redfern ("Respondent"), a former registered representative with Bear, Stearns & Co., Inc. ("Firm"), was charged by the New York Stock Exchange (NYSE) with having:
- Caused his member firm employer to violate NYSE Rule 405, in that he failed to use due diligence to learn the essential facts relative to a customer of his member firm employer, the customer's orders and/or the customer's accounts.
- Caused his member firm employer to violate NYSE Rule 405, in that he failed to communicate to his member firm employer the essential facts relative to a customer of his member firm employer, the customer's orders and/or the customer's accounts.
- Violated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade, in that he facilitated the purchase of United States Treasury Bills in a customer account to effect the appearance that the account had certain assets on its books to satisfy foreign tax authorities.
- Violated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade, in that he facilitated the purchase and sale of money market funds in a manner intended to obscure the paper trail of those funds.
- Violated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade, in that he failed to inform his member firm employer of relevant negative information relating to a customer and the customer's accounts.
A NYSE Hearing Board ("Panel") found that Redfern violated NYSE Rule 405 (Charges I and II) by failing to communicate to his Firm information about unusual or suspicious transactions in a customer's account that were indicative of money laundering. Charge V was dismissed and Redfern was found not liable for Charges III and IV. The Panel imposed a penalty of censure, a four-month bar and a $75,000 fine. Redfern sought a review of both the liability determination and the penalty. In the Matter of William Donald Redfern, NYSE Hearing Panel Decision 07-131 (August 3, 2007)
NYSE Rule 405: Diligence as to Accounts
Every member organization is required through a general partner, a principal executive officer or a person or persons designated under the provisions of Rule 342(b)(1) to
(1) Use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization and every person holding power of attorney over any account accepted or carried by such organization. . .
Redfern appealed the Panel's decision and sought a review of both the liability determination and the penalty imposed. On May 13, 2008, the NYSE Committee for Review ("CFR") convened to hear oral argument of the parties and subsequently recommended to the NYSE Regulation Board of Directors ("Board") that the Hearing Panel's findings on Charges I and II be reversed, and the censure, fine and suspension imposed by the Panel be vacated. The Board approved the CFR's recommendation.
In reversing the Panel's decision, the Board noted that the Firm had identified the "red flags" presented by the customer at issue when Redfern sought to open the accounts. As such, the Firm was on notice of unusual or suspicious aspects of the customer account that suggested money laundering. The Firm notified Redfern that the Firm would be conducting due diligence before permitting the accounts to be opened. Moreover, the Firm told Redfern that the customer's accounts would be subject to heightened supervision.
Clearly, the Firm either knew the essential facts about the customer and his accounts and chose not to act or, inexplicably, chose not to use its existing resources to fulfill its Rule 405 duties. As detailed in the Board's decision, the arsenal for detection at the Firm's disposal included its Compliance Department, Senior Management, Branch Managers, Legal Department, and Lexis/Nexis Research. Although Redfern certainly had his own obligations as a registered representative that he may not have fulfilled, NYSE did not prove that Redfern "caused" the Rule 405 violation which is the charge at issue in his appeal.
There is a somewhat esoteric point of law/procedure involved in the final disposition of this case. NYSE charged Redfern with causing Bear Stearns to violated NYSE Rule 405 because he failed to adequately communicate information that he was alleged to have had and that was allegedly unusual or suspicious and suggested of money laundering. In a nutshell, the charge was that but for Redfern's "silence" the Firm would not have violated the rule and money laundering activities would have been prevented. The problem with that conclusion is well explained by the Board. First, the Firm manifested a concern about the customer because it alerted Redfern when he opened the accounts that there was concern--the red flags were waving in the wind and noted. In furtherance of its detection of suspicious activity, the Firm specifically told Redfern that it would conduct due diligence before allowing the opening of the accounts. As in keeping with the old biblical admonition: The Firm had eyes but saw not and had ears but heard not. Even the Board described the Firm's failure to detect the facts as inexplicable.
Now, let me provide you with some of the facts in this case. I have presented this matter in a somewhat inverted manner because it was important to separate the legal/procedural basis for the overturning of the findings and sanctions from the (quite frankly) lurid details.
Redfern was employed at the Firm from 1994 through 2002. In May 1994, SR(a 33 years old
citizen of Russia, who maintained a business address in Moscow, Russia and a residence in Luxembourg) opened a securities account in his own name at the Firm. Redfern was assigned to SR's personal Firm account. On the new account form for this account, SR's occupation was listed as the Chairman of a certain Russian bank ("Russian Bank A"), which was chartered by the Central Bank of the Russian Federation. SR's annual income and net worth were listed as $3 million and $15 million, respectively. In July 1998, SR left his position at Russian Bank A. Subsequently, during 1998 to 2000, several other accounts besides SR's personal account were opened at the Firm, of which SR was the beneficial owner or had a beneficial interest (the "Accounts"). The Accounts included two accounts in the name of a commercial bank located in Russia ("Russian Bank B") and five accounts in the name of a private investment company ("Investment Co. A").Russian Bank B was a commercial bank with offices in Russia. SR's wife, who used a different last name from SR, was listed on the new account forms as the bank's President and had trading authorization for the two accounts, opened in August 1998 and February 1999. SR was listed as the bank's secretary. Russian Bank B's annual income was listed as $15 million and its net worth as $100 million. At the time Russian Bank B's accounts were opened at the Firm, Respondent was aware that SR controlled these accounts.
Investment Co. A was a limited liability company incorporated in Belize whose stated purpose was to invest in securities and real estate. The five Investment Co. A accounts at the Firm were opened between September 1998 and December 2000. At various times, Investment Co. A notified the Firm that its address of record was in Ireland, Belize, or the Channel Islands. SR was an officer of the company, as was his wife. During the period the Investment Co. A accounts were open at the Firm, other individuals not related to SR also were directors of the Investment Co. A accounts and had written authorization to give orders to buy and sell securities and to wire funds to and from the accounts. SR was the owner of and exerted control over the Investment Co. A accounts. Investment Co. A's annual income on the new account forms was variously listed as $10 million and $20 million and its net worth as $100 million and $250 million.
During 1998 to 2002, the equity in the Accounts ranged from $50,000 to $12 million, and there were 20 or more wires to the Accounts, totaling over $20 million, and 95 or more wires from the Accounts, totaling over $18 million. On approximately 145 occasions, a total of over $15 million was journaled between the various Accounts at the Firm.
As early as 1995, SR was the subject of reports in the Russian media alleging fraud and financial improprieties at Russian Bank A while he was Chairman. Redfern, who was fluent in Russian, became aware of those allegations. Over the next several years, SR was the subject of numerous stories detailing allegations of a $27 million financial scandal and that he was "on the lam" in Luxembourg.
I commend to you the details of the Panel decision and the Board reversal, which you can read at http://www.nyse.com/pdfs/07-131.pdf You will likely find your mouth ajar and eyes widened as you read more of the facts. I suspect that many of you will shake your head in disbelief when you try to reconcile the facts with the outcome. That's fine. Sometimes the best law is forged from unsettling facts and unpopular defendants. Sometimes the best regulation arises from the most noxious pile of garbage. Perhaps it will help if you keep Otto Von Bismarck's sage advice in mind:
Laws are like sausages, it is better not to see them being made