Peter C. Bishop, formerly with the Portland Maine offices of Ameriprise Financial and RBC Capital Markets, accepted a one month suspension and fine of $10,000 imposed by the Financial Industry Regulatory Authority for effecting unauthorized transactions in the securities accounts of his customers.
According to the FINRA Letter of Acceptance, Waiver & Consent, from January 4, 2011 through September 6, 2011, Bishop placed four "solicited" transactions in the customer account of one of his customers, solicited meaning that he contacted the customer, made a recommendation, and after due consideration to the recommendation, the customer gave permission or otherwise consented to the transaction.
There was only one problem: the customer died on December 18, 2010, and according to firm records, at least as of January 4, 2011, everyone was aware that the customer died, but given that the customer was unlikely to complain, apparently allowed the transactions to be effected anyway.
Absent written discretion, it is a violation of Section 10(b) of the Exchange Act, and Rule 10b-5, as promulgated thereunder, to effect transactions in customer accounts without their prior authorization or consent. See, e.g. Caiola v. Citibank, 295 F.3d 312 (2d Cir. 2002)("claims under Rule 10b-5 arise when brokers purchase or sell securities on their clients’ behalf without specific authorization." Saxe v. E.F. Hutton & Co., Inc., 789 F.2d 105, 112 (2d Cir. 1986); Armstrong v. McAlpin, 699 F.2d 79, 90-92 (2d Cir. 1983)( "By definition, a broker who is liable for making unauthorized trades makes them without the customer's authorization"); Nilsen v. Prudential-Bache Sec., 761 F. Supp. 279, 289-90 (S.D.N.Y. 1991).
Unfortunately, a frequent subject of stockbroker fraud claims is unauthorized trading, when a stockbroker places trades in a customer account without their prior knowledge or consent. However, these claims are exceedingly difficult to win because of the legal doctrine of ratification, waiver and estoppel, because once the customer receives notice of the unauthorized transaction when he or she receives a written confirmation in the mail detailing the transaction, and fails to complain, the law believes that the customer, by doing nothing, has ratified the transaction and has waiver, or is estopped, from complaining about the transaction later.
Securities regulators have also taken the same approach, and very rarely bring enforcement actions against brokers engaging in unauthorized trading, even when the transactions do not match customer or firm telephone records, and there is substantial evidence that the broker effected the subject transactions without any communication with the customer. Often these transactions are not marked "solicited" meaning that the broker made the recommendation but are marked "unsolicited," which is supposed to mean that the customer purchased the security on their own initiative, but in these cases can mean the broker made the purchase without a recommendation or for that matter, the customer’s permission.
In this particular instance, it appears that the regulators brought an enforcement action for unauthorized trading because in fact the customer was dead, and accordingly was unresponsive to the broker’s recommendation or otherwise was prevented from complaining.
One may think that such conduct is outrageous, particularly after getting caught red handed, but apparently FINRA does not think so. Mr. Bishop settled the matter by Letter of Acceptance Waiver & Consent. He agreed to a suspension of all of a month, and agreed to pay a $10,000 fine.
Nicholas J. Guiliano, Esquire, The Guiliano Law Firm, P.C.
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