July 13 (Reuters) - Falsifying expense reports is a fairly common offense, but for brokers, the fallout is unusually tough compared to the rest of Corporate America.
Take the case of Michael McIntyre. McIntyre, a veteran California-based broker, was permanently barred from the securities industry on Monday, partly due to a zero-tolerance stance by regulators.
McIntyre submitted more than $4,000 in fake restaurant receipts for reimbursement from Morgan Stanley Smith Barney , his employer until 2010, according to a Financial Industry Regulatory Authority disciplinary order.
Morgan Stanley fired McIntyre after learning of the bogus receipts he submitted for reimbursement in 2008 and 2009. McIntyre, however, argued that he was entitled to the money and that a branch manager encouraged him to get the extra pay.
The case highlights the serious consequences of a practice that is not uncommon in the brokerage industry or Corporate America. But for brokers, the outcome can be far more devastating than getting fired. Getting thrown out of the securities industry typically ends a broker’s only livelihood.
A review of FINRA’s disciplinary sanctions database shows eight expense report rulings since 2010.
In all but one case, brokers were barred from the industry for infractions including fabricated canceled checks or fake expenses for travel to seminars that never occurred. The remaining broker, alleged to have forged a supervisor’s signature, agreed to a one-year suspension and fine.
FINRA’s tough stance comes down to one thing: honesty. Seeking reimbursement for expenses one did not incur is stealing and lying.
“It’s still a matter of integrity,” said Michael Sullivan, a lawyer at Coughlin Duffy LLP in Morristown, New Jersey.
There are some situations that may fall into a grey area. While McIntyre admitted that his branch manager never told him to fabricate receipts, according to the ruling, the suggestion that he should “throw something together” could have implied as much. FINRA’s zero-tolerance stance could also leave some brokers in a bind as they try to reclaim legitimate expenses, including those from lost receipts.
McIntyre also claimed that some of his receipts had been lost.
McIntyre, whose disciplinary record was clean but for one customer complaint during his 27 years in the industry, is “disappointed and discouraged by the decision, and the process,” he said by email. He is now a broker for Crowell, Weedon & Co in Pasadena, California, and is considering an appeal. FINRA’s appellate body also has 45 days to decide on its own to review the case, during which brokers may keep working if their firms allow.
A Morgan Stanley spokeswoman declined to comment. A Crowell, Weedon spokesman did not return a call requesting comment.
Fabricating travel and entertainment expenses is common among employees who spend long hours away from home, said Allan Bachman, education manager for the Association of Certified Fraud Examiners (ACFE) in Austin, Texas. For brokers, that often includes frequent late night dinners and weekend outings. It can instill a “feeling like they’re giving way more than normal,” Bachman said.
A sense of entitlement sets in among some employees and a mindset that, if questioned about the expenses, they can simply “explain it all away,” Bachman said.
McIntyre’s case shows how badly that can go. He did not deny submitting fake receipts, according to the order. He argued, among other things, that he was entitled to the money through an expense allowance program he qualified for at Morgan Stanley. He made up the receipts because other business expenses he incurred were not eligible for the program.
FINRA’s hearing officers did not buy it. FINRA concluded that McIntyre’s “participation in the securities industry poses an unwarranted risk to the investing public.”
FINRA also had no sympathy for a Hawaii-based broker, barred in 2011. He tried to explain away $2,700 in fake invoices for a fictitious “conference room rental” as a “mistake.” But the case also involved a grey area: the broker said he used the money for office furniture after his firm had delayed that reimbursement for more than two years, according to a disciplinary order.
But FINRA found there were “no mitigating factors” in the broker’s pattern of misconduct. Efforts to reach the broker for comment were unsuccessful.
While it is tempting to think that no one looks at the reams of expense-report paperwork submitted at a large brokerage, that is not the case. A report may sail past a supervisor, but face another review by the accounts payable department, which checks the math. Sometimes a broker’s addition error can reveal a fraud scheme, said the ACFE’s Bachman.
Large companies also have internal audit departments. Their functions include verifying if expense reports are legitimate, said Bachman, who headed internal audit departments for several large organizations.
Auditors pay special attention to travel and entertainment expenses, a hotbed for fraud, Bachman said. That includes scrutinizing hotel receipts to see if the dates match receipts for airline travel.
Brokerages who fire advisers for expense report violations, or other misconduct, must disclose the termination in regulatory filings, so it is easy for FINRA to find out and ask questions.
The most obvious way to avoid harsh discipline is simply not to make up expenses.
There may be times when brokers feel compelled to fake receipts, such as when they really lose the originals. To avoid that scenario, charge as many expenses as possible so there are back-up records, said Marc Dobin, a lawyer in Jupiter, Florida.
And if you lose receipts for cash expenses, talk to your manager about how to legitimately substantiate them, he said.
In other words, do things by the book, rather than risk becoming the next poster child for regulators.
Otherwise, you may be barred by FINRA, which can then say, “See, we took another dishonest (broker) out of the system,” Dobin said.
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