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August 5, 2022

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J.P. Morgan Securities was censured and fined $200,000 by the Financial Industry Regulatory Authority for failing to reasonably investigate and address “red flags” of potential misconduct that snowballed into a high-profile $19 million arbitration award issued in February of last year.

The matter was settled without the traditional brokerage unit, now called J.P. Morgan Advisors, admitting or denying the allegations, according to the July 15-finalized letter of acceptance, waiver, and consent posted to Finra’s website on Thursday. 

From March 2014 through March 2019, the firm “failed to reasonably supervise” Evan Schottenstein, a now-barred broker referred to in the letter as “RR 1,” who had engaged in unsuitable and unauthorized trading in the account of a senior customer, his grandmother, referred to as “Customer A.” 

J.P. Morgan failed to follow up on the misconduct or review issues with the customer directly as required under Finra rules, the regulator said in accusing the firm of violating its Rule 3110 governing supervision and “catch-all” Rule 2010. 

A spokeswoman for J.P. Morgan declined to comment on the settlement. The agreement was signed by J.P. Morgan Advisors CEO Phil Sieg, who took over the unit in April 2021. 

J.P. Morgan has already paid the $9 million for which it was responsible to Beverley Schottenstein, the nonagenarian grandmother. Evan and his brother Avi Schottenstein, a former J.P. Morgan broker referred to in the letter as “RR 2,” are still contending their joint $9.8 million liability in the arbitration.

Finra said its enforcement case was prompted by J.P. Morgan’s firing of Evan Schottenstein in June 2019 and the subsequent U5 filing detailing concerns about trading activity. 

In March 2014, Beverley Schottenstein–then 88 years old, retired and widowed–opened an account at J.P. Morgan, where Evan was responsible for the investment strategy and made all of the trade recommendations for the account, Finra said. (Evan had moved to J.P. Morgan that year from Morgan Stanley, according to BrokerCheck.) 

Beverley transferred about $15 million in structured notes, representing nearly 15% of her liquid net worth, to J.P. Morgan from her previous brokerage firm, and Evan began purchasing additional structured notes in the account, according to the settlement. 

J.P. Morgan’s system generated alerts when structured products exceeded a 15% threshold for a customer’s liquid net worth, according to the letter. Evan’s supervisor in July 2014 identified the “large position” in structured products and decided to call Beverley—but kept the broker on the line against a common practice, Finra said.

The supervisor on this call also “did not explain to the customer that her account was concentrated in structured notes or ascertain whether she understood the features and risks of structured notes,” according to the letter.

The call was the last time any firm supervisor spoke with Beverley until nearly five years later, the letter states.

In the summer of 2014, meanwhile, Evan had submitted–and firm supervisors approved–suitability forms that indicated Beverley’s concentration in structured products rose from 14% of her liquid net worth in June to a high of 43% by August. Between August 2014 and April 2015, the account’s concentration in structured products remained between 27% and 40% of the customer’s liquid net worth.

On May 15, 2015, Evan “falsely updated [Beverley’s] liquid net worth from $100 million to $155 million in an attempt to avoid further scrutiny” of the account, according to the letter. While the firm mailed written confirmation to Beverley of the changes made, it did not call the customer or investigate the “significant addition” to her wealth.

The firm a week later did impose “certain limitations” on the purchase of structured products in the account and a “senior firm manager directed firm supervisors” to call and meet with her in-person. But no supervisor made the call and no in-person meeting ever took place, Finra said.

From May 2014 through May 2015, Evan had been able to purchase more than $77 million of structured notes, and by 2019, Beverley’s account had realized losses of $5.5 million in those products alone, according to the letter.

Evan had also tampered with his grandmother’s account statement delivery address and from January 2017 through March 2019 made at least 100 unauthorized trades, none of which were detected or adequately investigated by the firm.

These instances included Evan’s forgery of his grandmother’s signature in December 2018 to facilitate a $5 million unauthorized investment in a private equity fund that focused on emerging technology companies and had no public market, according to the letter. The purchase prompted an initial complaint to the firm from Beverley in January 2019 that there were certain unauthorized trades in her account. By July she filed her arbitration complaint with Finra.

Bill Singer, a securities lawyer who blogs about regulatory cases, said the fine appeared relatively small given the Finra letter spells out “huge flashing red flags that should have alerted even the most somnolent compliance office,” especially over a five-year period.

“There appears to be no safety net, no fail-safe, no back-up,” Singer said.

This post was originally published on this site