Initiated By
FINRA
Allegations
Doherty was named a respondent in a FINRA complaint alleging that he willfully violated Section 10(b) of the Securities Exchange Act of 1934, Exchange Act Rule 10b-5, and FINRA Rules 2010 and 2020 by engaging in prearranged transactions involving various securities, causing another FINRA member firm to suffer approximately $55,773 in losses. The complaint alleges that Doherty engaged in the prearranged transactions to obtain compensation and to enable another individual to deceive this individual's employer, the other member firm, into believing that he was complying with its internal policies and procedures relating to aged inventory so that he would receive additional compensation. Doherty undertook the prearranged trades when the individual used a code word, "Melissa," which was Doherty's wife name. Moreover, Doherty deceived his member firm about the nature of the transactions so that he could proceed with them despite such transactions being expressly prohibited by the firm's internal policies. Doherty also engaged in other conduct demonstrating that he knew, or was reckless in not knowing, that he was participating in a fraudulent scheme. In prearranged transactions, the individual and Doherty "split the ticket" and broke the sale(s) and/or purchase(s) into multiple trades to conceal their true purpose in the event of a trading review by the other firm or by Doherty's firm. In prearranged transactions, the individual and Doherty sought to conceal the pattern of their misconduct by switching the order of the trades and having this individual purchase securities from Doherty first, only to sell his aged position in the same securities to Doherty shortly thereafter, causing a loss to the other firm. Doherty also made multiple omissions of material fact when discussing the prearranged transactions with other firm personnel. Doherty acted with scienter when he defrauded the other FINRA firm by deceiving it into believing that it was no longer holding the aged securities positions, thus causing it both to violate the reserve requirements in its own aged inventory policy, and to lose the funds. The complaint also alleges that in the alternative, Doherty negligently made material omissions and engaged in a transaction, practice, or course of business that operated as a fraud or deceit on the other firm in violation of FINRA Rule 2010 by violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. The individual told Doherty that he wanted to enhance his compensation by deceiving his firm about his compliance with its aged inventory policy, so the unlawfulness of participation in the prearranged transactions should have been obvious to Doherty. Additionally, Doherty failed to disclose material facts when seeking internal approval from his firm to engage in the transactions. Those omissions were, at a minimum, negligent, because they involved the facts most necessary for firm personnel to apprehend the illegality of the prearranged transactions. The complaint further alleges that in the alternative, Doherty's conduct violated FINRA's rule by aiding and abetting the individual's violation of FINRA Rule 2020 through the fraudulent scheme.
Resolution
Decision
Bar
Bar (Permanent)
Registration Capacities Affected
All capacities
Duration
Indefinite
Start Date
6/15/2020
Sanctions
Monetary Penalty other than Fines
Amount
$7,897.48
Sanctions
Restitution
Amount
$56,093.00
Sanctions
interest on restitution
Regulator Statement
Hearing Panel Decision rendered June 14, 2019. The sanctions were based on findings that Doherty willfully violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and FINRA Rules 2010 and 2020 by intentionally engaging in a fraudulent, prearranged trading scheme to enable his customer, an individual associated with a FINRA member firm, who managed a proprietary account for the firm to evade that firm's aged inventory policy (its internal policies). The findings stated that Doherty and his customer undertook the prearranged round trip transactions for one purpose. Together, they sought to fraudulently update the "age" of Doherty's customer inventory on the customer's firm's books so that this customer would not be financially penalized. In doing so, Doherty engaged in a fraudulent scheme. Doherty knew that the customer's firm would have to pay his member firm commissions for non-bona-fide transactions in which there was no beneficial change in ownership. Doherty personally benefitted because he received a portion of his firm's commissions and kept his otherwise-difficult and second-largest client content. Although Doherty spoke with the head of his desk at his firm and the chief compliance officer before he executed the series of prearranged trades, he did not fully disclose the facts and circumstances of the trades. Furthermore, even if Doherty had acted with their approval, which he did not, as a registered representative in the securities industry, he cannot escape liability for fraud by shifting blame to his supervisors. The findings also stated that because FINRA found liability under cause one, it dismissed without discussion the alternative allegations of causes two and three.
On July 11, 2019, the Department of Enforcement filed with the Office of Hearing Officers a notice of appeal of the Hearing Panel decision.
NAC decision rendered June 15, 2020 wherein the findings made are affirmed and the sanctions imposed by the Hearing Panel are modified. The decision is final as of July 20, 2020.
Broker Comment
6/18/19 Disc Letter refers to Hearing Panel Decision of 6/14/2019 that Mr. Doherty be suspended from association with any member firm in any capacity for 2 years and pay restitution of $56,093 effective 8/4/2019. On 7/11/2019 the DOE appealed the Hearing Panel Decision to the FINRA NAC. As a result, all sanctions are stayed.
