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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