Carl W. Busch of Oklahoma City, Oklahoma, a Stockbroker with WFG Financial, was fined $5,000 and suspended in all principal capacities from association with any Financial Industry Regulatory Authority (FINRA) member firm after consenting to findings that he failed to adequately supervise the sales practice of Larry Michael Crabtree, a Stockbroker of WFG, who had recommended and engaged in unsuitable trading in the IRA account of a retired customer(s); and exercised discretion without prior approval from customers. Letter of Acceptance, Waiver and Consent, No. 2013038710502 (Dec. 16, 2015).
According to the AWC, from December 2010 through May 2011, Crabtree used discretion to make three unsuitable purchases of securities on CC’s behalf. CC’s purchase of a $100,831 position in GMX Resources Preferred Stock, a highly-leveraged oil and gas exploration company, resulted in nearly a complete loss when the company had declared bankruptcy. Further, the AWC indicated that other investments executed by Crabtree were closed-end funds, with substantial risks in pursuit of surpassing ten percent returns yearly. FINRA found that the three investments, which had collectively constituted almost one-half of the investable assets in CC’s account, had carried level of risk that was unsuitable for a retired individual with known health problems, limited income, and limited liquid assets. The AWC indicated that each investment was also inconsistent with CC’s moderate risk tolerance. FINRA found that as a result of recommending unsuitable transactions, Crabtree had violated NASD Conduct Rule 2310, FINRA Rules 2010 and 2111.
The AWC subsequently stated that Crabtree had exercised discretion in the accounts of three customers. Crabtree had reportedly executed approximately two hundred and twenty-nine discretionary trades in the account of customer CC, an estimated eleven hundred discretionary trades in accounts of JS and RS. Crabtree reportedly never received written authorization or firm’s acceptance of accounts as discretionary. The AWC stated that Crabtree falsely denied using discretion in compliance questionnaires from 2009, 2011, and 2012.
According to the AWC, Busch had failed to establish and maintain a supervisory system designed to ensure that transactions executed in the firm’s customer accounts were suitable. The AWC indicated that Busch failed to adequately supervise Crabtree’s business practices, and failed to detect his unsuitable purchases of high-risk securities or his own use of discretion without authorization.
Despite suspecting ongoing red flags, Busch had reportedly failed to take adequate steps to supervise Crabtree’s sales activities. The AWC indicated that rather than reaching out to customers directly to discuss their accounts, Busch instead sent out activity letters that did not require response. FINRA also found that Busch failed to verify Crabtree’s denial of using unauthorized discretion. Finally, Busch was found to have failed to ensure that Crabtree’s customers were being charged a limited commission as he had been directed to do so by his supervisor. FINRA held that by failing to appropriately supervise the sales practices of Crabtree, Busch had violated NASD Conduct Rule 3010 and Rule 2010.
FINRA, via NASD Rule 3010(a), requires that firms and supervisory personnel establish and maintain a supervisory system that is reasonably designed to achieve compliance with applicable securities laws and regulations. Additionally, Rule 3010(b) requires that firms establish, maintain and enforce written procedures to supervise their business and stockbrokers that are reasonably designed to achieve compliance with applicable securities.
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.
Public disclosure records via FINRA’s BrokerCheck reveal that Carl Busch has been subject to five disclosure incidents. On November 27, 2001, Busch settled a customer dispute for $50,000 after the customer alleged failure to supervise a representative who made unsuitable investments. On June 29, 2007, Southwest Securities, Inc. discharged Busch amid allegations that he owed the firm money and violated the firm’s policy and procedures concerning books and records. He was subject to a tax judgment/lien on July 7, 2009, a bankruptcy on December 11, 2009, and civil judgment/lien on April 3, 2014.
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