[ by Howard Haykin ]

Increasing Risk that Low Producers will Misappropriate Funds.

C-I's coverage of the FINRA Quarterly Disciplinary Review for October 2012, kicked off on Friday with a post about brokers who Share Commissions With an Unregistered Individual and then cover it up from their Firm.  Click it, read it, guard against it. 

FINRA's next warning for firms relates to 'down on their luck" registered reps - those generating low commission and margin interest revenues because they can't pull their timid customers off the sidelines and back into the market.  As a result, customer deposits and insurance payouts can be very tempting to a "starving" broker. 

Fraudulently Misappropriating Customer Funds. A recent FINRA case involved a registered rep ("RR")  who misled 2 customers to convince them to transfer $100,000, which the RR promply misappropriated.  One customer transferred $47,000 to the RR on the belief his money would be invested in corporate bonds. Instead, the RR allegedly deposited the funds into his personal bank account, and used it entirely for personal expenditures.

A 2nd customer was told his money would be invested in CDs.  Yet, the customer's $53,000 transfer also was allegedly diverted into the RR's personal bank account.  No CDs were ever purchased.  Such transgressions would violate Section 10(b) of the Exchange Act (fraud); Exchange Act Rule 10b-5 (fraud); NASD Rules 2120** (fraud), 2330(a)† (customers’ securities or funds) and 2110‡ (ethical standards), and FINRA Rules 2150(a) (improper use of customer funds) and 2010 (ethical standards).  The RR was barred from the industry.

To continue reading other cases, go to:  [FINRA Quarterly Disciplinary Review, October 2012].