Finra Fine For Broker's Failure To Prepare General Ledger and Trial Balance Upheld - Original Records Not Sufficient

North Woodward Financial Corp., Douglas A. Troszak, Exchange Act Rel. 60505, August 14, 2009

Time since appeal filed - 7 months 9 days
Time since last brief filed - 4 months 6 days

Summary

North Woodward, a registered broker-dealer and its principal owner Troszak were found by Finra to have failed to prepare and maintain a proper general ledger and trial balance for two months in 2005. They were fined $2,500 jointly and severally. The Commission upheld the findings and sanctions.

Troszak gave Finra examiners various financial records of the firm during an exam, but refused to produce a general ledger and trial balance. He claimed that he had given the examiners all raw data that would otherwise be included in a general ledger. He claimed that the firm's bank account statements and his handwritten notes were the equivalent of a trial balance. The examiners concluded that Woodward understated the firm's net capital by $6,900 and had thereby submitted an inaccurate FOCUS report to Finra.

The Commission rejected the claim that the underlying records satisfied the substantive requirement of Finra and Exchange Act rule 17a-3. Finra has specifically defined the requirements of a broker-dealer's ledger and trial balance since at least 1996. Among other reasons, this is because broker-dealers are required to use accrual accounting and source documents are not prepared using accrual accounting methods.

In upholding the fines, the Commission noted that they were at the lower end of the Finra penalty guidelines.

Comment

Appeal of a $2,500 fine? Not surprising that the appeal was pro se. At least the Commission didn't labor for too long on this one.

Stephen J. Horning, Exchange Act Rel. 56886, December 3, 2007

Failure to supervise, Net capital, Broker-dealer books and records, SIPC trustee appointment

Time between appeal and decision - 1 year, 1 month, 24 days.

Time between final brief and decision - 10 months, 8 days.

Pages - 23

Summary

This was the last case I tried while I was still at the Commission so I will refrain from lengthy discussion or comment.  The ALJ barred respondent from association with a broker-dealer in a supervisor capacity and suspended him from all association for twelve months.  She found that he failed to supervise, that the firm or its associated persons committed various violations, including fraud, net capital, books and records and that the respondent caused those violations.   

On appeal, the Commission upheld the sanctions and findings of violations found by the ALJ.  It noted that even "simple neglect or nonfesance" provides grounds for sanctions under Exchange Act Section 14(b) when a SIPC trustee is appointed.  Note - this section authorizes sanctions against any person associated with a broker-dealer solely on the grounds that  a SIPC trustee was appointed.  

This is an interesting failure to supervise case against the principal of a broker-dealer that resulted from the embezzlement of several million dollars of customer funds by a back office employee of the firm.  The firm failed as a result and a SIPC trustee was appointed. 

Comment

I cannot resist --- 10 months and 8 days to issue an opinion?