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Regulatory Sanctions

Hard to Pinpoint How the ‘Wheels Fell Off the Wagon’ for this Broker

May 2, 2019

by Howard Haykin


In late 2016, a broker with Louisville, KY-based J.J.B. Hilliard, W.L. Lyons was hit with a customer dispute alleging poor performance in their accounts. That dispute was denied. Yet, over the next 2 years, the broker was hit with 12 more customer disputes and one FINRA disciplinary sanction. And in October 2018, the broker voluntarily terminated his registration with the firm.
So where's the disconnect? First, this broker had no customer complaints and no disciplinary disclosures during his first 20 years in the business. Second, FINRA's findings don't reconcile with customers' accusations.



FIVE CUSTOMER DISPUTES THAT WERE SETTLED OR WENT TO ARBITRATION.    The broker settled four of the customer disputes, while a fifth went to arbitration (claimant awarded $445K); all told, the five disputes cost this broker around $1.3 million. A common theme of these disputes was that the broker conducted unauthorized, unsuitable, and/or excessive trading in the customer accounts. One customer claimed that, as early as 2011, the broker's failure to properly diversify his or her account, exposing the portfolio to significant risk.



SIX CUSTOMER DISPUTES THAT REMAIN PENDING.    The large number of pending cases means that the broker is likely to be burdened for years to come. And, here too, the broker was accused of conducting unauthorized, unsuitable, and/or excessive trading in the customer accounts. 



FINRA INVESTIGATION AND SETTLEMENT.    In February 2019, broker agreed to pay a $5K fine and serve a 15-day suspension to settle FINRA charges that he exercised unauthorized discretionary trading in customer accounts. FINRA found that the broker placed 75 total trades in 4 customers accounts between January 2014 and December 2015 - which averages to just over 3 trades per month in all the accounts combined.  [REALLY!?]  And of course, FINRA found that the broker failed to obtain express or written authorization from those customers for those trades prior to placing them. The broker also never sought or obtained Hilliard Lyons’s acceptance of the accounts as discretionary.



FINANCIALISH TAKE AWAYS.    Not only was it difficult to pinpoint how the ‘Wheels Fell Off the Wagon’ for this broker, it was hard identifying an overarching theme for this FINRA case. After all, how does one reconcile FINRA’s light findings and sanctions against the litany of serious charges leveled at the broker by his customers - other than to postulate that attorneys often exaggerate the charges against their clients' brokers?


Armed with accusations of unauthorized, unsuitable and excessive trading, FINRA managed to find ... just 75 trades over a 2-year period that were exercised without proper authorization. And the slap-on-the-wrist sanctions are further indication that FINRA was unable to substantiate the more serious customer accusations leveled by 11 of the broker's former customers.


Perhaps the biggest take away of the case: Success on Wall Street can be fleeting, and everyone is susceptible or capable of violative conduct. 



This case was reported in FINRA Disciplinary Actions for April 2019.

For further details, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2017054060301.