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Check Kiting: A Fraud that Effectively Ends Careers on Wall Street
by Howard Haykin
WHAT WENT WRONG. A broker with USAA Financial Advisors who engaged in a check-kiting scheme was sanctioned by FINRA. He agreed to pay a $7.5K fine and serve a 12-month suspension. He previously was discharged by the broker-dealer, after serving 9 years as a registered rep.
From October 2015 through August 2017, the broker deposited 35 checks totaling approximately $37,000 in 3 personal bank accounts he held with an affiliated bank. Each of the checks had previously been cashed by the broker – which he knew and thus expected that each would be rejected shortly thereafter by the bank. With the available funds generated by each deposit, the broker withdrew cash or made purchases, paid bills, or transferred money between his bank accounts. After the bank rejected the deposits, the broker repaid the amounts he owed. [By his actions, the broker violated FINRA Rule 2010.]
FINANCIALISH TAKE AWAYS. The broker in this case was hit with a 12-month suspension because he engaged in a long-term check-kiting scheme. That would seem 'par for the course', given what I learned about FINRA cases dealing with such activities.
Check-kiting cases are relatively straight forward, differing only in the number of checks involved, their total dollar value, and the duration of the scheme. Over the past 4 years, FINRA has sanctioned 15 associated persons – mainly brokers – for engaging in check-kiting schemes. In every case, the broker was discharged from the firm with which they were associated.
- Only one broker is still employed in a registered capacity; he's also been in the business the longest - 33 years.
- Most other brokers were relatively inexperienced – with 6 or fewer years in the business.
- Most brokers were fined $5K and suspended 3 or 4 months.
- These brokers typically kited 5 or fewer checks over periods ranging from 5 days to 4 months.
- Brokers with larger kiting schemes received more severe sanctions.
- $15K fine and 15-month suspension for $172,000 worth of checks kited over a 3-month period.
- $15K fine and 2-year suspension for $14,000 worth of checks kited over a 16-month period.
- $10K fine and 18-month suspension for $46,000 worth of checks kited over a 24-month period.
- $5K fine and 18-month suspension for $164,000 worth of checks kited over a 5-month period.
- At least 2 brokers were barred for failing “to request termination of his suspension within 3 months of the date of the Notice of Suspension.”
This case was reported in FINRA Disciplinary Actions for March 2019.
For further details, go to ... FINRA Disciplinary Actions Online, and refer to Case #2017055772801.
