2004
CASE ANALYSIS

 DEPARTMENT OF ENFORCEMENT, Complainant, v. RICHARD S. JACOBSON, Respondent
Disciplinary Proceeding No. C3A030024 
HEARING PANEL DECISION January 23, 2004 

 A Little Background

In March 1998, JW (who had been referred by her brother) opened an Individual Retirement Account at SSB with Registered Representative Richard Jacobson and initially invested approximately $5,000 in a Dow10 Unit Investment Trust (UIT), which she rolled over into a new Dow10 UIT in March 1999. Later in 1999, after her brother invested in an Internet UIT that performed well, JW also invested approximately $4,700 of her IRA funds in the same Internet UIT, on Jacobson's recommendation. In January 2000, Jacobson induced JW to open a margin account, in which she invested an inheritance of approximately $100,000 and on Jacobson's recommendation, she purchased an Internet UIT. JW subsequently also purchased some stocks in her account, and in June 2000 she transferred additional holdings from an account at another firm to her SSB margin account. 

Discretion

Beginning in approximately June 2000, Jacobson admits he exercised discretion in trading JW's account. He acknowledges that from June through November 2000, "there were a large number of trades in [JW's] account. These trades were made without specific advance authority from [JW], and without written discretion." According to Jacobson, JW's brother was trading his account very actively, and JW wanted to duplicate his trading patterns, but she was frequently out of town and unavailable to approve trades. 

Jacobson knew that the SSB regional manager generally did not permit RRs to exercise discretion in customer accounts, believing that discretionary accounts were too risky. The only exception to this policy was for accounts under two SSB programs which required that the representatives be specially trained and follow strict investment guidelines, and that the accounts be closely monitored. Jacobson knew JW's speculative trading would not have been permitted under those programs. In spite of this, Jacobson agreed to and did engage in discretionary trading in JW's account, without written authorization from JW and without notifying SSB. 

Margin Balance

Jacobson's trading led to a substantial margin debit balance in JW's account, which attracted the attention of branch management. In late 2000, the branch sent JW a letter noting the margin balance and corresponding interest charges, and asking JW to acknowledge that she had "been aware of all transactions in [her] account [and that the] transactions [met her] investment objectives and [had] been initiated with [her] full knowledge and consent." 

Client Balks

The Scheme

In February 2001 Jacobson met with his SSB branch manager and told him that JW had instructed him to liquidate her UIT holdings on September 22, 2000, but that he had forgotten to enter the order because he was leaving on vacation. Jacobson showed the branch manager an entry in his day-timer for September 22 that Jacobson had falsified to support his story. He told the branch manager that when he returned, he did not recall the order, and that JW did not realize he had failed to effect the order because she was caring for her ill mother and had not been opening her account statements and confirmations.

The then-current value of the UITs was approximately $100,000 less than on September 22. According to the supervisor, Jacobson "stated emphatically that he knew it was his entire fault, but that he would like some time to pay for this error as he did not have the funds available to him." Based on Jacobson's lie, SSB made a "trade error correction" in JW's account to reflect the sale of the UITs in September, which had the effect of adding approximately $101,000 to the value of the account. 

Although SSB could have charged the full amount of the correction to Jacobson, his branch manager decided, "given his forthright admission of guilt and willingness to pay for his mistake," that the branch would contribute $25,000. In addition, SSB allowed Jacobson to sign a note to SSB for the balance, approximately $76,000, which provided that Jacobson could pay the note through payroll deductions over the following 18 months. 

Customer Arbitrations

In January 2002, JW filed an arbitration claim against SSB, Jacobson and the branch manager, alleging unauthorized trading in her account. In her arbitration claim, JW included allegations regarding Jacobson's scheme to get SSB to pay for her losses. When SSB questioned Jacobson about those allegations, he insisted that they were untrue. 

In February 2000,  the branch manager, Jacobson and SSB counsel attended a mediation involving an arbitration claim filed by JW's brother, who had also alleged unauthorized trading by Jacobson in his account. During the mediation, the brother's attorney, who also represented JW, told the branch manager, SSB counsel and Jacobson that JW had tape recorded her conversations with Jacobson about the scheme, and gave them copies of transcripts of the recordings. Upon seeing the transcripts, Jacobson confessed. 

In light of his confession, SSB paid nearly $140,000 in settlement to the brother and then terminated Jacobson.  SSB entered into a settlement agreement with Jacobson, pursuant to which he reimbursed SSB the $25,000, plus interest, that SSB had contributed to the payment to JW, as well as the balance due under the $76,000 note. Jacobson did not contribute to the settlement with JW's brother.  Apparently JW has neither pursued nor settled her arbitration claim, and it remains pending. 

NASD Complaint

The Department of Enforcement filed a Complaint on June 26, 2003, charging that respondent Richard S. Jacobson (1) exercised discretion in the account of a customer without written authorization, in violation of Rules 2510 and 2110, and (2) engaged in unethical conduct, in violation of Rule 2110, by falsely representing to his employer that he had failed to effect a sell order placed by the customer, in order to induce the firm to restore value to the customer's account. Jacobson filed an Answer in which he admitted the violations, but requested a hearing on the issue of sanctions. Jacobson admited the violations but the Hearing Panel independently considered the charges and finds that they supported the allegations. 

Jacobson admits that he exercised discretion in JW's account; that he did not have written authorization from JW to exercise such discretion; and that, since he did not notify SSB that he was exercising discretion, SSB never authorized it. 

Jacobson conduct in concocting the scheme to essentially defraud SSB was unethical and constituted a violation of Rule 2110.

Sanctions

Enforcement requested that, for exercising discretion in JW's account without written authorization an $11,855.03 fine (which includes disgorgement of net commissions in the amount of $1,855.03 attributable to his discretionary trading in JW's account) and a 30 day suspension in all capacities. For his unethical conduct, a bar was requested. In contrast, Jacobson suggested for the discretion violation a fine of $4,355.03 (including his commissions), but no suspension, and, for his unethical scheme, a $10,000 fine and a 90-day suspension in all capacities. 

The NASD Sanction Guidelines for exercising discretion without written authorization recommend a fine of $2,500 to $10,000, plus the amount of the respondent's financial benefit from the transactions, and, in egregious cases, a suspension of 10 to 30 business days. The Guidelines list as principal considerations in determining sanctions for these violations (1) whether the customer's grant of discretion was express or implied, and (2) whether the firm's policies prohibited discretionary trading. 

In this case, there is no evidence refuting Jacobson claim that JW expressly granted him discretion to trade her account.  However, he knew that SSB's regional manger did not permit discretionary accounts for the anticipated trading.  Under these circumstances, the Hearing Panel agrees with Enforcement that this was a highly egregious violation. 

From Bad To Worse?

For the scheme to reimburse JW, there are no on-point guidelines, and the Panel analogized to those 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. The Panel noted the following circumstances at being highly egregious: 

• Jacobson made up an elaborate lie, and falsified his day-timer to support it, in order to cover up his improper discretionary trading in JW's account. 

• Although he claims that he expected that the full amount of the "correction" would be charged to him, when his branch manager offered to have the branch pay $25,000 of the total, he accepted it. 

• He also solicited a loan from SSB to fund the balance. 

• When JW filed her arbitration claim disclosing the scheme, he continued to lie. 

• He confessed only when confronted with transcripts his conversations with JW that made it impossible to continue to deny his misconduct. 

Additionally, the Panel noted the following aggravating factors: 

(1) Jacobson did not acknowledge his scheme until the firm learned of it through the transcripts of the telephone conversations; 

(2) he attempted to conceal his misconduct from the firm; 

(3) his misconduct caused direct and substantial injury to the firm; 

(4) his misconduct was intentional; and 

(5) his misconduct resulted in monetary gain for him. 

Mitigation?

Jacobson argued the following in mitigation: 

(1) his misconduct was "an isolated act in a long career without prior blemish"; 

(2) his scheme "was designed not to harm but to help his customer by allowing her to recover from a market loss"; 

(3) he was fired by SSB, which, he argues, constitutes discipline by the firm that can be considered in mitigation of discipline by NASD; and 

(4) he cooperated in NASD's investigation. 

The Panel was not persuaded by Jacobson's arguements. They noted that

• His scheme may have been an isolated instance, but it was carefully conceived and implemented by Jacobson in response to a perceived threat to his livelihood that, in turn, was attributable to his misconduct in exercising discretion in JW's account. 

• His scheme was primarily designed to save himself from being fired, and he pursued it at the expense of his employer. 

• His firing by SSB was not the sort of disciplinary action that could be considered in mitigation; it was the natural consequence of being caught in a lie.

• When he was fired, Jacobson moved to another NASD member, where he continues to function as a registered representative. 

• Athough he cooperated with NASD's investigation by, for example, providing a written statement of the relevant facts, he merely acknowledged the misconduct that he was forced to admit when the transcripts appeared. There is little doubt that if JW had not recorded the conversations, Jacobson would have continued to lie. 

Decision

Respondent Richard S. Jacobson (1) exercised discretion in a customer's account without written authorization, in violation of Rules 2510 and 2110; and (2) engaged in unethical conduct, in violation of Rule 2110, by falsely representing to his employer firm that he had failed to effect a sell order placed by the customer, in order to induce the firm to restore value to the customer's account. For the unethical conduct, he is barred from associating with any NASD member in any capacity; in light of the bar, no additional sanctions are imposed for improperly exercising discretion.