Carlos Benavidez, Jr., of Louisville, Kentucky, a stockbroker with Waddell & Reed, was fined $10,000 and suspended from association with any Financial Industry Regulatory Authority (FINRA) member in any and all capacities for two months after consenting to findings that he exercised discretion in eighty customer accounts without prior written authorization from the customers or prior written approval from his broker. Letter of Acceptance, Waiver and Consent, No. 2014043025701 (Jan. 4, 2016).
According to the AWC, beginning on or around December 2009, Benavidez and two other representatives, SR and MR, who were registered with Waddell & Reed, formed RBR Group and subsequently shared a customer base and conducted securities business together.
The AWC indicated that beginning in or around January 2013, Benavidez and SR had met with a group of customers quarterly, and made periodic telephone calls to customers to discuss any changes to their investment profile that might affect recommendations by RBR Group, and subsequently recommended the financial sector in which to invest. Benavidez, SR, and MR had met weekly to discuss whether trades should be effected in customers’ accounts, where MR would place the trades if so. MR had notified or attempted to notify customers of securities transactions in their accounts after the trades were placed.
The AWC stated that from January 2013 through January 2015, Benavidez had ultimately exercised discretion in effecting hundreds of securities transactions in an estimated eighty customer accounts. Benavidez reportedly failed to obtain written authorization from customers to exercise discretion in their accounts, and the firm did not approve the accounts for discretionary trading in writing. FINRA found as a consequence, Benavidez had violated NASD Conduct Rule 2510(b) and FINRA Rule 2010.
Additionally, the AWC reported that on or around September 2, 2014, RBR Group, acting through MR, effected the same securities transaction in an estimated twenty-six customer accounts. Consequently, on or around September 3, 2014, the firm informed MR that the firm was investigating whether RBR Group had exercised discretion in customer accounts without written authorization.
Further, on or around September 9, 2014, Benavidez and MR reportedly backdated twenty-six customer notes that were created in the firm’s SmartOffice program in order to falsely reflect that Benavidez or another member of RBR Group had conversed with such customers on August 29, 2014, prior to trades were effected on September 2, 2014. FINRA found that it was not until September 8, 2014, that Benavidez or MR spoke with twenty-six customers about the trades. FINRA held that Benavidez had violated Rule 2010 as a result of causing the firm to have inaccurate records (violation of Section 17a-3 of Securities Exchange Act of 1934).
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. FINRA Conduct Rule 3010 specifically provides that each member shall establish and maintain a system to supervise the activities of each stockbroker and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision shall rest with the member.
By definition, a broker is liable for making unauthorized trades without the customer’s prior authorization. Absent written discretion, it is a violation of Section 10(b) of the Exchange Act, and Rule 10b-5, as promulgated thereunder, to effect transactions in customer accounts without their prior authorization or consent.
Customers also have a duty to review securities purchase and sale confirmations and review their securities accounts. If a stockbroker has placed unauthorized transactions in a customer account, the customer under most circumstances has a duty to act, or a duty to complain, or else generally, the customer may be deemed to have ratified these transactions, with actual or imputed knowledge, by doing nothing. Under such circumstances, a customer’s damages may be limited to the time they knew or should have known about the unauthorized transactions.
Public disclosure records reveal that Benavidez was discharged by Waddell & Reed, Inc. on January 27, 2015, amid allegations of Benavidez’s use of discretion in multiple client accounts without written authorization in violation of the firm’s policies and allegations of falsification of client notes. Benavidez became subject to a pending customer dispute on February 12, 2015, where the customer alleged that the purchase of a closed-end fund did not fit with the customer’s objectives and risk tolerance, and was over concentrated in the account.
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