Rogue Brokers: Finra Asleep at the Wheel

Megan Barnett has the

interesting tale of Karen McKinley, a rogue Merrill Lynch broker in Florida.

McKinley had a habit of working to maximize her own commissions rather than

investing her clients’ funds in suitable investments; indeed, even after one

family told her that they would not pay commissions or fees, McKinley put them

in investments which forced them to pay $2.5 million in fees, of which McKinley

herself personally pocketed $600,000. Worse, she did that while explicitly telling

her client in three different letters that there were no commissions or fees

on the products she was putting them into.

Clearly, McKinley was not behaving in accordance with her fiduciary status,

and she is a repeat offender. The regulator, Finra, fined Merrill in 1997, again

in 2002, and quite possibly other times too, since most arbitration settlements

do not need to be made public. But McKinley kept her job, and it’s not clear

if she personally had to pay any fines.

What to do about this? Barnett implies that civil lawsuits like the one just

filed against McKinley and Merrill are a smart way to go. The family in this

latest case has been awarded $6 million, and might get even more in punitive

damages. It’s not clear how the $6 million was calculated, though, if it doesn’t

include punitive damages, since the clients seem to have ended up with more

money, at the end of the day, than if McKinley had followed their instructions.

This lawsuit does strike me as an instance of the tort system being stretched

past its breaking point to do the job that criminal law and the regulatory structure

overseeing brokerages should properly be doing. If there are no real damages,

then torts are not the best way to go. But at the same time, the regulators

do seem to have been asleep at the wheel: how on earth did McKinley manage to

stay in her job? Indeed, she might even still be at Merrill – there’s

no indication in the news reports that she has been fired.

McKinley should personally have been fined heavily by Finra long ago, and forced

to relinquish her position at Merrill. The fact that she didn’t, and that this

sorry story is coming out only because a rich family can afford to take Merrill

Lynch to court, is quite depressing.

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