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NEWSLETTERS & ALERTS
Legend Securities Travesty: Branch Manager Snoozed as Broker Churned Old, Blind Widow’s Accounts (Part I)
by Howard Haykin
What began as praise for FINRA, which (finally) took a branch manager to task for having failed to supervise an out-of-control broker, ended with unbridled criticism of FINRA and a broker-dealer's Compliance Department. As such, this case has morphed into a multi-part series: Part I is a discussion of the BOM's AWC; Part II will entail criticism of the Compliance Department; Part III will entail criticism of FINRA. Stay with me on these postings - they're individually and collectively critical in nature.
Michael Stanton agreed to pay a $5K fine and to not serve in a principal capacity for 7 months to settle FINRA charges that he failed to establish, maintain and enforce a reasonable supervisory system, and failed to enforce his member firm’s WSPs, to prevent a registered rep from churning and excessively trading an elderly, blind and physically disabled widowed customer’s brokerage accounts. [FINRA also cited Stanton's firm, Legend Securities, for these same failures.]
BACKGROUND. Stanton, a resident of Warren, NJ, has been in the securities industry for 31 years, during which time he’s been associated with 18 firms. He holds the following licenses: Series 7, Series 4 (Options Principal), Series (General Securities Principal). From February 2013 until December 2016, he was with Legend Securities, where he served as a General Securities Rep, General Securities Principal, and Registered Options Principal (ROP). He also served as Legend's Director of Capital Markets and as the Branch Office Manager (BOM) of its main branch office. He’s currently associated with a different broker-dealer.
Stanton had one similar disciplinary action - in 2006, Stanton paid $9K and served a 1-year suspension to settle charges brought by the Montana Commissioner of Securities for failing to supervise a registered rep’s activities regarding an account owned by 2 investors.
Let's begin with the “rogue” registered rep, Hank Werner. Werner, a 29-year veteran who held a Series 24 license, enriched himself at the expense of customer “DC,” an elderly, blind, and physically disabled widow. Werner did so by engaging in a manipulative, deceptive and fraudulent scheme pursuant to which he churned each of the 3 accounts DC had with Werner.
DC, who had been Werner’s customer at his prior firms, transferred her 2 IRA accounts to Legend on 2/15/13 when Werner moved to that firm. As soon as those accounts were opened at Legend, Werner began trading her accounts aggressively and without making a reasonable assessment of the suitability of his recommended aggressive trading strategy.
For nearly 3 years, between 2/15/13 and 12/31/15, Werner churned and excessively traded each of DC's 3 accounts, charging more than $232,000 in commissions and fees, and causing DC net losses of over $174,000. In conducting these trades, Werner charged DC either a principal markup or agency commission on every purchase and sale, ranging from 3.75 to 5.00% of the principal amount of the transaction. The annualized turnover rate in these 2 IRA accounts were 9.6 and 12.7.
In July 2015, upon Werner’s recommendation, DC opened a 3rd account with Werner – funded with a $45,000 withdrawal from one of the customer’s annuities. During the next 6 months, Werner placed 56 transactions, which generated nearly $20,000 in commissions and fees and a turnover rate of 18.0.
Stanton’s supervision, or lack thereof, over Werner. From the outset in 2013, Stanton was Werner’s supervisor. Legend's WSPs contained several procedures that supervisors of registered reps were required to perform to ensure that the account activity was suitable for customers – including procedures specifically related to IRA accounts, senior customers, active accounts and suitability. Stanton failed to “reasonably implement these procedures in connection with his supervision of Werner's activities concerning DC's accounts.”
Which is not to say that Stanton wasn’t aware of Werner’s egregious handling of DC’s accounts.
- On 5/3/13 – just 3 months in – Stanton received a memo from Legend's compliance department concerning the generation of large commissions from trading in one of the IRA accounts and significant trading losses.
- On 10/4/13, he received a report showing that, for September, DC's IRA accounts each had very high monthly turnover rates and very high monthly commission to equity ratios.
- On 10/18/13, he received a memo regarding trading activity since inception of the accounts – which again showed excessive commissions and trading losses.
- Further reports were received on 3/4/14 and 4/21/14.
- In all cases, Stanton apparently failed to follow up.
Stanton’s supervisory failures continued from there. Between May 2014 and December 2015, he failed to investigate whether Werner's trading for suitability, during which time his supervision consisted of reviews of daily trade blotters.
FINANCIALISH TAKE AWAY. So where was Legend Securities and its Compliance Department throughout all of this? Sending out reports and memos are meaningless unless there’s follow-up. This much I can tell you:
- Legend Securities was expelled by FINRA in April 2017, following the firm’s failure in later 2016 and early 2017 to pay arbitration awards and FINRA fees, among other things.
- The Stanton case, initiated by FINRA on 11/30/16, named both Stanton and his member firm with having “failed to establish, maintain and enforce a reasonable supervisory system, …” I bring this date up simply to indicate that (as it would appear) FINRA acted promptly once it detected or learned about the violative actions.
SO, WHO BEARS FAULT IN THIS CASE?
- STANTON. For his long-running failure to supervise Werner or to act on any of the obvious red flags. For this Stanton should have been suspended at least one year – in any/all capacities, not just as a principal
- WERNER. Per his CRD records, Werner had been in the industry for 29 years and held a Series 24 General Securities Principal license. Guess when you’ve been in the business as long as he had, you learn how and how far you can cheat.
- LEGEND COMPLIANCE DEPARTMENT. Wouldn’t you like to know if anyone in compliance was disciplined for having failed to follow up on the department’s memo and reports? I would, and if it were up to me, they would be serving time with Stanton. [More in Part II of this series.]
- FINRA. Looks like another case where FINRA failed to levy an appropriate sanction. How can FINRA justify $5,000 in fines and 7 months off as principal? Also, inquiring minds would like to know if anyone from Compliance shared in the sanctions. For issuing sanctions that are meek and provide for ineffective deterrent, I nominate FINRA for the "Financialish Hall of Shame." [More in Part III of this series.]
This case was reported in FINRA Disciplinary Actions for July 2017.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2015048048801.