As a former member of FINRA Enforcement’s Litigation Department and a current practitioner in FINRA regulatory matters, I have read my fair share of decisions from the Office of Hearing Officers (OHO). I recently read the Southeast Investments/Black decision, which was issued in March. There is some good stuff in there – from an entertainment perspective. The most entertaining cases are often those that should not have gone to hearing. Below are some of my favorites.

The Jenny Craig Dieter

The principal issue in the Springsteen-Abbott case was whether Springsteen-Abbott misused investor funds by improperly allocating expenses to investment funds. One of those expenses was a $104.23 dinner at Cody’s Roadhouse. Springsteen-Abbott initially claimed the meal was for business purposes. The receipt for the dinner, however, reflects charges for “kid’s mac & cheese” and milk. When confronted with the receipt, Springsteen-Abbott “explained that she was on a Jenny Craig diet and she was eating appetizers and drinking 2% milk.” The Panel did not buy her story:

Springsteen-Abbott’s assertion that she ate the “kid’s mac & cheese” meal as part of a Jenny Craig diet plan also was not credible.

The email that Springsteen-Abbott wrote to her sister about the family dinner at Cody’s Roadhouse also adversely impacted her credibility. The Panel found other misuses of investor funds, and it barred Springsteen-Abbott.[1]

The Auto Enthusiast

One of the issues in the Southeast Investments/Black case was whether Black conducted onsite branch audits at multiple locations across the country. FINRA presented evidence that he did not do them. One of FINRA’s most compelling pieces of evidence (aside from the reps who testified that Black did not conduct the audits) was the distance between the branches and the timing of the alleged audits. For instance, Black claimed to have: (1) driven 500 miles from his home in North Carolina to Ohio to conduct an audit on October 1; (2) driven back to North Carolina to conduct another audit on October 3; and (3) driven back to Ohio for another audit on October 4. Black testified that his back-and-forth trips to Ohio made perfect sense to him:

I love to drive cars . . . . I’ve been in a car for 22 straight hours without stopping. My day will start at 2:00 in the morning and I will drive until I can’t drive anymore, pull over, and get up and drive a little more.

It presumably did not help Black’s cause that in an unrelated proceeding, the IRS likewise took issue with his stated passion for driving:

Black claimed he drove 156,669 miles in 1991 and 181,692 miles in 1992, which averages 429 and 498 miles per day, respectively. At these rates, driving 60 miles an hour, Black would have had to drive between seven and eight hours per day, seven days a week, not including time spent stopping for gas meals, or meeting clients, the IRS reasoned.

Black, however, did concede the limits to his driving abilities. He acknowledged that he did not inspect a branch in Ohio on December 9 and another one in Texas on December 10, as his records reflect. He inspected the Ohio branch on December 19, not December 9; he said his records contain a typo. Black was barred for, among other things, providing false testimony to FINRA about his supposed branch audits, so he should have plenty of time to pursue his passion. Hopefully, he has a hybrid. [2]

The Beer Thrower

It is challenging to defeat a finding of “willfulness” in the Form U4 context, as the standard is not the dictionary definition of the word. Instead, “willfulness” means intentionally committing an act, irrespective of knowing whether or not the act violates any rules or laws. In the Harris case, Harris failed to disclose on his Form U4 felony and misdemeanor charges involving allegations of stealing a parking meter, throwing beer at a police officer, possessing someone else’s driver’s license, and stealing cough medicine at a homecoming party during his college days. The Panel found that his failure to disclose the charges on his Form U4 was not “willful” because:

The [Form U4] questions required that Harris remember details of allegations made nearly six years ago. The parking meter, beer-throwing, and driver’s license incidents would not, at first blush, appear so serious as to constitute felonies. Indeed, each ended up as a misdemeanor, and none ever went to trial. He misread the misdemeanor question’s reference to “investment-related” misconduct. Finally, the Panel credits Harris’ testimony that it would have made “no sense” for him to conceal the arrests because he knew that Dean Witter had his fingerprints and assumed that the firm would likely discover his arrest record in any event.

The Well-Dressed Man

In the Casas case, the Panel found that Casas used investor funds for personal and other improper uses. Those expenses ran the gamut from groceries to dog grooming services to client entertainment in the form of a massage at 2:00 a.m. Casas, presumably, with a straight face, attempted to justify all of the expenditures, including a $364.38 purchase of a new water heater for his home. Casas explained that the water heater was a legitimate business expense because he needed it to maintain clean clothes and good hygiene:

[I]f I wasn’t able to show up to a meeting in proper attire, in proper hygiene, MCB Capital would not have been able to move that transaction forward. So the nexus, as was common knowledge is, any out-of-pocket expense that I needed in order to meet the obligations.

Not surprisingly, the Panel did not buy Casas’ rather creative explanation, and it barred him. [3]

[1] The National Adjudicatory Council (NAC) affirmed the bar. The case is on appeal to the SEC.

[2] The deadlines for the parties to appeal the Decision and the NAC to call the case for review have yet to expire.

[3] The NAC affirmed the bar. The case does not appear to have been appealed to the SEC.