It's one of those stories that makes an advisor realize: That could have been me.
In September 1999, Customer X and her husband transferred their son's custodial account, a joint account and two retirement accounts to Advest. In August 2002, after the servicing rep left the firm, the accounts were transferred to Glenn Albert Hamler, who, in all likelihood rues the day he inherited them. It was the custodial account that would be his undoing. Comprised of four positions (two U.S. Treasury STRIPS due in 2005 and 2006 respectively, and shares in a Euro Pacific Growth Fund and a Capital Income Builder Fund), the account had a total value of $44,443 in 2003.
Early in March 2003, Customer X's husband instructed Hamler to sell the STRIPS and the Euro Pacific Growth Fund in the son's account, and to prepare a check. Hamler made the sales and the firm issued two checks payable to Customer X valued at $34,114.84. The husband picked up the checks later in the month.
The astute among us can see where this is heading: The husband was actually stealing this money from his estranged wife and their son, and Hamler has been caught in the middle of the man's scheme.
Hamler's fatal mistakes were failing to get Customer X's authorization for the sales and in never having obtained Customer X's authorization for her husband to place orders or give instructions for the son's custodial account.
As basic as his missteps might seem, let's not pretend that he is an aberration. In a routine transaction such as this, it's all too easy for a rep to find reasons to ignore proper procedure. The assumption here could have been that the man would never steal from his son. Or maybe Hamler reasoned that he couldn't cash the checks, which were payable to his wife. Or maybe he was guilty of a sexist assumption that the husband was actually the custodian.
Regardless, the mistake caught up with Hamler when Customer X received her son's account statement and promptly advised Hamler that the sales were unauthorized. Further, her husband was not living at home and he had not given the son the sales proceeds.
The firm reimbursed the customer the full $34,114.84, half of which Hamler agreed to contribute. Thus ended Part I of the story. Enter Part II.
Dredging Up the Past
On May 1, 2003, NYSE Enforcement received a Form RE-3, Submission of Required Information Pertaining To Members, Member Organizations, Allied Members, Registered and Non-Registered Employees from Advest reporting the Customer X matter. During the course of the investigation, the firm advised the NYSE of a prior customer complaint against Hamler.
It seems that in a letter dated June 5, 2002, Customer Y, the executor of his brother's estate, advised Hamler to liquidate the estate account on June 17, 2002, and to issue a check because the estate planned to make a final distribution of assets. Hamler failed to follow the customer's instructions to liquidate the estate account on the requested date.
When the customer complained about the delay, Hamler liquidated the account in transactions effected June 27 through July 2, 2002. The firm reimbursed the customer for the loss that had occurred as a result of Hamler's conduct. Hamler contributed the entire amount of the $2,279 settlement.
After reviewing both matters, the NYSE charged that Hamler:
Violated Exchange Rule 408(a) by accepting orders from a person other than the customer without first obtaining the written authorization of the customer.
Engaged in conduct inconsistent with just and equitable principles of trade by facilitating the issuance of checks against the account of a customer by an unauthorized person and for failing to follow a customer's instructions.
The NYSE imposed a censure and a one-month suspension in all capacities. (See Glenn Albert Hamler [SFC/NYSE Hearing Panel Decision 05-43/April 14, 2005].)
In the end, Hamler's missteps are understandable. He wasn't thinking that Customer X's marriage was on the rocks, and he might even be forgiven if his thinking was influenced by outdated, but deeply ingrained societal traditions, such as males being heads of financial households.
But that doesn't make his actions any less punishable. The facts are very clear: The wife was the custodian of the account at issue, and Hamler should have called her for authorization to buy or sell and to cut checks.
Given the fact that Advest apparently never even reported the Customer Y matter, it seems that the dispute was destined for the dustbin before Customer X resurrected it.
The lesson to be learned in Hamler is that if there's a book, you have to go by it — and in this case the page was dog-eared and well worn.
You cannot take trading instructions from anyone other than the authorized party. Not from the husband, the son, the wife, the grandfather, the business partner…no one other than the name on the dotted line.
It's a simple rule. So simple that it's easily forgotten.