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Regulatory Sanctions

After Years of Lies, Unauthorized Discretion and Large Commissions, A Broker is Barred

October 19, 2017

by Howard Haykin


Kim Isaacson , a veteran broker, agreed to be barred from the industry to settle FINRA charges that, during telephone calls with a customer, he intentionally and repeatedly provided the customer with false information about the actual value of the customer’s member firm accounts.


BACKGROUND.    Isaacson, a resident of Farmington, UT, had been in the industry 38 years with 8 firms – all wirehouses and large regional firms - including Morgan Stanley, with whom he was associated from December 2008 until February 2014. In submitting its Form U5, Morgan Stanley reported that Isaacson voluntarily terminated his employment while [being] the subject of an internal review regarding allegations that he provided a client inaccurate information about the client's account performance. Since leaving Morgan Stanley, Isaacson had been with Ameriprise. All told, Mr. Isaacson holds these licenses: Series 1 (Registered Rep); Series 7; Series 63; Series 3 (Registered Commodity Rep); Series 65 (Investment Advisor); and, Series 9 and 10 (General Securities Sales Supervisor).


FINRA FINDINGS.    This case involves “HM,” Isaacson’s long-standing client who's 71 years old. Over the past 19 to 20 years, the two developed a close business relationship and HM retained Isaacson as his broker even as he moved from firm to firm.


In or around December 2009, one year after joining Morgan Stanley, Isaacson devised a 6-part asset allocation plan for HM's accounts – 17 accounts with a combined value of approximately $27 million. The plan used a conservative-to moderate risk strategy with a 20-year investment horizon and a targeted rate of return of 4% to 6%.


From January 2010 - the time Isaacson put the asset allocation plan into play - until January 2014 (the “Relevant Period”), Isaacson generated nearly $400,000 in commissions and advisory fees from HM's accounts – around 18.5% of Isaacson’s total commissions earned during that period.


During the Relevant Period, Isaacson and HM spoke by telephone nearly every day regarding the performance of HM's accounts. During these telephone discussions, HM requested a daily update of his account values and often expressed concern about the portfolio strategy that Isaacson devised. Isaacson responded by reassuring HM that the strategy employed was long-term and performing as expected, and that fluctuations in account values were typical.


Where/When Did Things Go Wrong?   


  • By May 2010, when HM's accounts incurred a loss of more than $445,000, Isaacson opted not to tell HM about the losses. Instead, he began providing false and inflated account values during their near daily telephone conversations, and he concealed the fact that HM's accounts were not earning the 4%-6% target returns.


  • Isaacson was trading HM’s accounts – most of which were non-discretionary - without having proper discretionary authority. While the pair spoke almost daily during the Relevant Period, Isaacson did not inform HM of, or seek HM's approval for, the specific transactions he effected in HM's accounts. All told, during the Relevant Period Isaacson effected some 360 purchases and sales of securities - including stocks, bonds, UITs, futures, variable annuities and mutual funds.


  • On 2/18/11, Isaacson purchased 2,697 shares of Petrobras in one of HM's Firm accounts over which Isaacson had discretionary authority. However, shortly thereafter, HM told Isaacson that he didn’t want to be invested in Petrobras and directed Isaacson to sell the shares. Isaacson told HM that he executed the sales even though he did not. In fact, Isaacson continued to purchase Petrobras shares on HM's behalf through August 2013, resulting in HM's holding 16,000 shares of Petrobras in one of his discretionary accounts.


  • Similarly, in early 2012, HM instructed Isaacson to sell any bond positions with a maturity of more than 3 years in his accounts. Isaacson disregarded HM's instructions and continued to purchase bonds with a maturity of more than 3 years - without ever informing HM of these transactions. All told, Isaacson bought such bonds in HM's non-discretionary accounts on at least 21 occasions from June 2012 to November 2013.


  • Finally, on 1/3/14, after Isaacson provided an accounting of his client’s Morgan Stanley accounts - original account balances, the amounts earned, amounts withdrawn, and final account balances - HM noted that the figures were significantly less than the amounts Isaacson had previously represented to HM during their daily telephone calls.


  • During a meeting on 1/10/14, Isaacson “confessed” to HM that he had been providing false and inflated account values during their telephone calls over the Relevant Period, and he admitted that HM's accounts had actually earned $3.1 million less than the amounts Isaacson previously represented to HM during the Relevant Period.


  • At that same January 10th meeting, Isaacson offered to privately settle HM’s complaint, including restitution of ~$2.6 million. HM did not accept Isaacson’s proposal and shortly thereafter reported Isaacson’s conduct to Morgan Stanley.


FINANCIALISH TAKE AWAYS.    There are some disconnects, here. First as it pertains to the client.


Disconnect #1.   HM seemed to understand investments – to the extent that he knew he didn’t want to hold Petrobras stock and that he didn’t want to hold of bonds with maturities beyond 3 years.  Yet, from 2010 through 2013, did HM ever look at his monthly customer statements? If he had, he probably would have noticed the “long-term” bond holdings and the Petrobras stock. The implication that he never reviewed his customer statements is downright disturbing - even though I can appreciate the fact that reviewing statements for 17 or so brokerage accounts can be a chore.


A further question is whether HM had brokerage accounts elsewhere – and if he did, why wouldn't he have employed a third person (e.g., a CPA) to look over his investments? Unfortunately, we have no way of answering these critical questions and issues.


Disconnect #2.   Next up is the illogic demonstrated by this 35-year Wall Street broker. First, if HM had placed blind faith in his broker, why did Isaacson seemingly panic in 2010 when his new investment strategy tripped out-of-the-gate with a $445,000 loss? Such an unrealized loss amounted to less than 2% of HM’s $27 million portfolio. Isaacson then compounded the problem by never owning up to the losses, and he later disregarded his client’s instructions about Petrobras stock and “long-term” bonds. The longer one perpetuates lies, the greater the risk that those lies will be discovered.


Isaacson also used discretion in accounts when he was not authorized to do so. This issue could have been readily resolved – either by getting discretion over all accounts; or, by getting approval for transactions during his daily briefings.


While 20:20 vision is relatively easy after the fact, Isaacson seems to have acted foolishly, particularly for a Wall Street veteran of 35 to 38 years. Perhaps Isaacson lulled himself into believing that he could do no wrong – or that he'd never get caught. Another thought is that, when dealing with a client whose accounts are throwing off a significant flow of annual commissions, why risk “upsetting the apple cart?” Unfortunately, GREED AND HUBRIS will continue to have a place on Wall Street.


This case was reported in FINRA Disciplinary Actions for August 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014040199101.