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Compliance Concepts

FINRA Arbitration Panel Grants Expungement Based on Head-Scratching Logic

June 19, 2019

by Howard Haykin


It’s disconcerting when associated persons of a broker-dealer apparently turn a blind eye to red flags, suspicions or concerns that involve a broker. It’s similarly disappointing when FINRA arbitrators disregard basic logic and essentially condone the inaction of those same associated persons.
Let's circle back at the end and consider what FINRA might do to mitigate the risks to customers.



A Detroit, MI-based FINRA arbitration panel recently decided to grant expungement relief to respondents in a case arising from the alleged misappropriation of customer funds by Ernest Julius Romer, a former broker with CoreCap Investments. The Arbitrators found that the Respondents - Romer’s supervisor and sales assistant - were not involved in his alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds, based on the following rationale:


The Panel received information regarding Romer's criminal activity. This activity was concealed from [supervisor] and [sales assistant]. CoreCap Investments, their supervisors (including [supervisor]), and [sales assistant] could not have discovered this activity through the appropriate compliance reviews because it was being conducted outside of the firm. There was no evidence that these individuals were involved. A criminal investigation was conducted that resulted in Romer's incarceration for his actions. Neither [supervisor] nor [sales assistant] were implicated in Romer's illegal activity.  [FINRA Arbitration Decision 17-02794]



A DECISION BASED ON INCREDULOUS LOGIC.    That decision did not sit well with Bill Singer who, in his BrokerAndBroker blog, expressed concerns that: (i) the Respondents’ failed to act on suspicions and concerns even though Romer’s had a sordid disciplinary history that was commonly known and was readily accessible on FINRA’s BrokerCheck; and, (ii) the Arbitration Panel’s decided to excuse or condone the Respondents' failures to act even though they had ‘front row seats’ to Romer’s violative conduct at CoreCap Investments and undoubtedly had suspicions. Instead, the Arbitration Panel opted to refer solely to Ernest Romer’s 9 criminal convictions.


Bill Singer appropriately points to Romer’s 23-year disciplinary history that was an open book to anyone who know or understands the brokerage industry. For CoreCap Investments, the process of vetting Romer should have begun when he was hired. BrokerCheck offers numerous vantage points into Romer's career, which reveal, among other things, that this broker held a disregard for rules, regulations, and basic ethics:


  • As of June 18, 2019, Ernest Julius Romer had compiled 51 disclosure events during his 23-year brokerage career.
  • As of October 2012, when he first arrived at CoreCap, Romer had compiled 10 disclosure events, including 3 for-cause terminations.
  • By January 2017, when he was U5’d by CoreCap, Romer had compiled 5 more disclosure events plus his 4th for-cause discharge (from CoreCap).
  • By October 2017, when the Statement of Claim was filed, FINRA BrokerCheck had 30 disclosure events on file for Romer.
  • The list of disclosure events included 3 Regulatory Sanctions filed by FINRA, and 4 Regulatory Sanctions or Investigations filed/conducted by the State of Michigan.





And lest we forget these further insights from Bill Singer:

Some industry veterans and pundits might have you believe that Romer just appeared at his more recent brokerage firms out of the clear, blue sky. He was for all appearances a choir boy. No one should have had an inkling, a suspicion, a concern. Nothing should have tipped anyone off. No one should have seen a red flag or smelled smoke. Yeah, sure, that's how it was. He came to us for a job. We checked him out. Didn't see anything too out of the ordinary. After all, he wasn't barred from the biz by NASD, FINRA, any State, or even the SEC. If he's good enough for them, why shouldn't we have hired him? 



FINANCIALISH TAKE AWAYS.    FINRA can only reactively respond to the types of issues raised in this post. However, one proactive measure that FINRA might want to consider would be requiring member firms to distribute to new and/or prospective customers print-out summaries of BrokerCheck backgrounds and disciplinary histories of firms and assigned brokers. Such printouts would not only provide investors with valuable insights, but they might prompt broker-dealers and their associated persons to 'clean up their acts'.