More than five years after the alleged supervisory failures and about six weeks after its parent firm unveiled a merger into TD Bank Group, a wealth manager resolved a FINRA case.
First Horizon Advisors, the wealth management arm of Memphis, Tennessee-based First Horizon Corp., agreed to pay a fine of $175,000 after FINRA accused the firm of failing to investigate red flags raised by a former broker who caused clients significant losses,
TD Bank is
In any M&A deal between large, closely regulated entities, it’s “routine” to discuss any ongoing regulatory matters involving the seller, with the buyer sometimes asking the incoming firm to address them before the close of the transaction or to set aside money to pay for them, according to former SEC enforcement official and current Duane Morris partner Mary Hansen.
“Acquirers are very concerned about outstanding regulatory problems because corporate fines have been in the spotlight and, unlike previous administrations, we have an administration now that is not as deferential to the idea that shareholders are harmed by large penalties,” she said.
An earlier settlement
Representatives for TD Bank, which didn’t change hands as part of Charles Schwab’s $22 billion acquisition of
Representatives for First Horizon declined to comment. The firm didn’t admit or deny the allegations as part of the settlement, and a letter from First Horizon’s attorney that’s attached to the
A former First Horizon Advisors rep named Michael Scott Walker operated an outside business activity that was an investment club of two married couples who racked up losses despite Walker’s claims that it had yielded annual returns between 15% and 20% since 2005, according to FINRA’s letter of acceptance, waiver and consent. The document doesn’t identify Walker by name, but the listed timing of his association with First Horizon from March 2013 to October 2017 and a disclosure on FINRA
In May 2021, First Horizon paid a different settlement of $350,000 after clients alleged in a civil lawsuit filed in state court that Walker had embezzled “a substantial amount” of the money they invested through the club toward interests in a real estate asset, according to Walker’s detailed BrokerCheck file. Walker didn’t contribute any money to the payment, the document states.
“Neither the firm nor any of its affiliates approved or had any knowledge of the alleged investment club or the real estate investment scheme described in the complaint,” according to the BrokerCheck disclosure, which notes the client had initially sought $3 million.
Efforts to reach Walker weren’t successful. No information was available for any attorneys who may have represented him in either matter. He’s not currently associated with any brokerage or SEC-registered RIA.
Red flags
FINRA’s case against First Horizon focused on its supervision of Walker, who didn’t disclose the investing club to the firm until 19 months after he had first opened a brokerage account in its name in May 2014, according to the settlement order. Between July 2015 and November 2016, First Horizon failed to detect the red flags, and, from February 2014 to February 2017, it didn’t “reasonably supervise” electronic communications to and from its reps, the order states.
Over part of that span, the signals of misconduct related to the fact that Walker was “engaged in an undisclosed, investment-related, outside business activity,” according to FINRA.
During others, it didn’t follow up on other potential signs or risk, such as the 100 trades per month in the outside brokerage accounts with high-margin balances of up to 140% of its value, investigators say. With additional large cash transfers flowing out of the account, its balance tumbled to $730,000 in November 2016 from $2.6 million in December 2015, FINRA says. A 2015 email with a promissory note of $300,000 plus interest and other messages should have raised alarms too, according to the document.
In another email from the following year, Walker told one former First Horizon client that an investment strategy he was using could “easily manufacture one percent per month” and that he would “personally guarantee that,” FINRA investigators say.
Under the settlement, First Horizon agreed to a censure as well as the fine and the certification of its undertakings to correct the failures. Separate claims against First Horizon “remain pending” as part of the civil lawsuit filed by Walker’s former clients, according to FINRA.
First Horizon’s wealth manager has 77 branches and 320 reps. At the end of the first quarter, its parent had $88.6 billion in assets, 417 banking centers and 7,900 employees, its earnings statement
“While higher long-term rates and global uncertainty impacted our counter-cyclical businesses, our highly asset-sensitive balance sheet is well positioned to benefit from rising short-term rates,” First Horizon CEO Bryan Jordan said in a statement. “I'm particularly proud of the hard work and dedication of our associates who contributed to the successful completion of [Iberiabank’s] systems and signage integration during the quarter. With that work behind us, we remain focused on driving value for our associates, clients, communities and shareholders as we look forward to completing the proposed transaction with TD Bank Group.”
