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Brokerage Firms and FINRA Crack Down on Broker Expense Account Violations

By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Monday, December 4, 2017.

Erwin J. Shustak, Esq.
619.696.9500 ext. 109
[email protected]

In a growing number of high profile cases, often involving major producers and star brokers at major wire houses, the firms and FINRA have adopted  a zero-tolerance policy for  violations of expense account reporting.  These crackdowns involve both firm funds and personal business development accounts (“BDA Accounts”), which are available at most wire houses and are funded with brokers’ pre-tax earnings.  What is unusual is both the recent frequency of the crackdowns and the severity of the sanctions involved.

Most recently, Sandy Galuppo, a 21-year veteran Merrill Lynch broker managing director who oversaw a large stock-management practice for corporate executives, accepted a one-year suspension from the securities industry and a $10,000 fine for “violating high standards of commercial honor by improperly using Merrill funds in connection with expense reports.  Merrill fired Galuppo- who briefly played in the National Hockey League as a goalie in 1994- last November for “conduct including improper submission of personal expenses for reimbursement, resulting in management’s loss of confidence.  The FINRA investigation and ultimate sanction followed when Merrill filed Galuppo’s U-5 which listed an involuntary termination and the reasons for it.

According to the consent decree (called an AWC) with FINRA, Galuppo traveled extensively between 2012 and 2015 on business, submitting through subordinates more than 600 reimbursement requests to cover his “substantial” travel and entertainment expenses.  The AWC consent decree referred to “about 82” instances of inaccurate expense account reporting, mostly for meals.  According to the FINRA order, Galuppo “on some occasions” provided information about meals and entertainment that he knew or was reckless in not knowing was inaccurate.  Some involved his inaccurate description of meals with colleagues as having been attended by clients.

In October, a former Morgan Stanley corporate stock plan manager also accepted an industry bar.  Barbara Waters, who managed 35 administrators at Morgan Stanley Wealth Management’s equity compensation outsourcing group in New York, declined to participate in a FINRA investigation following Morgan’s filing of a U5 which also disclosed an involuntary dismissal and the expense account improprieties.  Morgan reported Waters was fired over an allegation that “event attendees on employee’s expense report incorrectly included one person who did not attend the event”.

Waters, who worked at Morgan and its predecessor firm, Smith Barney, for 11 years, said that Morgan never elaborated on what she did wrong in relation to the approximately $250 expense involving four people.  The only disclosures on her FINRA Broker-Check relate to the incident and her failure to cooperate with FINRA in its investigation.  Her industry bar arises out of FINRA rule 8210, which requires all licensed persons to cooperate with investigators and Rule 2010 which requires representatives to observe “high standards of commercial honor and just and equitable principles of trade”.

The list of terminated brokers who have violated their firm’s expense reimbursement policy is growing and lately has involved big producers- a category of brokers who most firms were more than willing to turn a blind eye to on expense infractions.

For example, Merrill terminated a million-dollar producer over allegations of inaccurate expense reports.  Charles Pouliot, a Manhattan based Merrill broker, who spent nine years at the firm, was fired in October for “conduct involving submission of inaccurate business expense reimbursement forms”, according to his BrokerCheck.  And Morgan fired one of its top-producing brokers for expense account violations.  Charles May, an executive director of Morgan and one of its top producers in its Augusta, Georgia branch, resigned “voluntarily”, also in October, while under review for inaccurate expense account submissions.

And it not only is firms that are cracking down on expense account violations; FINRA also is taking a very hard look at allegations of expense account violations.  Tracy Chen was fired by Morgan in 2013 and was “permitted to resign” from Oppenheimer in February 2017.  According to FINRA’s Broker-Check, Ms. Chen converted Morgan funds “for her own use, causing Morgan Stanley’s books and records to be inaccurate”.  According to FINRA, Chen produced app. $900,000.00 in revenue and earned app. $440,000.00 as she exploited Morgan’s Automated Flexible Grid (AFG) program.  The program allows brokers to deduct money annually from their pre-tax earnings if used within the upcoming year for client expenses and other, legitimate, business expenses.

Chen allocated 10% of her 2013 salary to the program, the largest amount put aside by any other broker in Morgan’s La Brea, California branch and five times the average.  According to news articles, over a 17-month period, Chen falsely expensed hundreds of bracelets, serving platters, decorative candles and other client gifts that she ordered online from Nordstrom’s and other stores before she cancelled the orders.  According to FINRA’s enforcement ruling which permanently barred Chen from the securities industry, she received almost $29,000 of the $38,000 of merchandise ordered, and then cancelled, before her scheme was discovered by the firm.

The message to brokers is both clear and compelling.  Neither firms, nor FINRA will tolerate expense account abuse.  Brokers who play fast and loose with firm expense accounting, face termination from their firms and possible sanctions or expulsion from the industry at the hands of FINRA.  And this risk apparently is the same for smaller, as well as “power” brokers.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, or if you or your company require counsel in these areas, contact us today for a confidential, complimentary consultation.

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