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Never Admit Wrong Doing Right Away

If you have been in the securities business for any length of time, you know it is an extremely highly-regulated industry with a myriad of complicated rules and regulations to contend with.  The SEC, FINRA and State Regulatory Agencies are always looking closely at your activities.

You also know it is a particularly unforgiving industry, as technical rule violations often result in official actions being brought against you, including fines, sanctions and suspensions from doing business.  Official charges will stain your professional record, and like a tattoo, once you are found guilty the stain will be permanent.

But, as in any complicated endeavor, things that initially appear to be black and white, may in actuality, be a thousand shades of grey.  When it comes to securities laws, rules and regulations, what at first glance may look like a violation, may in reality not be an infraction.  Since the stakes are so high, we always recommended having a securities expert review all allegations before responding to them.

And that is where we come in to this story.  Our client, a FINRA Member Firm, called us after they were charged with an historic net capital violation after their CFO, who was a CPA himself, resigned and signed an Acceptance, Waiver and Consent (“AWC”) Agreement with FINRA.

The AWC against the CFO, called for a $5,000 fine and a three month suspension, as a FINOP.  FINRA also wanted to fine the Broker/Dealer $25,000, and the company would have the permanent stain of a net capital violation on their record.

One would normally think that a net capital violation is a cut and dried matter.  After all you either have enough net capital to remain in compliance with the rule, or you do not.  To make matters worse, the charges stemmed from circumstances that were anything but recent, as FINRA was basing its allegations on financial filings that were over three years old.

We realized that the allegation against them, was not a simple claim of not having enough money, when FINRA used a little known rule to disallow certain receivables normally counted toward net capital.  This was one of the first indications of something that initially looks simple, is not.

We initiated an in depth forensic analysis of both the financial statements and net capital computations, as well as, various written company documents.  This was important because if we could show company documents contained certain specific language, it would contractually allow for the favorable net capital treatment, of otherwise non-allowable receivables.

Our forensic financial analysis began with a review of FINRA’s net capital computations.  When we completed this step, we found major discrepancies in FINRA’s computations which showed a violation.

Then we proceeded to perform our own forensic net capital computations.  Due to the complexity of the process, it took over a year to complete.

Once we had all of the elements in place, we submitted net capital computations which clearly, and unequivocally, showed our client was in net capital compliance during the months in question.  And, then we waited to hear from FINRA.

It took a couple of months for FINRA to digest and come to terms with our findings, but they finally did.  FINRA never did admit they were wrong, and sent a letter of caution to our client, but the threat of fines, sanctions, and a permanent stain on their record, were gone.

In the words of the immortal Yogi Berra, “it aint over till it’s over.”  In this case it was over when FINRA dropped the case against our client.  So if you are ever charged with wrong doing by FINRA, don’t immediately admit your guilt, there is always plenty of time for that later.  Instead call us at 407 696-9600.


Posted by: editor October 1, 2016


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