by Howard Haykin

A registered rep ("Broker") with Watts Capital agreed to pay a $15K fine and serve a 10-month suspension to settle FINRA charges that he accepted a personal loan of $13,310 from a customer without notifying or obtaining pre-approval from his member firm. FINRA adds that, in an attempt to conceal the loan from the firm, Broker twice altered the firm’s engagement letter with the customer, thereby causing its books and records to be inaccurate.

IN 2015 A CUSTOMER ALLEGED THAT …  “on August 28th 2015 [broker] entered into a client service agreement (CSA) with [customer], LLC on behalf of Watts Capital, LLC for which he received prior supervisory approval. [Broker] made amendments to the CSA on 10/6 &10/12/2015 without his supervisor knowledge and stored all related records on his personal computer. On 10/6 he change[d] the agreement to include contracting his personal services as CFO and website developer. On 10/12 he amended the agreement to include an upfront payment of $13,310.00 in lieu of waiving future fees for raising capital. On 10/12 [Broker] invoiced the client $13,310.00 for the upfront fee on Watts Capital LLC letterhead and instructed the client to wire the funds directly to his personal bank account without the knowledge of his designated supervisor.”

IN RESPONSE TO CUSTOMER DISPUTE, [BROKER] COMMENTED THAT … “in my opinion the client did not allege, nor incur, any damages. The $18,685 sought were advance payments for a website ($5,000) and interim-CFO role ($13,685). the $18,685 was returned to the client. From this time, and through October 27th, 2015, the client consistently praised, without any criticism, the work product. On October 29th, 2015, the client terminated the agreement with the firm, disparaged the work product, and demanded funds be repaid. By way of a settlement, client readily took ownership of all the work product and received the advance payments back.”

IN ITS 2015 FORM U5 FILING, WATTS CAPITAL ALLEGED THAT … “[Broker] made several amendments to the client service agreement without consulting his supervisor and stored all records on his personal computer. He made several substantial changes to the agreement without the knowledge of his supervisor, to offer his personal services as CFO and change the terms to include a upfront payment. Based on the amended agreements he invoiced the client $13,310.00 on Watts Capital LLC letterhead and instructed the client to wire the funds directly to his personal bank account without the knowledge of his designated supervisor.”

IN RESPONSE TO WATTS CAPITAL’S FORM U5 FILING, [BROKER] COMMENTED THAT … “The role of CFO for the client at issue was at the request of the client, and outside the scope of what the firm was licensed to do. As such, in my opinion, direct payment to me was appropriate. All correspondence related to this were through the firm's email system. In my opinion, the firm was aware that all work that I did was on my personal laptop computer, particularly since the firm did not provide me with a work computer, let alone a desk. The GSA only required that executed agreements be approved. amendments did not have the same express requirement, nor did the firm object on previous occasions when amendments were made for other clients.”

FINANCIALISH TAKE AWAYS.    Whether or not this case involved unauthorized borrowings from a customer or unapproved outside business activities, the broker was largely at fault and deserving of the FINRA sanctions. Which is rather unfortunate, because this seemingly ‘above board’ and ‘fully disclosed’ customer service agreement ['outside business activity'?] quickly morphed into violative conduct that ultimately cost the Broker his job, $34,000, and a 10-month suspension. YEOW!

Where did the Broker apparently go wrong? 

• He wrongly implied that the firm was aware of the changes he made to the Customer Service Agreement because “all correspondence related to this were through the firm's email system.”
• He wrongly believed that “the GSA [the CSA?] only required that executed agreements be approved; while amendments did not have the same express requirement.”

This case was reported in FINRA Disciplinary Actions for January 2018.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015048056501.