FINRA Negligent Supervision and Theft Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
Timothy Charles Cross (CRD #1452750, Registered Principal, Washougal, Washington) submitted a Letter of Acceptance, Waiver and Consent in which he was fined $10,000, suspended from association with any FINRA member in any principal or supervisory capacity for six months, and required to requalify as a general securities principal by examination before association with any member firm in a principal or supervisory capacity. Without admitting or denying the findings, Cross consented to the described sanctions and to the entry of findings that he failed to supervise the activities of a registered representative of his member firm in a manner that was reasonably designed to achieve compliance with applicable securities laws and regulations. The findings stated that Cross was the registered representative’s designated supervisor. The findings also stated that the registered representative, through her fraudulent scheme, converted to her own use and benefit at least $8 million from clients, including the firm’s customers.
The findings also included that the representative persuaded her clients to liquidate existing investments, for the purpose of purchasing other investments, and instructed the customers to make the checks payable to an entity Cross owned and with which she conducted business. Rather than use the clients’ funds to purchase the other investments, she diverted their funds to her own personal use. FINRA found that in order to conceal her conversion of the clients’ funds, she prepared and sent to the clients’ false account statements, and she concealed from the firm the personal bank account where the clients’ funds were deposited. The findings also included that approximately once a month Cross received from the representative a blotter that listed purchases and sales processed through direct applications to issuers; Cross also received reports from the firm’s insurance affiliate, which showed the representative’s insurance sales activity, except for the business she conducted with other insurers.
FINRA found that some of the representative’s outside insurance business was conducted through Cross’ insurance agency; Cross was therefore able to track all of the representative’s business except for a portion of her outside insurance business. FINRA also found that the representative’s income from her securities business and from insurance business conducted through the firm’s affiliate was not sufficient to pay her expenses; and that, although it was obvious that the representative had additional income, Cross did not attempt to determine the source of that income. In addition, FINRA determined that the securities blotters Cross reviewed showed numerous sales of securities by the representative’s clients and did not show that they had purchased other products with the proceeds of those sales; but Cross did not take note of the liquidations shown on the blotters and make inquiries to determine what happened to the proceeds of those sales. Moreover, FINRA found that Cross conducted an inspection of the representative’s office; and that the firm’s inspection checklist required him to complete a checking account review form for each doing business as (DBA) and outside business activity (OBA) accounts owned or controlled by the representative as well as any other accounts where commissions are deposited, including business accounts, DBA accounts and personal accounts. Furthermore, FINRA found that before the inspection of the representative’s office, Cross participated in the firm’s webcast training session regarding office inspections; a significant portion of the training was devoted to the review of checking accounts. The findings also stated that as part of the inspection, Cross reviewed account statements for the registered representative’s business account; the representative told Cross that the business account was her only bank account. The findings also included that there were several reasons why Cross should have known that the representative had another bank account and that some of her commissions were deposited into that account; FINRA found that Cross should have realized that the commissions deposited into the business account represented less than all of the registered representative’s income. FINRA found that Cross knew that the representative frequently sold an entity’s annuities and there was no evidence that the entity’s commissions were deposited into the business account; and that Cross could also see that the representative did not pay her personal expenses from the business account, a further indication that she had another account. FINRA also found that Cross failed to note large deposits that were shown on the business account statements; that the statements showed 35 deposits of $2,000 or more from unidentified sources in a 12-month period, and that the total amount of those deposits was approximately $497,585. In addition, FINRA determined that pursuant to his firm’s directives, Cross should have requested documentation showing the sources of those payments; had he done so, Cross would have learned of the personal account where the registered representative had deposited clients’ funds, and thus would have discovered that the representative had received large payments from customers.
The suspension is in effect from July 18, 2011, through January 17, 2012. (FINRA Case #2010021640302).