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Regulatory Sanctions

'Off-the-Books' Broker Gets Barred from the Industry

December 28, 2018

by Howard Haykin


A broker spent 31 years with 3 firms, and had a spotless record for 30 of those years. No fines, no sanctions, no terminations for cause, no customer complaints. So what did he do wrong that got him barred from the industry? Let’s just say, he was good at keeping his ‘private clients’ happy … for many years!



Over a 31-year career, a California-based broker worked for 3 brokerage firms: LPL Financial, CBIZ Financial Solutions, and Montage Securities/Mariner Wealth Advisors (“Employer Firms”). For nearly 20 of those years, this broker also served his private clientele, serving as an ‘off-the-books’ investment advisor and tax preparer.


From 1996 to 2016, his 'public' and 'private' lives never intersected - that is, until December 2016, went it all came apart. First, Montage Securities and Mariner Wealth Advisors terminated him for cause noting that the broker was “named an ‘Interested Party’ on the [outside brokerage] accounts of several individuals, none of whom were clients of Mariner Wealth Adviors.” FINRA followed up with an investigation and put together the details of this broker’s private career.


FAILURE TO DISCLOSE DISCRETIONARY AUTHORITY AND OUTSIDE BROKERAGE ACCOUNTS.    From May 1996 through October 2003 and from June 2005 through December 2016 (the "Outside Account Period"), while associated with the 3 aforementioned broker-dealers, this broker had discretionary authority from 50 individuals to effect securities transactions in their 87 outside brokerage accounts. During the time he was associated with Montage (2012 through 2016), the broker executed more than 2,800 common stock and bonds trades in these 87 accounts, with a total value of more than $30 million. For his efforts, he received $103,000 in compensation.


Yet, throughout the Outside Account Period, the broker never notified the Employer Firms about the Outside Accounts or the trades he effected in those accounts. Nor did he notify the 2 executing broker-dealers of his association with the Employer Firms. Furthermore, on 5 occasions during the Outside Account Period, the broker falsely stated on Montage Securities Annual Compliance Questionnaires that he did not have discretionary authority over any outside securities accounts belonging to non-family members.


The broker’s violative conduct violated NASD Rules 3050(c) and 2110 (for conduct occurring prior to 2009), and FINRA Rule 2010 (for conduct beginning around 2009).



FAILURE TO DISCLOSE OUTSIDE BUSINESS ACTIVITIES.    From March 2012 through December 2016 (the "Outside Business Activity Period"), while associated with Montage, the broker prepared tax returns for at least 18 individuals, who were not customers of Montage. The broker never disclosed these activities to Montage, and tax preparation services were not within the scope of his duties at Montage. For his efforts, the broker received $27,000 in compensation.


On 5 occasions during the Outside Business Activity Period, the broker falsely stated on Montage Securities Annual Compliance Questionnaires that he had fully disclosed his outside business activities.


The broker’s violative conduct violated FINRA Rules 3270 and 2010.



FINANCIALISH TAKE AWAYS.    In response to his termination from Montage Securities, the broker offered this defense:


With regard to the outside activities allegations, most of the activities were for no compensation and I did not intend to conceal anything from anyone. My goal was always to serve my clients to the best of my ability. Additionally, I did not intentionally mislead my firm on any compliance questionnaires and answered the questionnaires to the best of my ability and as I understood the questions.


Yet, FINRA had no option but to bar this broker. The 20-year time frame and the number of transactions were simply too excessive for FINRA to ignore. Furthermore, this broker intentionally lied on the Annual Compliance Questionnaires - a common, yet unforgivable "crime" in the regulator's view.


In the end, we learn that 'past performance is no indication of the future'. And for this broker, who had a spotless record over his first 30 years, his 31st year was a deserved 'comeuppance'.



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

For details the case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016050142601 .