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Regulatory Sanctions

SEC Rejects CEO's Appeal of FINRA Sanctions Over Net Capital Violations

July 25, 2017

by Howard Haykin


FINRA Enforcement brought a case against Keith Geary on charges he violated FINRA rules in 2009 and 2010.  He took his case to FINRA’s Office of Hearing Officers, or OHO, which issued its decision in 2014 to reject his arguments and sanction him accordingly.  Geary subsequently appealed his case before FINRA’s National Adjudicatory Council, or NAC (concluded in 2016), and before the SEC (2017). The sanctions were affirmed at each level. Might Mr. Geary now plan to take his case to the federal courts? Stay tuned.


The SEC (Acting Chair Piwowar and Commissioner Stein) sustained the sanctions imposed by FINRA’s National Adjudicatory Council against Keith Geary based on its findings that, on 2 separate instances, Mr. Geary permitted his member firm to operate while it lacked the required minimum net capital. Geary was fined $20K, suspended in all capacities for 30 days, and barred from serving in any principal or supervisory capacity – charges that Mr. Geary has appealed to the U.S. Court of Appeals for the 10th Circuit.


BACKGROUND.    Geary, a resident of Edmond, OK, has been in financial services since 1979. Among other things, he’s worked as a consultant for financial institutions dealing with interest rate risk management. In August 2007, Geary purchased Capital West Securities, which later became Geary Securities (“GSI" or the “Firm”). At GSI, Geary intended to continue serving the banks that had been his long-standing clients, while earning additional revenue from the Firm's securities business. When Geary acquired the Firm, he became its chairman, CEO, and president – while registered as a general securities rep, general securities principal, muni securities principal, operations professional, and investment banking limited rep.


When Geary acquired GSI, the Firm had approximately 50 employees. Geary kept the existing staff, including the Firm's primary FinOp (Norman Frager), an on-site accountant and bookkeeper, and the Firm's CCO and on-site FinOp. Frager was on-site at the Firm at least 2 days per month to finalize and submit the Firm's FOCUS reports. At the time Geary acquired the Firm, and throughout the relevant period which ended in April 2012 when GSI terminated its FINRA membership, the Firm was subject to a $250,000 minimum net capital requirement. Since February 2012, Geary has been registered with another FINRA member firm.


FINRA AND SEC FINDINGS.    For 2 days in May 2009, and again for 13 days across a 3-week period in January-February 2010, the Firm operated a securities business without having the required minimum net capital of $250,000.


According to the SEC, the issue here is Geary's responsibility for the net capital violations and whether his involvement was sufficient to find him in violation of FINRA Rule 2010 – i.e., requiring FINRA members and associated persons to adhere to “high standards of commercial honor and just and equitable principles of trade."


FINRA’s OHO (Office of Hearing Officers) Panel had concluded that Geary violated FINRA Rule 2010 in both the 2009 and 2010 instances. Although each incident involved different circumstances, in both cases Geary “displayed a reckless, if not knowing, disregard for the net capital requirements. FINRA Enforcement proved, as charged, that Geary permitted the Firm to continue operating a securities business when it did not have the required minimum net capital.“


  • Re: Violation #1.  Geary caused the net capital violation when he acquired in the Firm's account almost $77 million in collateralized mortgage obligations ("CMOs") without having a buyer for the CMOs. He did so even though the Firm didn’t have the money to pay for the CMOs and despite a warning by the Firm's FinOp that the Firm could not do such a transaction. The Firm, which generally made $500,000 to $600,000 per year, fell into a huge net capital deficit of $11.5 million, but it nevertheless continued conducting business. Although the violation was for only 2 days, if Geary had been permitted to implement his plan, it would have continued for weeks. Geary only remedied the deficiency at the FinOp’s insistence.


  • Re: Violation #2.  Geary knew in late January 2010 that the Firm's net capital was steadily declining and dangerously low. He was informed in early February 2010 that the Firm's net capital had fallen below the required minimum at the end of January. Nevertheless, the Firm continued doing business without the required minimum net capital for 13 days, until 2/26/10. During that time, Geary struggled to find money to cover the shortfall and was involved in discussions with the FinOp about what to do. While he knew that the Firm should stop doing business under those circumstances, Geary tried to shift blame to the Firm's FinOp for the failure to stop doing business. However, the decision was ultimately Geary's, and he “simply ignored the requirement to stop doing business.”


FINANCIALISH TAKE AWAYS.    Good intentions will get you only so far, but it will never be an excuse for violating securities rules and regulations or firm policies. With regard to Violation #2, the SEC acknowledges that Geary attempted to resolve the net capital deficiency upon learning about it on 2/4/10. He immediately transferred $75,000 in personal funds to the firm, and he sought a bank loan. Unfortunately, the loan approval was delayed through most of February while GSI's net capital deficiencies continued.


When it was apparent that approval on the loan would be delayed, another firm officer considered sending an e-mail to brokers telling them to stop conducting securities business with GSI. But after conferring with Geary and others, FinOp Frager instructed the officer "not to send out any notice to brokers" (emphasis in original) because a loan was pending and would be approved the next week. At the hearing, Geary admitted that, although Frager had previously reminded him that deficiencies required a broker-dealer to stop doing business, it was Geary's decision to continue GSI's operations despite the deficiencies.


Geary did not receive the loan or make the necessary capital infusion until February 26, but he continued to operate GSI throughout this period despite varying net capital deficiencies. GSI sent FINRA net capital deficiency notices on February 10, 12, and 26 and began daily net capital calculations on February 10, which the bookkeeper reported to Geary on a daily basis. At the SEC hearing, FINRA explained its net capital calculations showing that the firm had deficient net capital on 15 of the 17 business days from February 2 to February 25, with deficiencies ranging from $3,903 to $131,273 short of the firm's $250,000 requirement.


Geary’ purchase of the CMO when the firm did not have the capital to do so, followed by his insistence that the firm continue to do business while in a net capital deficiency – while faced with the uncertain timing of the bank loan – would appear be a blatant and egregious violation of securities rules and regulations. And his actions placed both his firm and other broker-dealers doing business with GSI at financial risk.


So, I support the regulators’ decision to bar Geary from serving in a principal or supervisory role. And frankly, I don’t fully understand why Geary has taken the case all the way to the Court of Appeals. Is it hubris, or are we missing something else?


This case was reported in FINRA Disciplinary Actions for July 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2009020465801.