Recently, I was approached by a former investment banking associate (“the former associate,” “the ex-associate,” “my former associate client, or “my ex-associate client”) who, over two years after she quit her employment with a brokerage firm in Manhattan City and began working as a vice president, in a non-registered capacity, with a financial services firm, was being investigated by the brokerage firm and by the Financial Industry Regulatory Authority, Inc. (“FINRA”) for repeatedly and successfully submitting to the brokerage firm, for reimbursement, receipts for meal orders which the ex-associate had doctored to appear to comply with the brokerage firm’s reimbursement policy for after-hours meals at the office. I persuaded FINRA to discontinue its investigation of my ex-associate client for lack of jurisdiction. If you are a professional in the financial services industry, call FINRA Investigations and Disciplinary Actions Lawyer David S. Rich.
A few years ago, the then-investment banking associate quit her employment with the (FINRA member) brokerage firm. At the same time, she began employment as a vice president, in a non-registered capacity, with a large financial services firm (the “large financial service firm” or the “financial services firm”) in Manhattan.
Throughout the associate’s employment with the brokerage firm, the then-associate had been a registered representative with several securities licenses.
The financial services firm which, in 2016, the then-associate joined was not, itself, a member of FINRA. As a result, upon leaving the brokerage firm and joining the financial services firm, the then-associate ceased registering with FINRA.
More recently, 25 months after my ex-associate client left the brokerage firm, the brokerage firm had launched an internal investigation of dozens of its employees, including my ex-associate client. This was for altering the time stamps on e-mailed receipts for dinner orders to appear to conform to the brokerage firm’s policy for late-night meals at work.
(In the brokerage firm’s internal investigation, the brokerage firm had sought to interview my ex-associate client about whether she had photoshopped receipts for meal orders that the ex-associate had successfully submitted, to the brokerage firm, for reimbursement. On my advice, my former associate client had declined to be interviewed by the brokerage firm.)
After conducting its internal investigation, the brokerage firm completed and filed an amended Form with securities regulators U-5 (Uniform Termination Notice for Securities Industry Registration). The amended Form U-5 stated that, on multiple occasions, my ex-associate client had successfully submitted to the brokerage firm, for reimbursement, receipts for meal orders which the ex-associate had altered to ostensibly comply with the brokerage firm’s policy for reimbursing employees for late-night meals at work.
In effect, the brokerage firm had alleged, on the amended Form U-5, that the brokerage firm’s internal investigation found that the former associate violated investment-related statutes, rules, or regulations.
As a result, FINRA dispatched an inquiry letter to the ex-associate asking for a signed, written statement replying to the firm’s allegations. FINRA’s inquiry letter also demanded that the ex-associate produce records relating to the firm’s charges.
FINRA made these requests under FINRA Rule 8210, which requires brokers, advisors, and other registered representatives to provide information and records. The former associate retained my law firm to represent her in FINRA’s Rule 8210 investigation of her.
I interviewed, at length, the former investment banking associate. In addition, I obtained from the ex-associate and reviewed all records relating to the Termination Explanation included in the former associate’s amended Form U-5. In interviewing the broker and reviewing the records, I discovered that the ex-associate had committed serious violations of securities rules.
Like many brokerage firms, the brokerage firm for which the ex-associate had worked reimburses employees for food that they order when, to work on deals and other assignments for clients, the employees stay late in the office. However, under the brokerage firm’s policy, only meal orders placed at 7:30 P.M. or later are eligible for reimbursement.
The brokerage firm intends this policy to prevent employees from ordering dinner, at the firm’s expense, on normal workdays (that is, on workdays on which employees don’t work late).
On at least six or seven occasions, the former associate (i), using an online platform for food ordering and delivery, and before 7:30 P.M., had ordered from restaurants, and had caused to be delivered to the brokerage firm’s offices, dinners for the associate and for a number of the associate’s coworkers, for which meal orders the restaurants e-mailed receipts to the ex-associate, (ii) had then intentionally altered the time stamps on these dinner order receipts to make it appear that she had ordered the meals after 7:30 P.M., and thus that the meals were eligible for reimbursement, and (iii) had successfully submitted to the brokerage firm, for reimbursement, these doctored meal order receipts.
By repeatedly forging or falsifying receipts to obtain, from the brokerage firm, reimbursements to which she was not entitled, the former associate had converted the brokerage firm’s funds. As a result, the ex-associate violated FINRA Rule 2010. See, e.g., In re Thomas, No. 2017053262901, at 2-3 (FINRA Dep’t of Enforcement Feb. 7, 2019). FINRA Rule 2010, entitled “Standards of Commercial Honor and Principles of Trade,” states: “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”
FINRA’s Sanction Guidelines provide that, for securities rule violations by respondent registered representatives such as forging or falsifying receipts for expenses, (i) the monetary sanction is a fine of $5,000 to $155,000, (ii) “FINRA is to consider suspending the respondent individual for a period of two months to two years,” and (iii) where the falsification of the document(s) “is accompanied by significant aggravating factors, a bar from the securities industry is standard.” FINRA, Sanction Guidelines 37 (Mar. 2019). Therefore, FINRA was likely to impose harsh penalties on my ex-associate client for her repeated falsification of receipts for meal expenses.
FINRA’s By-Laws authorize it to exercise regulatory and enforcement jurisdiction (i), based on conduct that began while the respondent individual was a registered representative, over any individual whose registration with FINRA ended within the past two years and (ii) over any “associated person.” See FINRA By-Laws art. V, § 4(a).
FINRA Rule 1011(b) provides that the term “Associated Person” includes, among other entities and individuals, “any person engaged in investment banking or securities business controlled directly or indirectly by a FINRA member firm whether such person is registered or exempt from registration under the FINRA By-Laws.”
My ex-associate client’s registration with FINRA ended more than two years ago when the ex-associate ceased working for the brokerage firm.
However, the FINRA investigator who’d drafted FINRA’s inquiry letter to my ex-associate client (“the FINRA investigator”) argued, to me, that FINRA was authorized to investigate my ex-associate client because the ex-associate supposedly was an “associated person.” In the FINRA investigator’s view, this was so because my ex-associate client was purportedly employed by the FINRA member subsidiary of the large financial services firm.
I offered, to the FINRA investigator, my ex-associate client’s employment agreement and paystubs. These documents demonstrated that my ex-associate client was employed not by the large financial services firm’s FINRA member subsidiary but, rather, by a non-FINRA member subsidiary of the financial services firm.
Further to the FINRA investigator, I proffered securities filings showing that the financial services firm has more than 700 non-FINRA member subsidiary companies. These 700 non-member subsidiaries employ more than 20,000 people, most of whom are not registered with FINRA.
In telephone conversations with the FINRA investigator, I explained that the fact that my ex-associate client’s employer and a FINRA member firm were subsidiaries of the large financial services firm did not make the ex-analyst an “associated person” within the meaning of the FINRA Rules.
In other words, I maintained, to the FINRA investigator, that the fact that my ex-associate client’s employer and a FINRA member firm were two of the 700 subsidiaries of the large financial services firm did not render the ex-associate “a person engaged in investment banking or securities business controlled directly or indirectly by the FINRA member firm.” See FINRA Rule 1011(b).
I pointed out to the FINRA investigator that FINRA, by continuing to investigate my former associate client for falsifying receipts for expenses, necessarily would be asserting that FINRA likewise has jurisdiction to regulate, investigate, and discipline every one of the 20,000 other non-registered employees who, like my ex-associate client, work for one of the financial services firm’s 700 non-FINRA member subsidiary companies.
I observed, to the FINRA investigator, that the drafters of the FINRA Rules, in defining an “associated person,” did not mean to confer, on FINRA, such exceedingly expansive authority to regulate, investigate, and punish non-registered individuals.
On consideration of these points, the FINRA investigator notified my ex-associate client, in writing, that FINRA had decided to discontinue its investigation for lack of jurisdiction of my ex-associate client.
In discontinuing its investigation of my former associate client, FINRA implicitly conceded that, as I maintained, it lacked the authority to investigate or to punish my ex-associate client for altering receipts for meal expenses.
Given (i) the gravity and numerosity of my ex-associate client’s breaches of securities rules, and (ii) the breadth of FINRA’s definition of an “associated person,” see FINRA Rule 1011(b), this dismissal of FINRA’s Rule 8210 investigation of my ex-associate client with no monetary fine and no suspension, bar or other sanction was a greatly favorable result. Indeed, this discontinuation of FINRA’s Rule 8210 investigation of my former associate client with no punishment was the optimal result.
Fortunately, and as a result of the exceptional ‘acquittal’ I obtained for my ex-associate client in FINRA’s investigation, the ex-associate retained her employment, as a vice president, with the large financial services firm. So, because I persuaded FINRA to discontinue its investigation of my ex-associate client, my client maintained her career (which had been jeopardized by FINRA’s investigation) and continued to support her family.
If you are an employee in the Manhattan area securities industry and FINRA has dispatched you an inquiry letter, call FINRA Investigations and Disciplinary Actions Lawyer David S. Rich at (347) 970-5550.
If you are a securities industry professional in the Manhattan area and FINRA has called you to testify under oath in an on-the-record interview, call FINRA Investigations and Disciplinary Actions Lawyer David S. Rich at (347) 970-5550.
Likewise, if you are a professional in the financial services industry in the Manhattan area and FINRA has brought a formal disciplinary action against you, call FINRA Investigations and Disciplinary Actions Lawyer David S. Rich at (347) 970-5550.
David S. Rich is the founding member of the Law Offices of David S. Rich, LLC,
a Manhattan Employment and Business Litigation Law Firm, in New
York City and in Englewood Cliffs, New Jersey...View Profile