An executive at a small brokerage firm is accused by FINRA of of failing to supervise a broker who engaged in unsuitable penny stock trades, and after the affected client complained, the firm improperly agreed to guarantee the client against losses. As part of that guarantee, FINRA said Freedom Investors got the customer to agree not to file a complaint with FINRA.
Let's review - failure to supervise, unsuitable trades, unsuitable penny stock trades, guaranteeing a client against losses, obtaining agreement not to file a complaint with FINRA.
The fine? Let's be fair - the fine and penalty depends on the details. There are different degrees of failing to supervise, depending on who the supervisor is, the conduct, and who is being supervised. The details of the guarantee make a difference, and given FINRA's history of overstatement in its charges and press releases, it is possible that is a very mild, borderline "guarantee." Finally, we don't know what that agreement says about filing a "complaint with FINRA." If it is referring to a regulatory complaint, that is a problem. If they are referring to an arbitration complaint, it is not an issue at all. You can settle with a customer and have him agree, as part of the settlement that he is not going to sue you - that is the point of the settlement. But you cannot settle with a customer and get him to agree not to cooperate with FINRA in an investigation. That is a significant violation.
Referencing FINRA's own Sanction Guidelines, the starting point for FINRA's Enforcement Staff when they bring a case says: impeding FINRA investigation, a fine of $2,500 to $50,000, PLUS a suspension of one month to two years. Guaranteeing a customer against a loss, a fine of $2,500 to $25,000 plus a suspension of 30 days, or up to 2 years or a bar in egregious cases.
When I started looking into this my thought was that the penalties were too low. Using the guidelines, that may not be the case. Again, it depends on the details, but a $30,0000 fine and a 90 day suspension is within the guidelines. There are commentators who are arguing that the fine is a wrist-slap. Keep in mind that the supervisor did not do anything wrong to the customer, and the fact that he will be out of work for three months, with no compensation, plus a $30,000 fine, that sanction is not exactly mild.
Now add this to the mix - "His testimony, under oath, was at times both evasive and contradictory, thus highlighting the system's inadequacies." that is not good, and surely will increase the amount of the fine.
The real question is what would the fine and suspension have been if the broker was an executive at one of the thousands of small brokerage firms in this country. First, a 90 day suspension for an executive can be quite damaging to a small firm, as you lose a member of what is by definition a small management team for a quarter. But I have significant doubts that an executive of a small firm with that type of charge would have gotten a 30 day suspension - a year would have been more like it.
I don't know Mr. Blumenschein and as a defense attorney, I am happy for him that he was able to resolve the case with FINRA. But what is FINRA thinking? The man is on FINRA's Board of Directors! He gives "evasive and contradictory" answers during the investigation, he guarantees a customer against a loss, you suspend him for a month, and you let him stay on the Board, setting policy and making decisions that affect the whole industry?
Mr. Blumenschein may very well be a terrific Board Member, but what sort of message is FINRA sending by having him stay on the Board under these circumstances?
