Finra Benches Former Merrill PBIG Stars over Outside Businesses
(Updates with comments from brokers’ lawyer sixth and eleventh paragraphs.)
Two former top producers at Merrill Lynch Wealth’s private banking unit have been sidelined by the Financial Industry Regulatory Authority for inaccurate reporting of investments by themselves and clients, and for other disclosure violations.
Stephen S. Brown, co-head of the Rochester, NY-area team, was suspended for nine months and fined $125,000 for his ring-leading role in investing in private companies and businesses and inviting some Merrill customers to invest without full and complete disclosure to his former employer.
James P. Goetz, his partner in the “private banking and investment group” practice that managed $32 billion for 92 clients, was fined $25,000 and suspended for one month for participating in some of the investments, according to a Finra disciplinary hearing decision dated August 2.
“This is a lesson that this is serious stuff,” said Brian Neville, an employment lawyer with Lax & Neville in New York who was not involved in the case. “Someone getting 30 days may be light, but nine months can effectively be a death sentence in the industry.”
The brokers, who currently work at Stifel Financial, did not return calls for comment about the enforcement action or whether they will appeal.
“Steve Brown and Jim Goetz accepted responsibility for their violations from day one,” said Thomas B. Lewis, a lawyer at Stevens & Lee who represented them.
Brown, who was the team’s primary rainmaker, “candidly admitted that his attitude toward Merrill Lynch’s disclosure requirements was arrogant and cavalier, and he had not appreciated the importance of full compliance,” the decision said. “He testified that he now understands the importance of compliance. We find Brown’s testimony credible, and we factored Merrill Lynch’s termination into our sanctions determination.”
Brown and Goetz worked together at Merrill for 15 years before they were fired in September 2014 for their internal disclosure lapses and investing activities. Their dismissals by the firm played a role in determining the new sanctions, the Finra enforcement panel wrote.
The pair’s status as top Merrill producers garnered headlines, and has generated additional interest as details of their dismissals have been clarified. One of the most heavily attended sessions at Finra’s annual membership meeting this year was devoted to outside business and private investment rules, which many participants have pilloried for lacking clarity.
The Brown-Goetz enforcement decision focused on the pair’s inadequate disclosures of their business and investment activities and on Brown’s failure to get permission for inviting some of his clients to participate in the outside activities. Merrill caught wind of the ventures when one of their customers wired money from his brokerage account to a third-party bank account in the name of Iron Smoke, a whiskey distillery that Brown co-founded and in which Goetz had invested, the Finra panel said.
“Merrill Lynch never trained the advisors about policies or any of these issues,” said Lewis.
The hearing officers showed little sympathy for the brokers’ arguments that they had asked Merrill managers for help with their investment disclosures before the firm began its investigation. Merrill denied the assertions.
“On this conflicting testimony, we need not make a credibility determination because we do not need to decide whether Brown and Goetz sought assistance from management in order to find the violations alleged,” the panel wrote in a footnote. “As registered representatives, Brown and Goetz were responsible for complying with FINRA’s rules. A registered person cannot shift responsibility for compliance to firm principals.”
On the other hand, the panel acknowledged Brown’s testimony that his behavior was culturally acceptable at Merrill.
“He states that as a large producer, management had overlooked disclosures in the past, and he wrongly assumed he could continue in this manner,” the panel wrote. “We credit his statement that, in the past, Merrill Lynch management enabled this conduct by assisting him in fixing mistakes without repercussions.”
While the cultural argument was an unacceptable defense, it played a role in determining the enforcement panel’s sanctions, according to the hearing decision.
A spokesman for Merrill declined to comment.
After Finra filed its complaint against the brokers in April 2016, Brown told AdvisorHub that the team was attempting to rebuild its book and had transferred around $1 billion in client assets to their Stifel Nicolaus office in Fairport, NY.
Merrill last May filed an arbitration claim seeking $300,000 of “forgivable” retention loan balances tied to promissory notes the brokers had signed, their lawyer said at the time. The brokers counterclaimed for some $2 million of deferred pay.