During Timothy Freeman's employment with Morgan Stanley's Institutional Securities Operations Department, a corporate credit card for business expenses was issued to him in his name. Monthly bills were sent to Freeman's home and he was responsible for payment upon receipt.
From September to November 2007, Freeman charged $2,000 to the card. As to a $625 expense for employment-related training ($125 of which was paid in cash, leaving a $500 charge to the card), Freeman did not apply the $500 reimbursement from the firm towards the debit. In addition to the training expense, Freeman incurred $1,500 in card charges for improper personal expenses unrelated to his employment. As if Freeman's creative accounting weren't enough, he also ignored several monthly bills from the card company. By May 2008, the card company had contacted the firm concerning the then six-month-old unpaid $2,000 debit. The firm subsequently terminated Freeman and paid the debit balance.
FINRA Comes A Knockin'
Apparently, Freeman's credit card shenanigans became a regulatory matter because the Financial Industry Regulatory Authority (FINRA) decided that Freeman's actions constituted a violation of NASD Conduct Rule 2110, which requires members to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.
Freeman entered into an Acceptance, Waiver and Consent (AWC) settlement with FINRA, whereby he accepted and consented, without admitting or denying, the findings stated above, and he also waived certain procedural and appellate rights. The AWC is now part of Freeman's permanent disciplinary record, and may be considered in any future regulatory actions and is made available for public disclosure. In accordance with the AWC, Freeman accepted a three-month suspension from association with any FINRA member in any capacity. In consideration of a sworn financial statement that demonstrated an inability to pay contemplated fines, FINRA did not impose any fine. For more detail, see In Re Timothy Freeman (AWC/2008014928501).
In the recent case of Gary Steven Swiman (FINRA/2008012094801), the respondent settled a FINRA case that alleged he improperly obtained approximately $607.21 from his member firm by submitting inaccurate T&E reports and by seeking reimbursement for non-business expenses. Unlike Freeman, Swiman subsequently reimbursed the firm. In consideration of his financial status, FINRA declined to impose a fine but suspended him for two years.
In another recent case, Stephen Paul Leary (AWC/2008011999901), the respondent submitted receipts and/or other documentation purporting to substantiate alleged business expenses that he either had fabricated or knew did not document bona fide business expenses. Leary agreed to a bar.
Regulation or Collection?
Some of you may be scratching your heads over these cases. I don't mean to make light of the false expense reports and the non-payments, but these matters seem more like collections cases than regulatory ones. Of course, while not necessarily a factor in any of the above cases, there is the inescapable fact that many registered men and women suffered devastating financial reversals during the recent Great Recession. Although such economic conditions do not justify fraud, they may explain late or non-payment of bills.
Given FINRA's tarnished regulatory record in the Madoff affair, the Stanford Financial debacle, and other similar miscues, is this a sensible allocation of enforcement staff — or is this another unjustified distraction that ultimately compromises FINRA's effectiveness?
Tool of Management?
Assuming that FINRA is justified in disciplining registered persons who abuse the business expense process, why do we see so little regulatory concern for compensation and workplace abuses by member firms? Speak to enough brokers and you will hear the stories about employers who wrongfully withhold commissions (often as a post-termination maneuver) renege on salary/bonus promises, or engage in workplace discrimination/harassment. Funny thing, though — I can't find nearly as many fines and suspensions imposed upon such firms as I find imposed upon their employees for similar misconduct. When was the last time that FINRA designated such employer practices as failing to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business?
Oh, yes, I know — it's different. It's always different for member firms with FINRA. And perhaps therein lies the problem.
is the publisher of RRBDLAW.com and BrokeAndBroker.com