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FINRA'S "Catch and Release" Program

There has long been a dark underbelly to the investment world, filled with boiler room firms, often with presumptuous British sounding names, and the brokers who staff them. It's almost like a nightclub circuit- the same performers turn up at the same firms on a rotating basis, migrating from one to another. Once someone finds themselves employed in this netherworld of broker/dealers, it's as if they were tarred and trapped forever for the rest of their working lives. Almost none break through to a “bulge bracket” firm like Merrill or UBS, or go on to make an effort at professional development.

The compliance officers for these firms also remain in the same circuit. I know of one compliance officer whose employment history reads like a “who's who” of well known boiler rooms. If one ever gets shut down, he moves on to another one with a similar reputation. All of his working years have been spent locked in an employment death loop of shady operators, and he's forced to be a cop in a company full of recidivist felons. I don't know how they live with the conflict embedded in their working lives. The firms they work for have no intention of obeying the rules, but there must be a compliance staff, and they've got the job. They also accept another risk: “Failure to Supervise” is an offense that can carry stiff fines, so unless the company is willing to reimburse them for not catching infractions, there is a chance of financial punishment that comes with the job. So how do these firms exist for years on end, and the people who work in them are allowed to continue in the trade? Blame it on a regulator who relies on recidivism to line their own pockets: FINRA.

For an example, take a look at the following list of fines and arbitrations from a local broker who was recently barred from the industry, starting over 18 years ago:

1996- Failure to follow instructions

Damage requested: $175,000

Damages Granted: $15,000

1997- State regulator alleges unethical practices- issues cease and desist order.

Fined $2000, barred from doing business in the state for a year.

1998 – Restricted by a neighboring state by the local regulator, by virtue of the employing broker/ dealer's compliance track record and reputation.

2000 - Unauthorized trades

Damage Requested: $14,000

Damage awarded: $15,0000

2000 - Unauthorized transactions

Damage requested: $200,000

Damage awarded : $15,000 in judgment

2002 - Misrepresentation

Damage requested: $13,000

Damages granted: $6000

In 2008, this broker becomes a part owner of a well known bucket shop. It racks up several violations and is involved with arbitrations regarding various infractions.

2013 - Breach of contract, unsuitability, fraud, violation of federal securities law.

Damages requested: $300,000

Damages granted: $166,000

2013 - Wired over $250,000 to his personal account from an asset pool of client funds.

In 2013, a funny thing happens: the broker duly reports a public lien on his U-4, as required by industry regulations. This is a prime example of how FINRA works:

A rogue broker can get away with multiple infractions or cost clients millions over a period lasting decades, but for pity's sake, please follow their procedures, or their could be consequences.

2015 – At long last, probably due to that last bit about simply absconding with a quarter million dollars of client money, FINRA takes action, and after a lengthy investigation and hearing process, permanently bars the broker from the industry in any capacity, and ends a career spanning eighteen years and no less than sixteen broker dealer firms. He leaves a trail of ruin for perhaps hundreds of individual investors behind him, who will never see redress or have use of the assets he squandered. Best of all, with a rap sheet like this, the broker is appealing the bar.

This is, after all, the only career he knows.

So, why does FINRA play this catch and release game for years on end with thousands of notorious players who have no intention of employing best practices, honing investment skills, or simply trying to do the right thing? For the same reason the boiler rooms operate- it pays well. The last thing FINRA wants to do is shut down the cash cows that allow its senior executives multi-million dollar salaries, plus a boatload of generous benefits that few, even in the private sector, will ever see. Compare this to the salary of SEC Chair Mary Jo White, the Chief Regulator of financial markets in the nation: $165,300.

So FINRA has no incentive to clean up the industry, because if these recidivists had their careers abruptly ended- say, for this character, 15 years ago, when he demonstrated no intention of actually “investing” a client's money - that puts an end to a reliable income stream for them. Never mind the clients who had been victimized for over a decade afterwards.

Perhaps my favorite example of FINRA's mindset was on a compliance report they generated:

FINRA settled a matter involving a registered person who willfully failed to disclose his criminal history on a Form U4. The registered person submitted a Form U4 to FINRA in June 2008. In response to a question that asked whether he had ever been charged with a felony, he falsely answered “no,” even though he had been charged with the criminal felony of first-degree burglary two years prior. The registered person also falsely answered “no” to the questions of whether he had ever been convicted or plead guilty to a misdemeanor involving the wrongful taking of property and whether he had ever been charged with a misdemeanor. In 2001, he had been charged with the misdemeanor offense of property theft by check, to which he plead guilty.

FINRA found that the registered person’s failures to disclose were willful and violated

NASD Rule 2110* (ethical standards), NASD Membership and Registration Rule IM-1000-1‡ (filing misleading information as to registration), and Article V, Section 2(c) of the FINRA By-Laws (application for registration). As such, FINRA fined the registered person $5,000 and suspended him in all capacities for six months.

That's right. A person who actually went into someone's home or place of business and physically removed items of value, and later tried to pass off a phony check, was merely given a suspension and allowed to resume selling securities to the public again. Somehow, I don't think this fellow is going to be of service to anyone. Except perhaps FINRA, when they decide to look at his records after a “decent interval.” It should net them another penalty, and like the example above, the catch and release program will run its course until he's no longer any use to them.

I used to see FINRA “executives” at industry conferences. When you see a cop in a $1000 suit, custom shirt and gold cuff links, chances are he's no better than the criminals he claims he's trying to catch.

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