The Smaller They Are, The Harder They Fall

May 1, 2008 12:00 PM, By Bill Singer

On April 28, 2003, the SEC, the NASD, the NYSE and various states announced a $1.4-billion landmark settlement with 10 of Wall Street's largest broker/dealers for failing to provide independent and unbiased research. The day after the announcement of the historic settlement, Morgan Stanley's then-CEO, Phillip J. Purcell, attended an investors' conference and said, “I don't see anything in the settlement that will concern the retail investor about Morgan Stanley. Not one thing.” Given that Morgan had paid $125 million towards the settlement, those public comments rattled regulators.

Amidst the ensuing firestorm of negative publicity, SEC Chairman William H. Donaldson wrote a letter to Purcell admonishing him about his “troubling lack of contrition,” and reminded him that the settlement required Morgan Stanley not to deny the allegations. Donaldson warned, “I caution you that the commission would regard a violation of that obligation as seriously as a failure to comply with any other term of the settlement.” But in the end, neither Purcell nor Morgan were fined or suspended.

Modern Day Regulation

In March 2008, the Financial Industry Regulatory Authority (FINRA) announced in The Department of Market Regulation v. James R. Kelly (FINRA OHO 2006005457801, January 17, 2008), that James Robert Kelly entered into an Offer of Settlement (without admitting or denying the allegations) in which he consented to findings that:

in 2005 and 2006 he failed to provide complete and timely responses to FINRA requests for information;
in 2007 he willfully failed to amend his U4 with material information; and
in 2004 he filed an amendment to his U4 that included an improper optional comment regarding a 2003 Acceptance, Waiver and Consent Agreement for OATS misconduct (2003 AWC).

In 2004, Kelly updated his U4 to disclose the 2003 AWC, and noted in the “optional comment” section:

I never had any OATS interaction and should not have been responsible for the OATS problem. Technically I was listed but should not have been. I was advised by my attorney to accept the fine and did so. It is my intention to appeal the decision and have brought it th (sic) the NASD Small Firm Advisory Board and have made them aware of my situation. When initially I accepted the AWC, I felt I was mislead (sic) by the examiner as to his intent during his investigation and was not even aware that we had a late reporting issue. In essence I was mis titled (sic) and held responsible for a oversite (sic) that I had nor should not have had any involvement in.

In 2007, FINRA deemed the optional comment on Kelly's U4 a violation of NASD Conduct Rule 2110 because it was a public statement questioning the validity of the 2003 AWC. Kelly removed the offending language in December 2007.

Still, the regulator thought it appropriate to impose a $10,000 fine and an eight-month suspension, to which Kelly consented. No nasty-gram. No sharing of concerns. Just a good, old-fashioned smackdown.

If you will permit, let me draw some comparisons. Purcell headed a major broker/dealer. His firm paid over $100 million dollars towards a billion-dollar settlement. When he questioned the seriousness of his firm's regulatory case, it appeared on the news, was criticized in Congress and evoked the ire of Wall Street's cops. But no retribution fell upon his head — or that of his company.

Poor old James Robert Kelly had an old AWC stuck in his craw. But he didn't get up and vent before a public audience. He didn't set off a national debate about the effectiveness of high-profile settlements. No, our unhappy Mr. Kelly filled out an optional statement on an amended U4. FINRA made him pay the price, and do the time.

Why did Purcell get off with a tongue-lashing while Kelly was fined and suspended? You can't justify one outcome without criticizing the other. Frankly, as an industry, we've had far too much of such equivocation. This politicking must end. For all the day's talk about overhauling Wall Street regulation, committing to one simple step would go a long way: a guarantee of equal justice.

Writer's BIO: Bill Singer
practices law at Stark & Stark, and is the publisher of RRBDLAW.com