Martha Stewart apparently is not alone in her creative approach to document management.
During a recent NASD examination, a broker/dealer could not locate originals of every new account form requested by the regulator, so it set about preparing replacements. Unfortunately, the firm cut a few corners with the new documents, and the NASD caught the following indiscretions: a) The produced forms were not originals; b) The names of so-called preparers had been added on a signature line without such individuals' authorization or consent; c) The forms were backdated; d) The firm and its personnel lacked documentary confirmation supporting the recreated customer information, investment objectives and risk-exposure disclosures.
For this the b/d was censured and fined $37,000. The advising principal was fined $7,500 and suspended 10 business days in all capacities. The providing principal was fined $15,000 and suspended for nine months in all capacities.
Leave That Monkey Alone
It's an oft-quoted lament that on a given day at a securities firm, at least one mismarked order ticket will emerge — and that will be the ticket the regulators ask for.
Similarly, we all know about the box of records that was destroyed in the basement flood or lost in the move to the new offices or thrown out by mistake. It happens.
When it comes to regulatory investigations or litigation in general, what's done is done; and if something is missing, they are eventually going to find out.
Skilled regulatory defense lawyers will warn against doctoring or fabricating any materials — no matter how sincere the motives or how detailed the explanations of the imperfect record keeping.
Lawyers can often sound like nagging mothers when it comes to matters like these. But let's face it: Mothers are right most of the time. Remember when your mom counseled you about that little pimple on your face on the eve of the prom? “Leave it alone,” she told you. But you didn't listen, and that little blemish quickly mushroomed into something the size of a pumpkin.
It's important to note in the case above, though, that the advising principal was charged by the NASD even though there was little evidence he had any direct involvement in the documentary monkey business.
The NASD decision states three pertinent facts about the advising principal. First, he only advised the b/d to prepare substitute forms. Second, it was the producing principal who prepared the substitute documents, and he did so without the advising principal's participation. Third, the advising principal failed to ensure that the firm disclosed the nature of the substitute forms to the NASD.
Essentially, the advising principal was charged with advising his firm to do something — notwithstanding the fact that the NASD specifies that whatever the firm did was accomplished without his participation.
Let's apply this logic to another crime: A friend tells you he's broke, and you suggest he go rob a bank — then he goes and does it. You don't buy the gun; you don't drive the car; you don't participate in the planning or execution in any way, yet the police charge you when they catch your friend.
This is not far off from what's going on in the securities industry today. You can get in trouble for doing something; i.e., preparing substitute documents. You can get in trouble for not doing something; i.e., not participating in the preparation of substitute documents.
You can get in trouble if someone asks your opinion, but do nothing more. You can get in trouble if you don't tell a regulator that someone else submitted a substitute document without your participation.
The regulators' hypersensitivity to misconduct should serve as ample warning to anyone considering actions that might “set the record straight.”
Listen to mother: Leave it alone.
Writer's BIO:
Bill Singer is a partner with the law firm of Gusrae, Kaplan & Bruno.
rrbdlaw.com