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2004
CASE
ANALYSIS
DEPARTMENT OF
ENFORCEMENT, Complainant, v. GREGORY A. EASTMAN, Respondent
Disciplinary Proceeding No. C3A030012
HEARING PANEL DECISION February 18, 2004
A Little
Background
Beginning in about 2001, RBC Dain Branch
Manager Mark Delton attempted to recruit Piper Jaffray Registered
Representative Gregory A. Eastman. However, Delton was only interested in recruiting
representatives who were generating at least $300,000 in annual gross commissions and had at least $30 million in assets under management. In early
2002, Eastman advised Delton that he was interested in moving to RBC Dain
and that he met those criteria.
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WHAT HE SAID
Eastman provided Delton with a
hand-written month-by-month and quarter-by-quarter summary of his
commissions for 2001, which indicated a quarterly increase from 1Q/2001
of $125,000 to 4Q/2001 of
$190,000. He supported his representations with a Piper Jaffray "Commission Sheets"
showing quarter-ending total commissions. Eastman also
told Delton he had $41.6 to $42.5
million in assets under management for 1Q/2002, which did not include an additional
$3.5 million invested in annuities. He gave Delton a Piper Jaffray
"Individual Performance History" to substantiate the assets
under management.
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THE
TRUTH
Unfortunately, Eastman had only $114,517 gross commissions at Piper
Jaffray during all of 2001, which was less than than 20% of the
$619,134 he claimed he had generated for the entire year. The 2001 quarterly
amounts he provided were actually his four highest quarters from 1999 and
2000 (and he never reached the $619,000 figure during either of
those years). In addition, Eastman's 1Q/2001 assets under management ranged from $14.6 to $15.3
million. |
Eastman made photocopies of the
Commission Sheets
that combined the dated top portions of his Commission Sheets for the four
quarters of 2001 with the bodies of Commission Sheets from his four best
1999 and 2000 quarters, so it appeared that the commissions he had
actually generated in 1999 and 2000 were earned in 2001. He also falsified
the assets under management disclosed in the Individual Performance History by taking a document showing the correct
figures to a photocopy shop, which replaced those figures with the false
numbers that Eastman had given Delton.
Based upon Eastman's representations, RBC Dain offered him a position, and as an inducement,
offered him a 72-month forgivable loan of $400,000. On May 31, 2002,
Eastman signed an Employment Agreement stating
that "[a]s a major inducement for the employment of [Eastman] with
RBC Dain, [Eastman] agree[d] and/or warrant[ed] and represent[ed]"
among other things, that his "total commissions … for the twelve
month period immediately preceding [his] employment with RBC Dain was
$620,000" and that his "total assets under management … in the
month immediately preceding [his] employment with RBC Dain was $46
million."
During
the course of a routine conversation, however, Eastman's former Piper
Jaffray branch
manager told Delton that Eastman's claims regarding his
2001 commissions and his assets under management were not correct, and
provided Piper Jaffray documents showing Eastman's true
commissions and assets under management.
Delton asked Eastman for an explanation. According to Delton,
Eastman claimed that the numbers he had given Delton were correct, and
when asked for additional supporting documentation, said that he had given
Delton all the documentation that he had. ( At the NASD hearing, Eastman denied
that he told Delton that the numbers he had claimed were correct, but
admitted that he did not acknowledge that he had misrepresented the
amounts.) On June 5, 2002, RBC Dain withdrew
the $400,000 loan proceeds from Eastman's account, and a few days later, as RBC Dain planned
to terminate Eastman, he submitted his resignation.
Admit
the Crime, Argue the Fine
The NASD Department of Enforcement filed a Complaint charging that Eastman engaged in unethical conduct, in violation of Rule
2110, by falsely representing his commissions and assets under management
at his then- current employer in order to obtain employment with another
NASD member firm. Eastman filed an Answer in which he admitted the
violation, but requested a hearing on the issue of sanctions.
Notwithstanding Eastman's admission of liability, the Hearing Panel
independently considered the charge and found the violations had occurred.
Enforcement
requested that the Hearing Panel fine Eastman $20,000 and suspend him in
all capacities for 18 months. Eastman, who had no prior disciplinary
history, proposed a fine of less $20,000 and a suspension of no more
than 90 days. Although there are no directly applicable NASD Sanction
Guidelines for the acts alleged, The Hearing Panel deemed Eastman's
misconduct warranted analogizing to the guidelines for intentional
misrepresentations, which
recommend a fine of $10,000 to $100,000 and a suspension for 10 days to
two years, or, in egregious cases, a bar. In applying the NASD's Principal
Considerations to the ultimate determination of sanctions, the Hearing
Panel found the following
highly- aggravating. circumstances particularly relevant.
- Eastman did
not accept responsibility for and acknowledge his misconduct to RBC Dain prior to detection.
- Although this was a single episode, Eastman made his
misrepresentations over several months. He could have told the
truth, or simply said that he had changed his mind about
leaving Piper Jaffray.
- Finally, Eastman's misconduct was intentional, and it resulted
in the potential for very substantial gain.
Eastman points to several mitigating
factors.
- He did
not attempt to move or spend the $400,000 loan before RBC Dain reclaimed the funds.
The Panel found Eastman entitled to little credit because, given the speed with which RBC Dain reclaimed
the funds, he had little opportunity to spend or move them --- moreover, Eastman did not voluntarily return
the funds.
- He was not motivated by any pressing need
for funds. The Panel noted that the $400,000 loan was sought by
Eastman and was substantially larger than what RBC Dain initially
offered. Further, he admitted that he wanted the additional money he would obtain from RBC
Dain, compared to
what he would earn at Piper Jaffray.
- He had no
prior disciplinary history, but while a prior history may be an
aggravating factor, the lack of a prior history is not mitigating.
- No customers were hurt by his actions, but the fact that he
employed misrepresentations to obtain funds from a firm, rather than from
a customer, is hardly mitigating.
- RBC
Dain did not suffer a loss, but that was attributable to RBC Dain's prompt
action in reclaiming the funds, not to anything that Eastman did.
- He assisted NASD staff during the investigation by providing
requested documents and testimony, and by admitting his actions during his
testimony. Regardless, he was required to provide requested documents and
testimony, however, pursuant to NASD Rule 8210, and he is entitled to little
credit for telling the truth, at last, when compelled to testify under
oath.
Decision
The Hearing Panel suspended Eastman in all capacities for two
years and imposed a $20,000 fine.
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Bill Singer's
Comment
Okay, look, I'm not
defending Eastman's conduct in any way, shape, or fashion. We
all clear on that from the git-go? Nonetheless, here's what
troubles me. The NASD has come down on a stockbroker for
misrepresenting his production --- plain and simple. Bottom
line: fraud is fraud. However, I thought we just read in
the newspapers and watched on television a slew of stories about major
brokerage firms engaging in wholesale fraud by lying about their
research practices, their IPO allocations, and the manner in which
they entered late trades at mutual funds. Now, just taking this
Eastman case to its logical conclusion, weren't a lot of stockbrokers
induced into signing on with the major BDs because they were told
about the firm's reputation for having top-rated, independent research
. . . and for making bona fide public distributions of their IPOs . .
. and for generally having a reputation for integrity in the
industry? If you think I'm stretching the point, why not look at
some of the recruiting ads some of the big boys ran the past few
years. While you're at it, watch some of their television spots.
It's nice that the NASD
suspends Mr. Eastman for 2 years and fines him $20,000. But what
about the thousands of men and women on Wall Street who were induced
to leave their former firms --- with the added enticement of a
loan --- and woke up one day to learn that the shop they came to
wasn't all it was cracked up to be? What about those folks who
now want to leave because their firm's name was tarnished when its
misconduct was publicized but are now being held hostage by the threat
of repayment of the loan? Will NASD also prosecute the employer
BD for fraudulently inducing its employees to leave their jobs?
Or is it yet another double standard on Wall Street? |
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