accounts and the firm failed to have follow-up procedures for suspicious
activity, which led to Smith being able to conduct his illegal scheme.195
Smith’s scheme started over a decade before he began working at CRI.196
When he joined the CRI, he came with a separate brokerage account from
another FINRA member firm.197 Although he was asked to transfer the
account to CRI, he gave several reasons for why he could not and was
ultimately allowed to keep the fund.198 Cantone saw odd activity in the
statements for the separate account and questioned Smith.199 Smith lied about
the funds, claiming that they were from real estate and his wife’s antique
business.200 There were other times that Cantone noticed suspicious activity,
but Smith always had explanations for the activity in question.201 Cantone
relied on the explanations from Smith without further investigation into his
account and customer activity.202 FINRA thus concluded that Cantone failed
to supervise Smith for her reliance on his statements.203
This comes down to the question of “reasonable supervision.” She had
more authority in the company than most CCOs. Cantone was in fact
monitoring Smith’s accounts and she questioned activity that seemed out of
the ordinary. Is it reasonable to trust a veteran registered representative with
a good reputation? Many compliance professionals would say “yes.”
It is also noteworthy that the fraudulent activity started over a decade
before Smith’s employment with CRI. How is it that the other registered
FINRA firm—i.e., Smith’s previous employer—never caught on to this
activity and was not held liable, but CRI and Cantone were held liable? It
also begs the question: how long has Smith been taking advantage of
customers? Smith registered with FINRA in 1974 and the scheme in question
started in 1992.204 How much did Smith get away with in over three decades
before he registered with FINRA? Smith’s scam makes it easier to
understand why Cantone believed his well-reasoned explanations for the
suspicious activity in his outside brokerage account.
195. Id. at 3–4.
196. Id. at 4.
197. Id. at 6–7.
198. Id. at 7.
199. Id. at 7–8.
200. See id. at 8.