The danger of the pre-audit heads-up

February 2, 2012 | Last updated on February 2, 2012
2 min read

Only a month into 2012, the delegation of compliance duties is already becoming an issue with Wall Street regulators.

Following on the heels of the recent sanction of the Lane Capital Markets CEO by FINRA, the Securities and Exchange Commission (SEC) has now published a settlement involving pre-authorized compliance audits and 1st Discount Brokerage (1DB), Inc., a West Palm Beach Florida based corporation.

The executive vice-president Michael R. Fisher had primary responsibility to oversee 1DB’s Heightened Supervision Committee (HSC), created to reduce the firm’s exposure due to inappropriate conduct by its reps.

However, 1DB had already invited a bad boy into their midst by hiring Michael Jinyong Park as a registered representative in 2002. Prior to his employment at 1DB, Park had been terminated by his previous two employers for customer complaints and misconduct.

Not only did 1DB overlook his past, Fisher proceeded to ignore his own compliance duties when conducting audits. Despite being obligated to conduct “unannounced inspections and audits”, they announced the audits a month in advance and didn’t provide auditors with prior reports for comparison.

Park, who began operating a Ponzi scheme through his securities firm Park Capital Management Group, Inc. in 2001, had ample time and opportunities to cover up his illegal activities and succeeded in defrauding more than 50 investors out of almost $9 million.

Fisher, given the responsibility of overseeing the HSC, also failed to follow up on customer complaints regarding Park, and did not review Park’s activities as required by the committee.

The SEC asserts that, “An inquiry into [Park’s declining commissions] would have included contacting customers who were closing or liquidating their accounts…in order to invest with Park’s other business, [and would have] revealed the Ponzi scheme.”

1DB has been censured and ordered to pay civil penalties of $40,000, and Fisher has been suspended and ordered to pay civil penalties of $10,000.

Read the summary of the case by Bill Singer, Wall Street blogger.