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Regulatory Sanctions

Go Fly a Kite, But Not in the Securities Industry

October 24, 2018

by Howard Haykin


I’m all for second chances – hell, I’ve been given second chances throughout my life. Yet, when an individual - a broker, who's 2 years into his financial services career - demonstrates a pattern of violative financial transactions, I believe that FINRA can no longer trust this individual with customer funds and securities.


From October 21, 2016 through December 30, 2016 ("Relevant Period"), while registered with Morgan Stanley Smith Barney, a broker made 17 electronic fund transfers totaling $6,975 from his personal bank account to his personal brokerage account knowing that he had insufficient funds to cover those transfers. The improper transfers artificially inflated the individual's brokerage account balance, which he used to withdraw funds for his personal use.


FINRA FINDINGS.    During the Relevant Period, this broker maintained an online savings account at a bank, as well as a brokerage account and an associated Active Assets Account with Morgan Stanley. The Active Assets Account was akin to a bank account in that it allowed for cash deposits and withdrawals and had both a debit card and checks associated with it (the "MS Account"). Banking activity in the MS Account was conducted on-line. Fund transfers from external accounts into the MS Account were available immediately up to $1,000 for accounts held 90 days or less and up to $5,000 for accounts held for more than 90 days.


As noted above, the broker submitted 17 electronic wire transfers - with individual amounts ranging from $100 to $1,250 - from his bank account into the MS Account. All the fund transfers were eventually returned for insufficient funds, which created deficits in his bank and brokerage accounts. In each instance, the deficits were cleared within a week when direct deposits of the broker's semi-monthly pay were posted to the two accounts.


Yet, before the fund transfers were returned, the broker used the temporarily inflated balance of his MS Account to purchase goods and services at restaurants, bars, hotels and Uber, make cash withdrawals, and pay monthly personal expenses. In each instance, the balance in the bank account at the time of the transfer was significantly less than the amount of the transfer effected, and the pre-transfer balance in the MS Account was insufficient to cover his spending after the transfer was completed.


The practice of writing checks or otherwise transferring money from a bank account knowing that there will be insufficient funds to cover the check or transfer violates FINRA Rule 2010.
The broker agreed to pay a $5K fine and serve a 3-month suspension to settle FINRA charges.



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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2017053148502.