You Have to Ask

Nov 1, 2005 12:00 PM, By Bill Singer

In October 2003, a back-office glitch made Robert Burns the recipient of $12,000 that did not belong to him.

Burns was an advisor with Merrill Lynch, Pierce, Fenner & Smith, and the error involved crediting the funds to Burns' personal account instead of to the account of the customer. Under ordinary circumstances, the bookkeeping gaffe would have been no big deal; upon noticing the mistake, the advisor would just notify the back office and the transaction would be corrected.

Unfortunately, Burns, reacting as though he had drawn a “Bank Error in Your Favor” card in a game of Monopoly, quickly spent $11,335.90 of the money.

To Catch a Thief

Unsurprisingly, Merrill quickly figured out what happened to the funds and confronted Burns. Burns admitted his misdeed, and Merrill fully reimbursed the customer, then terminated Burns on Nov. 14, 2003, for failure to notify management of an erroneous deposit to his personal account.

Subsequently, the New York Stock Exchange investigated the matter, and pursuant to a “stipulation of facts and consent to penalty (SFC),” Burns agreed to the penalty of a censure and a five-year bar, without admitting or denying guilt.

As of the date of the decision, Burns had only repaid Merrill about $700. (In the Matter of Robert Burns, New York Stock Exchange Hearing Panel Decision 05-75, June 16, 2005.)

Typically this is where such a story would end, and indeed it is where Burns' story ends — but the outcome could have been better, if only Burns had understood the settlement process at the NYSE.

In some regulatory situations, a respondent cannot afford the costs of a contested hearing and tries to settle, but gains some benefit by not having to admit to specific misconduct. At other times, the respondent gets caught red-handed and simply tries to get the best deal possible before throwing in the towel. Either way, when the regulators propose settlement terms to the respondent, it is often followed by a bit of back and forth over the precise terms.

Burns apparently decided to simply submit to the punishment the NYSE proposed.

Surprise, Surprise, Surprise

Imagine his reaction, then, when after issuing its proposed censure — a five-year ban — the NYSE essentially stated that it was open to negotiating the specifics of the punishment.

The Hearing Panel is of the view that there should be some credit given to a Respondent who acknowledges wrongdoing, stipulates to facts and consents to a penalty, thereby conserving Exchange resources. Nevertheless, we accept the consent to penalty in this case as appropriate given the current regulatory climate.

Trust me, this is a very unusual comment from a regulator, and every future respondent should take note of the implication. The panel is all but saying that Burns should have submitted an offer for something less than a five-year bar and that they might well have agreed to the proposal.

It's not unusual in legal proceedings for clients to get credit for not wasting the court's time. Lawyers even have a term for it: “settlement discount.” Still, the current hard-line posture of securities regulators might leave advisors with the impression that there is little room for negotiation these days.

To the contrary, this NYSE ruling suggests the regulators are more flexible, and I respect the panel for signaling this to the world. Their statement showed class and might well help future respondents better navigate the SFC process.

However, it would seem to me that the system would have far more integrity if the NYSE hearing panel had declined the proposed SFC and suggested that a lesser term would be fairer.

Sadly, the panel took the path of convenience, which wasn't the high road. If the NYSE would have accepted less than a five-year ban, then it should have. Ultimately, this “if you don't ask, we won't tell” practice smacks of price gouging.

Writer's BIO: Bill Singer is a practicing regulatory lawyer and the publisher of RRBDLAW.com