Lifetime Ban Affirmed for Brokerage Founder
CHICAGO (CN) - The 7th Circuit upheld a lifetime ban from the securities industry for Birkelbach Investment Securities founder Carl Birkelbach for his "egregious" supervision of one of his traders.
The Financial Industry Regulatory Authority imposed the disciplinary sanction on appeal for Birkelbach's "egregious" supervision of his employee William Murphy's management of two accounts at Birkelbach Investment Securities.
This was a much harsher penalty than the original penalty imposed on Birkelbach - a fine of $25,000 and a 6-month suspension.
Murphy began managing Amy Lowry's account in 2004, and immediately began racking up transaction fees, buying and selling the same options contracts for nearly the same price to generate fees without any profit for the client, according to the 18-page ruling.
He generated more than $1 million in commissions from the Lowry account, which was valued at $1.7 million when Murphy took over management, and which at one point made up 18 percent of the firm's total revenues.
Murphy also assumed management of Benjamin Martinelli's account, and depleted 45 percent of the account's value in two months through unapproved trades and transaction fees.
As Murphy's supervisor, Birkelbach was required to approve all options trades, but never checked that Murphy's activities were authorized by the clients, or disapproved any of his trades, even after FINRA began investigating Lowry's complaint.
The SEC agreed with FINRA's assessment that "Birkelbach is a serious risk to the investing public, in whatever capacity he would function, that his failure to supervise was egregious, and that sanctions at the high end of the relevant range are warranted."
The 7th Circuit upheld the sanction on May 2, finding the SEC properly reviewed Birkelbach's "utter failure to take reasonable supervisory steps in light of the many red flags" raised by Murphy's conduct, and imposed the sanction based on the "significant harm caused to the customers on account of his inadequate supervision."
"We conclude that this was a meaningful review of Birkelbach's conduct, supported by the unrebutted facts of the case, and grounded in the law. In this light, we cannot say that the SEC abused its discretion in finding that this case was sufficiently egregious to impose a lifetime bar in all capacities," U.S. District Judge Frederick Kapala wrote for the three-judge panel.
While the SEC may have considered some of Birkelbach's behavior that occurred before the 5-year statute of limitations period, "the SEC may consider pertinent conduct occurring both before and after the relevant violative period to craft its sanction," the opinion concluded.