Welcome to Financial Advisor IQ

How Submitting False Expenses Gets You in Deeper Trouble Than You Think

By Rita Raagas De Ramos June 10, 2019

Some people might think they can get away with submitting false expenses, especially if they amount to only a few hundreds of dollars. But the offense itself is considered a serious violation by broker-dealer firms and Finra. And it can get you fired, with a black mark on your permanent record.

Susan Schroeder, head of Finra’s Department of Enforcement, says falsifying expenses should be considered a warning sign of an individual’s potential for harming investors.

“Something we’ve been talking about internally when it comes to T&E [travel and expense] is the value of false T&Es as a red flag,” Schroeder said last month at the Finra annual conference in Washington, D.C.

“If you’ve got a registered rep who is consistently putting in false expenses for reimbursement from her firm, first of all, you have sort of a demonstrated willingness to engage in dishonest conduct,” she explained.

Beyond that, and “more importantly,” Schroder said broker-dealer firms must investigate the root causes of the falsifying of expenses.

Schroder said the “circumstances in the rep's life” should be probed to see if the rep is experiencing “financial difficulty” that would lead the rep to engage in other kinds of misconduct, such as customer-facing misconduct.

“That’s what we’re really worried about,” Schroder said. “And so, if we see a pattern of T&E abuse, what we’ll look at is the customer-facing misconduct. Or, is there access to trading going on? Are we seeing unsuitable recommendations for the sake of earning higher commissions? Is the T&E a symptom of a larger problem?”

At the same conference, William St. Louis, regional director for sales practice at Finra’s Northeast Region, said the self-regulator is seeing “an increasing number of associated persons being terminated for presenting falsified expense documents to their firms, typically around meals or car services.”

Schroeder and St. Louis were responding to a question from an individual in the audience, who wanted to know how T&E falls under Finra’s wheelhouse. The individual noted that during his last Finra examination, the self-regulator “spent a lot of time questioning me about my T&E.”

St. Louis said there are at least two areas of concern to Finra where T&E is relevant — from the perspectives of books and records and principles of trade.

As T&E relates to those two areas, “that’s something that we will look at and in egregious cases make referrals to enforcement,” he said.

T&E draws Finra’s attention when there appears to be “no real business basis for” the expense, according to St. Louis.

“Obviously, it could be under-reported compensation, it could be a tax reporting issue for the firm, but it’s also a books-and-records issue for the firm,” St. Louis said.

“Similarly, if a firm is thinly capitalized and we see that these sorts of personal reimbursements — that could raise capital implications. And from a permanency of capital perspective, if the reimbursement is for someone who made a recent infusion, it could be a disguised premature capital withdrawal and that also would raise net capital and books and records concerns,” he added.

Finra’s disciplinary actions reports in recent months show three individuals who were employed at broker-dealer firms and have been barred from the industry for T&E issues. The individuals accepted the bar without admitting or denying Finra’s findings.

Elizabeth Marie Garcia was barred in February. Finra’s findings showed that while associated with Merrill Lynch, she obtained around $9,015 in reimbursement for childcare expenses that she did not incur. Finra said Garcia falsely stated that she had paid a daycare facility for childcare services on particular dates and also falsified signed certifications and fabricated signed receipts purporting to be from the daycare facility.

John Joseph Baldeck was barred in November. Finra’s findings showed that Baldeck refused to complete on-the-record testimony in connection with its investigation concerning his request and receipt of reimbursement from Morgan Stanley for expenses described as client meal expenses, when the meals were actually personal in nature.

John Robert Nicholson was also barred in November. Finra’s findings showed that Nicholson obtained $1,959.80 from Merrill Lynch by submitting false expense reports. Finra said while Nicholson was a complex manager at the firm, he was permitted to request and obtain reimbursement for car mileage expenses that he incurred. Nicholson submitted false expense reports to the firm overstating the miles he actually traveled and claimed that he incurred fictitious mileage expenses to obtain funds from the firm that he was not entitled to receive, according to Finra.