The Blog Of The Securities Industry Professional Association

A Head Scratching FINRA Verdict



Recently the National Adjudicatory Council (NAC)has been raising eyebrows with a variety of new rules, sanction guidelines and some decisions that are quite confusing to say the least.  Recently we wrote ‘Broker Beware” in which the NAC will now be recommending a lifetime bar for unsuitable trading and other infractions.  Last month the NAC issued a decision that on the surface seemed pretty standard but if you read the whole verdict its nothing less than shocking.  

Respondent Merrimac Corporate Securities entered into a settlement with FINRA to settle a variety of charges stemming from two rogue brokers who formed an unapproved outside business and then proceeded to run a ponzi scheme out of it.  Merrimac agreed to the findings of lack of supervision and a fine of $100,000.  There was however no way the firm could afford to pay the fine and based on the needs and financial condition of the firm, both Merrimac and FINRA went off to hearing to allow a hearing officer to decide if Merrimac has the financial means. The fine of $100,000.00 was in front of the NAC subcommittee for review on ability to pay.  The NAC affirmed the previous decisions and agreed that Merrimac had to pay the fine and gave detailed reasons, which made sense to any logical person.  However at some point the NAC decision took a strange twist when they wrote:

“In addition, Merrimac provided no evidence that it tried to raise capital or borrow money. Stephen and Thomes testified that it is unlikely that the Firm can raise capital because of other pending FINRA matters (i.e., pending arbitrations against the Firm and another FINRA disciplinary action). As to whether Merrimac could get a loan, Stephen acknowledged that he had not actually attempted to get a bank loan for the Firm or tried to obtain other sources of financing.” 

That’s right, the NAC thinks Merrimac should be raising capital and selling private equity in order to help pay for a fine that was from a Ponzi scheme.  If Merrimac did in fact do this, wouldn’t they essentially be running a Ponzi?   NAC wants them to raise money so FINRA (previous debtor) gets paid with new investor money.  This seems to be a shocking way to pay for a regulatory fine.  They want to ask investors, who are supposed to be the primary concern of FINRA, to sign a private placement offering knowing that the first $100,00.00 of the offering is going to fill their own accounts?.  It’s also bewildering that they suggest that Merrimac should get a bank loan to pay for the FINRA fine.   Who came up with this decision, the guy who created reverse mortgages?  Telling a company to borrow what would basically amount to a 30 year mortgage in order to fill FINRA pockets seems a little far out there.  It’s also an indication of how out of touch with reality the NAC and its members are.  They have no clue what it’s like to raise capital in this current environment.  It’s tough enough to raise money today for a private company that has a new technology and no disclosures or blemishes. Do these members of NAC really think a PPM that states: Use of Funds:  “Pay $100,000.00 fine to FINRA” is going to be well received by investors?  Are they aware of the amount of legal work that would have to be done just to get a legal opinion and due diligence?  The legal and due dillie letters would probably exceed $100,000.00  I get the feeling they have not walked into a bank lately by suggesting he attempt to get a bank loan.  Four years ago, I refinanced my home down from about 22 years to a 15 year fixed rate and had equity in the home.  It was a long winded nightmare of paperwork and giving blood samples to get Wells Fargo to give us the loan.  Does NAC think banks give out unsecured loans to people like they did years ago?

This head scratcher is very telling of the growing disconnect between the Boards of FINRA and the real world industry that brokers and small firms live in.  On a side note, the firm was unable to pay the imposed fine and on May 15th the firm sent dozens of employees home and filed a BD withdrawal. Would it not have made more sense to set up a victims fund and keep the company in business so there could be some sort of recovery?  what do you think?  please feel free to share your thoughts.

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June 15th, 2015



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