Expense reimbursement is a wonderful thing. Three-hundred dollars for dinner at the Four Seasons? No problem. Submit an expense report, get a check. It’s like magic. All you need are paper receipts. Paper does the trick.
Many soon realize it would be easy to create receipts at home. So easy, in fact, one must be careful to avoid making receipts that look too genuine, if you know what I mean. And it’s lucrative to be “reimbursed” for expenses not incurred. It’s tax-free income. But it can be career-ending for financial advisors. Finra recently barred a financial advisor from the brokerage industry for submitting false expense reports to Wedbush Securities, Inc., her former employer. She allegedly submitted fictitious expenses of $8,218.18, of which Wedbush paid $6,022.50. Wedbush later discovered the truth and terminated her. Finra then came knocking.
So what does Finra have to do with this? Well, two things really. First, her employer is a broker-dealer. Broker-dealers must keep certain “books and records.” The Finra Rule 4510 series governs this. Required records include certain accounting and finance records. By submitting false expense reports, a broker creates “inaccurate books and records,” as Finra sometimes puts it.
Second, there’s Finra Rule 2010, sometimes called the “catch-all” rule. This rule states, simply:
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
Nobody really knows what “high standards of commercial honor” means. It’s hard to define. It depends on the context. And the standards can change and evolve. It reminds me of a similar law in Massachusetts called Chapter 93A. It prohibits any “unfair or deceptive act or practice.” Courts have struggled to define an “unfair” practice. The best definition is from Justice Kass, then of the Massachusetts Appeals Court. He came up with this:
The objectionable conduct must attain a level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce.
Levings v. Forbes & Wallace, Inc., 8 Mass. App. Ct. 498, 504 (1979). That’s a great definition, but the Supreme Judicial Court didn’t think so:
We view as uninstructive phrases such as “level of rascality”
Mass. Emp. Ins. Exch. v. Propac-Mass, Inc., 420 Mass. 39, 42 (1995)
Broad and vague rules can be controversial – especially to those who want to walk close to the line. As Louis Brandeis reportedly once advised his clients: he could not tell them how to avoid falling off a cliff if they persisted in walking along the edge, but could tell them how to stay away from the edge. Of course, the vaguer the prohibition, the farther from the edge one must walk.
So what do you think? Did this expense-account padding broker fail to “observe high standards of commercial honor”? It would certainly seem so. Does it matter if her alleged take was relatively small – the $6022.50 was spread over a four-year period. And what if expense padding is rampant in the industry – as some reports would suggest? For those of you inured to the rough and tumble of the world of commerce, did you find yourself raising an eyebrow when you heard of the alleged conduct here? Or did you shrug your shoulders and reflect back on some of your own creative expense reports? Most would agree that whatever the standard means, padding an expense account violates it.
But even so, was a permanent bar justified? With no possibility of re-entry, even if she is later fully rehabilitated? Here it’s hard to say whether that’s appropriate. She did not have a contested disciplinary hearing. She chose to settle the case with Finra and agreed to accept the bar. In the settlement (called a Letter of Acceptance, Waiver and Consent), she neither admitted nor denied Finra’s findings about her alleged wrongdoing. Perhaps had she taken the case to a hearing, she may have avoided a bar. But we’ll never know. We also do not know all the facts of her case. There is no requirement to put all facts into a Letter of Acceptance, Waiver and Consent. Still, for those tempted to pad the expense account, the lesson is clear. It is possible not only to get fired from a broker-dealer, but also to be permanently barred from all broker-dealers. For those interested, the Letter of Acceptance, Waiver and Consent is No. 2012033843101.
Published by Jeremy L. Bartell
Financially Regulated is published by Jeremy L. Bartell, a long-time admirer of Wall Street and its interesting cast of regulators. Jeremy is an attorney with Bartell Law in Washington D.C. He represents financial professionals nationwide in Finra inquiries and investigations, Finra arbitration, securities employment disputes and registration and disclosure matters.