A cursory review of FINRA's AWC and Disciplinary Action for September reveals the "hows" but not the "whys" an ING Financial Partners Principal enabled a Registered Rep under his supervision to misappropriate $8 million from firm customers.  Registered Principal Timothy Cross, an RR since 1986 and a General Securities Principal since 1997, had no prior disciplinary history prior to this case.  And based on the information presented by FINRA, he was aware, or should have been aware, of out-of-the-ordinary activities and observations that would raised most persons' concerns. But it didn't elicit that response from Principal Timothy Cross, who agreed to settle FINRA charges that he failed to adequately supervise a Registered Rep who misappropriated the customer funds.  Perhaps he was complicit in the crime.  After all, he ultimately was fined $10K and suspended 6 months as a principal - a relatively small price to pay for sharing (this is our presumption) in an $8 million booty. As will be noted below, Principal Timothy Cross was aware, or should have known about transactions were taking place outside the firm and that bank accounts were being used as depositories for commissions and customer checks.  He also should have know that the monies that were deposited into the accounts far exceeded what the RR could possibly be earning from sources he knew about. Nevertheless, by all indications, Cross failed to conduct or failed to document findings from his required inspections of the RR.  This would only seem to infer that Cross was failing or abdicating in his obligations - although we cannot be sure whether he did so knowingly or unknowingly.  In any case, we know that his efforts, or lack of efforts, effectively enabled the RR to ultimately take more than $8 million from firm customers.   Scheme Carried Out by Rogue Broker. During a period beginning no later than 2006 and continuing until February 2010, the RR devised and carried out a scheme to defraud her clients and convert their funds to her own use and benefit.  In addition to serving as an RR with ING Financial Partners, this individual sold fixed insurance products and acted as an investment adviser and financial planner.  She also was the sole owner of a firm ("B&A"), through which she conducted business.

As part of that scheme, the RR persuaded her clients to liquidate their existing investments, including accounts at the Firm, for the purpose of purchasing other investments, including mutual funds and annuities. At her request, the clients made checks payable to B&A, which the RR deposited in a bank account in the name of "RB/B&A Wealth Management" ("the Personal Account").  Rather than use the funds to purchase other investments, as she told the clients she would do, the RR diverted their funds to her own personal use. In order to conceal her conversion of the clients' funds, the RR prepared and sent to  the clients false account statements from the Firm, from another member firm, and from an insurance company. Those  statements purported to show that the clients owned securities and other investments, which the RR knew they did not actually own. The RR concealed the Personal Account from the Firm, although her employees knew of its existence.   Commissions from her securities business were deposited into another account at the same bank, in the name of "B&A Wealth Management" ("the Business Account"), which was also used to pay the RR's payroll and other business expenses.  Some of her other commission income, including commissions for sales of JNL annuities, were deposited in the Personal Account. The RR frequently withdrew funds from the Personal Account and deposited them into the Business Account in order to cover her expenses.  When the RR's supervisors asked to see her bank account records, the RR or her staff provided copies of statements for the Business Account.

Through her fraudulent scheme, the RR converted to her own use and benefit at least $8 million from at least 38 clients, including customers of the Firm.  She also made untrue statements of material facts in connection with the offer and sale of securities and omitted to state material facts necessary in order to make the statements she made, in light of the circumstances in which they were made, not misleading. Timothy Cross's Failures as Supervising Principal. Cross supervised the RR from March 2004 until February 2010, when the RR's registration with the Firm was terminated.  His duties included conducting an annual inspection of the RR's office, preparing a written report of that inspection, and reviewing and approving RR's P&S blotters. FINRA found that, when the RR persuaded clients to liquidate existing investments, for the purpose of purchasing other investments, she instructed them to make the checks payable to an entity Cross owned and with which she conducted business. Rather than use the clients’ funds to purchase the other investments, she diverted their funds to her own personal use.  FINRA found that in order to conceal her conversion of the clients’ funds, she prepared and sent to the clients’ false account statements, and she concealed from the firm the personal bank account where the clients’ funds were deposited. Cross received at least once a month from the RR a blotter that listed purchases and sales processed through direct applications to issuers;  he also received reports from the firm’s insurance affiliate, which showed the representative’s insurance sales activity, except for the business she conducted with other insurers. Some of the RR's outside insurance business was conducted through Cross’ insurance agency;  Cross was therefore able to track all of the RR's business except for a portion of her outside insurance business. FINRA found that the RR's income from her securities business and from insurance business conducted through the firm’s affiliate was not sufficient to pay her expenses; and that, although it was obvious that the RR had additional income, Cross didn't attempt to determine the source of that income.  In addition, FINRA determined that the securities blotters Cross reviewed showed numerous sales of securities by the RR's clients but without concurrent purchases with the proceeds.  Again, Cross made not note of the liquidations shown on the blotters and/or inquire as to the disposition of proceeds from those sales. FINRA further found that Cross's inspections of the RR's office, which was supposed to be based on an inspection checklist, required him to conduct a complete review of checking accounts for each "DBA" and outside business activity accounts owned or controlled by the RR, as well as any other accounts where commissions are deposited, including business accounts, DBA accounts and personal accounts.  These reviews, at a minimum, should have disclosed the existence of the outside bank accounts and the activities taking place through them because ... Timothy Cross was aware, or should have been aware, that other bank accounts existed.  Yet, he accepted at face value the RR's explanations that the RR's business account was her only bank account. So, for whatever personal reason, Cross looked the other way or simply chose to aid and abet the RR's activities - whether or not he realized the scope of her misappropriations.  Alternatively, he was having an affair with this RR, or simply was smitten with her beauty and did not want to "cross" her.  In any case, he essentially abdicated his supervisory responsibilities by failing to document such information.  Had he complied with his duties, the findings would have indicated or raised enough red flags for others to question whether any crime or violation was taking place. Sanctions. Cross agreed to a $10K fine and a 6-month principal or supervisory suspension, and agreed to re-qualify as a general securities principal by exam before associating with any member firm in that capacity. For further details, go to:  [AWC #2010021640302, Reporting in FINRA Disciplinary Actions for Sept. 2011].