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CCO’s Memory Lapse No Excuse for Not Reporting Dealings with Statutorily Disqualified Person
by Howard Haykin
Thaddeus North was fined $40K and suspended from serving as a principal and supervisor for 3 months for having allegedly committed several violations, including this charge which is addressed in this post: while he was chief compliance officer (CCO) at his member firm, North failed to report to FINRA that an associated person at the firm was involved in a business activity with a statutorily disqualified person.
North continues to deny all charges and has appealed the case to the SEC. At a FINRA hearing, North asserted that, for much of the time period at issue, he neither knew about, nor had reason to know about this relationship. He added that, by the time he learned of it, he concluded that he was not obligated to report it because FINRA already knew about the relationship or at least was investigating it.
BACKGROUND. The case centers around 3 players - Thaddeus North (Supervisor), Ms. Leslie King (RR), and Todd Cowle (statutorily disqualified person).
► Thaddeus North, who first became registered in 1994, has been registered with 7 firms – including Southridge Investment Group, a Ridgefield, CT-based broker-dealer, from 2008 to 2011. Southridge had around 50 registered reps, who operate out of at least 3 branch offices.
During the relevant period, July 2009 to August 2011, North served as Southridge's CCO, while retaining the following registrations: a general securities principal, registered options principal (ROP), general securities sales supervisor, general securities rep, equity trader limited rep, and investment banking limited rep. North is currently registered with another member firm.
► Ms. Leslie King, while associated with Southridge, was registered as a General Securities Rep, General Securities Principal, and a Municipal Securities Principal. At Southridge, she primarily effected inter-dealer and customer trades in muni bonds and government securities. Prior to joining Southridge, she was associated with Southwest Texas Capital, where she worked with the statutorily disqualified registered rep in question – Todd Cowle.
► Todd Cowle had become statutorily disqualified from associating with any FINRA member firm after a disciplinary hearing panel found in November 2007 that he had had willfully failed to update his Form U4 to reflect federal tax. He was terminated by Southwest Texas Capital in June 2009.
FINRA FINDINGS. While at Southridge, Leslie King continued her business dealings with Todd Cowle. Under a services agreement between their respective entities, King Asset Management (KAM) agreed to pay Cowle’s Ultimate Tier Advisors (UTA) - for: (i) "[i]ntroduction to business relationships; (ii) unlimited phone calls to UTA regarding “research, business strategies and/or any business advice;" and, (iii) training sessions.
Over the next 2 years (July 2009 through September 2011), KAM received and paid at least 42 invoices from UTA totaling $605,365 for various services, which included Cowle introducing King to individuals who were bond brokers at certain broker dealers. A FINRA investigator testified that "it appeared" King was also sharing her commissions with Cowle.
North apparently knew nothing about the relationship until March 2010, when FINRA was conducting a routine examination of Southridge. While gathering documents for FINRA, North obtained invoices from King that UTA had issued to KAM. He looked at them briefly, saw the reference to UTA, and sent them on to Southridge’s CEO, who was also Leslie King's supervisor. The invoices were produced to FINRA examiners, who then requested applicable agreements. It was at that point that either North or Southridge’s CEO first saw the Services Agreement, which was forwarded to FINRA for its inspection.
FINRA notes that North did not question King about the agreement at that point in time. Nor did he investigate the relationship between UTA and King. Nor did he attempt to learn the details about UTA. Later on, at the hearing, North explained his lack of due diligence: “I don't think I would ever look at a company – if Leslie hired a cleaning service, I wouldn't look at the cleaning service and try to find out who owns it and who operates it and things like that.” Besides, he observed, there was nothing on the face of the Services Agreement that struck him as "illegal or immoral."
However, around the time North saw the UTA invoices, he realized that King was involved in a business relationship with Cowle - though it's unclear whether this realization occurred after produced the invoices for FINRA in March 2010, during FINRA's investigation in December 2010.
FINRA notes that, regardless of the timing, North did not investigate the King-Cowle relationship, and instead left it up to Southridge's CEO to conduct any follow-up. FINRA adds that, after learning of the relationship, North did not check to determine if Cowle was statutorily disqualified.
That failure was relevant because, in the summer of 2009, shortly before Southridge hired Leslie King, the CEO had considered also hiring Todd Cowle. However, Cowle was not hired after North ran a CRD report that found Cowle to be statutorily disqualified.
During his hearing, North testified that months later, when he finally learned of the Cowle-UTA connection, he did not immediately remember that Cowle was the person that Southridge had declined to hire because he was statutorily disqualified. But around the time when FINRA began sending the Finn information requests during the investigation, North said, he “put two and two together" and remembered that Cowle was the statutorily disqualified person whom the Firm had considered hiring.
However, at no time did North ever report to King’s business relationship with Cowle to FINRA.
Based on its findings - and the fact that Southridge's WSPs required the Firm, through North, to report to FINRA if one of its associated persons was involved in certain activities with a statutorily disqualified person - FINRA concluded that North should have known of the relationship and should have followed up by seeking all relevant details of the associated persons’ relationship with the statutorily disqualified person. Having failed to to do so, North then failed in his obligation to report the relationship to FINRA.
This case was reported in FINRA Disciplinary Actions for June 2017.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2010025087302.