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The Rep and The Dancer - FINRA Bar Against Rep For Improper Extension Of Credit To Customer Upheld

John D. Audifferen, Exchange Act Rel. 58230 (July 25, 2008)

Time since appeal filed - 8 months, 9 days
Time since last brief filed - 5 months, 14 days
Pages - 21
Footnotes - 41


FINRA found that Audifferen, a registered rep, for three months in 2000, improperly extended credit for a customer to purchase securities, or caused his firm to do so. It also found that Audifferen engaged in "free riding" and shared profits in the customer's account.  FINRA also found that Audifferen for two months caused his firm to improperly extend credit for securities purchases in his personal account because he paid for purchases with checks that bounced.  Finally, FINRA found that Audifferen failed to disclose a customer complaint on his Form U4.  Audifferen was barred and ordered to pay restitution of $7,835 and fined $9,665.  

The Commission upheld the FINRA sanctions.  The customer at issue had a personal relationship with Audifferen and was a "dancer at a night club."  She had an annual income of $49,000 and about $16,500 in savings.  She had limited investment experience.  Audifferen opened an account for her, claiming that her income was $100,000 and that she had five years of investment experience.  The customer opened her account with a $5,000 check that bounced but eventually cleared.  Audifferen also asked her to give him a personal check for $7,000 payable to his firm's clearing firm and to sign two blank personal checks. 

Audifferen, in an unauthorized trade, then bought $6,900 of securities in his customer's account, but payment was not timely made as required by Regulation T.  He then cashed a $7,000 personal check and deposited $7,000 in the customer's checking account allowing the previously written check to the clearing firm to clear.  Soon thereafter the stock was sold at a profit.  Audifferen also made an unauthorized $63,000 stock purchase in the customer's account.  Audifferen obtained a Reg T extension, but the customer did not have sufficient funds in her bank accounts to make payment for the securities. Audifferen attempted to pay for the transaction with the two blank checks that were made payable to the clearing firm.  These checks bounced, but the securities were liquidated at a $13,000 profit.  As a result, no payment was ever made for the purchase as the sale proceeds covered the purchase cost.

When the customer saw the statements with the unauthorized trades she ordered the account closed.  Instead, Audiffferen wired the account balance to the customer's bank account, and attempted to further wire the funds to his own personal account.  He repeatedly called the customer demanding that she pay him the $17,500 derived from the securities trades.

Exchange Act Section 7 prohibits broker-dealers and their associated persons from extending credit to customers except in accordance with Reg. T.  Reg T requires that cash accounts may buy or sell securities only if there is sufficient funds in the account or the broker- dealer has a good faith belief the customer will promptly make full cash payments before selling a purchased security.  

The Commission held that the purchases clearly violated these provisions as the trades were unauthorized and Audifferen knew the customer did not have sufficient funds to pay for the trades.  In addition, Audifferen violated Section 7 because his own funds were used to fund one of the purchases.  

FINRA credited the customer's testimony, which was corroborated by other circumstantial evidence.  As is its practice, under these circumstances the Commission did not disturb the initial fact finder's credibility judgment which it traditionally affords "considerable weight."

FINRA rules also prohibit "free riding" (one of two practices given this moniker) where purchases are paid for through the expected sale before payment is due.  This occurred in the second unauthorized transaction as the customer never paid for them, and at Audifferen's behest, payment was made from the proceeds of the sale.

Audifferen argued that it was  violation of due process for FINRA to find that his handwriting was on one of the "blank" checks without testimony from a handwriting expert because this would be required under the Federal Rules of Evidence.  The Commission rejected this argument, noting that FINRA is not bound by the FRE.  In doing so it noted that the customer identified Audifferen's handwriting (which she was familiar with) on the check.  

Exchange Act Section 7 also prohibits associated persons from benefiting from an extension of credit unless Reg T is complied with.  Audifferen's actions in attempting to obtain the profits from the trades violated this provision.  

FINRA rules also prohibit reps from sharing in the profits or losses from customer accounts unless the firm has given written permission.  By attempting to obtain the profits from the trades Audifferen violated this rule.  The Commission rejected Audifferen's claim that he was attempting to obtain repayment for an earlier loan to the customer, largely because he gave inconsistent accounts of the circumstances of that purported loan.  

Adding insult to injury, Audifferen attempted to pay for $50,000 of purchases in his personal account with bounced checks.  The stocks were sold by the firm at a loss.  At the time he wrote the checks Audifferen had only $22,000 in his checking account. Depositing NSF checks to pay for purchases was also a violation of Reg T and Reg X.  

As if it couldn't get any worse, Audifferen left his firm and when he applied to associate with another, failed to disclose a customer complaint accusing him of unauthorized trades at a previous employer.  He claimed that he failed to make disclosure because he did not think they were "complaints" that needed to be disclosed. 

Audifferen raised a number of procedural claims.  For example, he argued that because FINRA counsel warned witnesses associated with firms that they had a duty to testify truthfully pursuant to FINRA rules he claimed the witnesses were improperly intimidated.  The Commission rejected this claim because the warnings simply reminded the witnesses of their existing obligations.  The Commission also found nothing improper in FINRA's practice of not holding a separate sanctions hearing after liability has been found. 

The Commission upheld the sanctions finding Audifferen's conduct to be egregious.  Not only did he make unauthorized trades, but he violated the extension of credit rules in doing so.  It upheld FINRA's findings that the violations were willful, noting that he had personal financial problems at the time.  Because Audifferen attempted to blame the customer he "exhibits a fundamental lack of respect and understanding for an important element of the securities industry's regulatory apparatus, which indicates a likelihood that [he] would repeat similar misconduct in the absence of a bar."  


Clearly Audifferen's conduct was egregious.  It is troubling however, that the Commission in part justifies the bar because Audifferen did not admit the wrongful nature of his conduct. The violations here were blatant.  Audifferen's conduct was clearly inappropriate for a fiduciary who has access to other people's money. The sanction could easily have been justified by his conduct in bouncing checks, unauthorized trades, and attempting to transfer the proceeds from his customer's bank account to his own.  Under these circumstances there is no need for the Commission to justify the sanctions by citing Audifferen's defense of himself.  Doing so seems to suggest that a vigorous unsuccessful defense will be punished.