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Regulatory Sanctions

Troubled Events of Past and Present Can Stick to a Broker Like ‘White on Rice’

June 26, 2019

by Howard Haykin



I’m all for giving second chances, and I appreciate that hindsight is 20:20. Yet I have a hard time getting past patterns of troublesome events and/or financial difficulties in a person’s CRD file history - which I believe often indicate what one might expect about that person’s future. And knowing financial services as I do, I recognize that hiring a potentially dishonest or troubled person can ratchet up risks to customers and firms.



Take, for example, a broker who joined Growth Capital Services in 2015. Though he had only 6 months of experience as a registered broker, he had been employed for 11 years (working in some capacity) for a state-registered investment advisor, and prior to that had significant non-financial services business experience dating back to the 1980s. That said, this broker had a persistent pattern of red flags in his CRD files on BrokerCheck:


  • 9 Judgments/Liens from 1992 to 2011, including:
  • 6 tax liens relating to a failed business for which he had been CEO and a minority stockholder.
  • 2 civil liens relating to an airplane he supposedly owned that he said was stolen from an airport.


  • One Customer Dispute that apparently was settled in February 2015:
  • It pertained to a July 2014 contract that called for him to develop and place a private stock offering, for which he received a $5,000 fee (Note:  At that time, he was not registered nor associated with a broker-dealer.) 



WHAT WENT WRONG.    The broker agreed to pay a $5K fine and serve a 7-month suspension to settle FINRA charges that he forged the signature of his member firm’s CEO on a document that purported to be a private placement engagement agreement involving the firm and an issuer.


According to FINRA, in June 2017, while registered with Growth Capital, the broker acted through his approved outside business to negotiate a private placement engagement agreement with an issuer to facilitate a potential offering. The broker signed the contract on behalf of his approved outside business, but before he would receive a $5,000 retainer fee from the issuer, the agreement had to be signed by Growth Capital – which, under the agreement, was to market any potential offering. The broker forged the CEO’s signature on the document, even though he didn’t have the CEO’s permission to do so, and the CEO didn’t even know about the purported engagement agreement.



OTHER VIOLATIVE CONDUCT.   FINRA notes that the broker also used an unauthorized outside email address to communicate with the issuer about the agreement. He typically deleted emails on his personal accounts on a weekly basis and as such, did not retain those business-related communications.
FINRA didn't note, however, that this broker seemingly violated his approved outside business activity ('OBAs') by entering into (or at least negotiating) private securities transactions ('PSTs') within the context of his OBAs. [A surprising oversight.]



FINANCIALISH TAKE AWAYS.    Given the red flags in the broker’s CRD files, along with the added fact that he never terminated his employment with the state-registered investment advisor (he stayed employed until December 2017), I’m not at all surprised by his subsequent violative conduct at Growth Capital.


If anything, I wonder about the depth of due diligence that Growth Capital Services conducted on this broker prior to associating with him in May 2015. And, if I may be permitted to throw in some hindsight, I'm not only troubled by the nature of the 2014 Customer Dispute - i.e., that he engaged in activities requiring securities registration - but by the similarities in terms and conditions (and circumstances) between the 2014 and 2017 contracts – cited, respectively, by the broker in the Customer Dispute and by FINRA in its AWC Letter.



While second chances are admirable, they sometimes can be misguided.



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

For further details, click on ...  FINRA AWC #2017056786501.