LexisNexis Corporate & Securities Law Community 2011 Top 50 Blogs

Bon mots

"You can observe a lot just by watching." Yogi Berra

"We do not distain to borrow wit or wisdom from any man who is capable of lending us either." Henry Fielding, Tom Jones

"In our complex society the accountant's certificate and the lawyer's opinion can be instruments for inflicting pecuniary loss more potent than the chisel or the crowbar." United States v. Benjamin, 328 F.2d 854, 862 (2d Cir. 1964)

FINRA Unauthorized Trading Findings Remanded Due To Unfair Hearing - Sanctions For Failure To Disclose Outside Compensation Affirmed

Wanda P. Sears, Exchange Act Rel. 58075 (July 1, 2008)

Time since appeal - 8 months, 8 days
Time since last brief - 5 months, 1 day
Pages - 12
Footnotes - 42


Sears was a registered rep with American Express. FINRA found she made unauthorized trades and prepared tax returns for customers for compensation without notifying the firm. She was suspended for two years for the unauthorized trading and six months for the undisclosed business activity. The Commission remanded the unauthorized trading charges and sustained the sanctions for undisclosed business.

FINRA found that Sears executed twenty unauthorized trades in the accounts of six customers. Sears denied the trades were unauthorized. The Commission set aside findings as to eighteen of the twenty trades in four customer accounts because Sears had no notice that the violations would be based on those transactions.

A rep is “responsible for obtaining his customer’s consent prior to purchasing a security. . . .” Unauthorized trading “goes to the heart of the trustworthiness of a securities professional” and “is a fundamental betrayal of the duty owed by a sales[person] to his customers.” (footnotes omitted)

The hearing panel did not credit Sears’ denials based on the demeanor of both Sears and two customer witnesses. The Commission defers to the fact finders credibility determinations. It will overturn those findings only if there is “substantial evidence to the contrary.”  Therefore, findings of two unauthorized trades were sustained.

Sears argued it was unfair to base findings of violations on testimony or declarations by customers who were not specified in the complaint. Only two of the customers who testified were mentioned in the complaint. The Commission found that Sears did not have adequate notice of the other unauthorized trades because the additional customer allegations were not mentioned in FINRA’s pretrial brief. Further FINRA counsel claimed at the hearing that the additional evidence was being introduced only as corroboration and that FINRA would not ask that Sears be found to have committed violations in connection with the additional customers. Finally, FINRA did not ask in its post trial proposed findings that violations be found as to the new customer allegations.

Reps are prohibited by FINRA rules from engaging any any compensated activity away from the firm without giving notice to the firm. Sears does not deny that she prepared tax returns for her clients for compensation and did not notify her firm in writing as required. She claims she gave informal notice to Amex of her activity.  In addition, the hearing panel credited the testimony of Sears’ supervisor who claimed to have no knowledge of her outside activities. The Commission did not weigh in on this credibility issue because FINRA based its sanctions on Sears’ admissions that she did not provide written notice to Amex.

The Commission found Sears’ failure to disclose to be quite serious but noted that FINRA found that Sears had received only minimal compensation and had not caused injury to any customers. Because Sears’ conduct could have misled clients into believing her activities were sanctioned by Amex the Commission found her violations to be “aggravated.” The Commission found FINRA’s six month suspension appropriate.


Basing findings on evidence that FINRA enforcement counsel argued would not be claimed as the basis for finding of violations was clearly unfair. Despite the claims by its counsel that FINRA enforcement was not asking for sanctions based on new customer testimony not mentioned in the complaint the hearing panel found violations anyway. The fact that FINRA upheld this clearly unfair procedure on appeal and apparently tried to justify it in Sears’ appeal to the Commission is quite remarkable. The Commission’s conclusions were completely appropriate. This is a good example of why the Commission should make appellate briefs of the parties publicly available.  It does not appear that Sears argued that the hearing panel’s apparent zealousness also infected the sanction for her admitted failure to give written notice of her outside compensation.