Courts call a lifetime bar “the securities industry equivalent of capital punishment.” PAZ Sec. Inc. v. SEC, 494 F.3d 1059, 1065 (D.C. Cir. 2007). It is a draconian measure which not only permanently removes you from the securities industry but also subjects you to “statutory disqualification” under Section 3(a)(39)(A) of the Securities Exchange Act of 1934 and all the collateral consequences that come with it.
Given the seriousness of a lifetime bar, a recently released AWC presents an alarming fact pattern in which a supervisor was barred due to the transgressions of an FA he failed to properly supervise. Let’s consider the case of Michael Leahy, FINRA Case No. 2019063631802. The question is, why did FINRA go after the supervisor with guns blazing?
The Applicable Rule: FINRA Rule 3110
FINRA appropriately demands that each member establish and maintain a system to supervise the activities of each associated person. Importantly, Rule 3110 requires that the supervisory system be “reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.” FINRA takes violations of Rule 3110 very seriously but rarely seeks a bar. According to FINRA’s Sanction Guidelines, violations of Rule 3110 would typically call for a monetary sanction of $5,000 to $77,000 and a suspension of up to 30 business days. Of course, in “egregious cases,” the Sanction Guidelines does call for suspensions of up to 2 years or even a bar.
Ok, so clearly FINRA thought Leahy’s conduct was “egregious.” The question is: why?
Underlying Facts
Interestingly, the underlying violations all occurred within a very short period of time: September 18, 2019 through October 9, 2019. During that period of time, according to FINRA, Leahy failed to reasonably supervisor an individual FINRA calls “PS.” According to FINRA, PS engaged in unauthorized trading, unauthorized use of margin, recommended excessive and unsuitable transactions, and charging excessive commissions.
According to FINRA, Leahy was aware of multiple “red flags” but failed to investigate those red flags or take action. The red flags highlighted by FINRA were:
- Leahy knew of PS from a prior firm and was aware of prior allegations of misconduct;
- Numerous customers complained to Leahy about PS’s supposed unauthorized trading;
- The broker-dealer’s clearing firm informed Leahy that it too received complaints of PS’s supposed unauthorized trading;
- A review of the trade blotter would have provided indicia of unauthorized trading;
- PS recommended inconsistent trading strategies. On the same day, PS would recommend that some customers buy “Security X” and other customers sell “Security X.”
- The firm’s trade blotter reflected a pattern of in-and-out trading by PS;
- PS was charging commissions that came near 5% or exceeded 5% (one time PS even charged a whopping commission of 11.8%).
Who is the Mysterious “PS”?
FINRA drops a hint by stating that the NJ Bureau of Securities issued a Summary Penalty and Revocation Order against PS. So, I did a little digging and here it is. Apparently, PS is Philip J. Sparacino, and Mr. Sparacino was apparently a very busy man at his old firm. According to the State of New Jersey, Sparacino engaged in a pattern of unauthorized and excessive trading starting in June 2019. And the numbers seem to support the Bureau’s allegation. From April 2019 through May 2019, Sparacino’s production totaled $24,258. However, once he inherited accounts in June 2019, his production skyrocketed to $1,452,514 from June 2019 through October 4, 2019. Incredibly, in the last 2 weeks of September 2019 alone, Sparacino generated production in excess of $450,000.
Not surprisingly, when FINRA reached out Sparacino he refused to respond to FINRA’s request for documents and information. As a result, Sparacino signed an AWC consenting to a bar.
Upshot
This case sends a warning to any supervisor who adopts the head-in-the-sand approach to supervisor. Clearly, FINRA will seek a bar when the facts warrant it.
Herskovits PLLC has a nationwide practice defending individuals and institutions with FINRA regulatory investigations. Feel free to call us for a consultation: 212-897-5410.