John Coghlan was living a charmed life in 2001. He worked at Merrill Lynch's San Diego office, leading a group of registered reps and sales assistants working in his area of expertise: retirement planning. Moreover, he had a marketing plan and approach that was humming along. He conducted retirement-planning seminars for employees of corporations, and supplemented that effort with mail and phone solicitations.
A Matter of Style
In January 2002, during an internal audit of the San Diego office by Merrill's compliance department, the auditor reviewed some of Coghlan's marketing material, which had been approved by the San Diego office and submitted to Merrill's headquarters for the final OK. In the interim, Coghlan's managers allowed him to distribute the marketing material.
Following the audit, Coghlan and some other San Diego employees met with representatives from the compliance department, the office of general counsel and the vice president of retirement services in Merrill's headquarters on Feb. 8, 2002.
It was agreed that the marketing material had to be altered to better comport to Merrill's preferred style and protocol. Coghlan was told that he could continue to conduct his seminars, but that he could not use the marketing material until Merrill's marketing and legal departments had approved the requested changes. After the meeting, Coghlan's branch administrator and his district administrative manager reiterated that only Merrill-approved marketing materials could be used at seminars and in other marketing activities.
Subsequently, a member of Coghlan's group made changes to the marketing material based on the New York meeting, then reviewed the revisions with the branch administrator. At a seminar on March 14, 2002, that had about 15 people in the audience, Coghlan distributed or made available the revised marketing material, which had not been approved by the marketing and legal departments.
An Unsettling Settlement
On March 25, 2002, Coghlan resigned from Merrill during an internal review concerning his distribution of the marketing materials. On May 16, 2002, the NYSE notified him that he was under investigation. Coghlan agreed to settle. Without admitting or denying the allegations, Coghlan consented to a finding that he distributed to the public marketing letters and sales literature that had not been properly approved in advance. In tossing in the towel, Coghlan agreed to a censure and a $50,000 fine. Frankly, that's usually the end of the case.
In a shocking break with tradition, the NYSE panel reduced the fine to $25,000 — notwithstanding that Coghlan had agreed to settle for twice that amount. In slashing the fine, the panel noted that:
Coghlan's violation involved only one meeting at which he distributed revised material to 15 members of the public;
The original version of the material distributed had issues relating only to style and protocol;
Changes were made locally to the material based on the discussions at the New York meeting (although, admittedly, the changes had not yet been approved by the marketing and legal departments); and
The misconduct in the precedent cases cited by the NYSE in support of the agreed-to sanction was significantly more serious than Coghlan's.
Sometimes it just makes sense to settle; you cap your legal fees. You know with certainty how long and how much, rather than throw the dice in a contested hearing. You get on with your life.
However, sometimes you have to insist upon a fair settlement or, in the absence of such an agreement, climb into the ring and fight the good fight. Sadly, too many regulators think that a settlement is an opportunity to get as much as they can.
Enforcement actions must be better than the tactics used at a used-car lot, where shady hucksters paint one number on the windshield, have another they will agree to and yet another that miraculously arises as you leave the premises. It's time for the industry's cops to put an end to these unseemly negotiations.
Writer's BIO: Bill Singer is a practicing regulatory lawyer and the publisher of RRBDLAW.com