FINRA’s Department of Enforcement investigated Schmidt and found he violated FINRA rules and regulations in several ways. First, Schmidt borrowed approximately $2.25 million from seven LPL customers from May 2009 through November 2012. According to FINRA, the purpose of the personal loans was to purchase real estate in Hawaii and construct a vacation rental property on the premises. At the time, LPL’s policies and procedures prohibited a registered representative from borrowing money from a customer subject to certain exceptions not applicable here.
Second, FINRA alleged Schmidt purchased real estate in Hawaii and constructed a vacation rental property on the premises. FINRA alleges Schmidt developed the vacation rental property and opened for business in or around May 2012. Schmidt failed to disclose this outside business activity to LPL, which was also a violation of firm rules and regulations. To make matters worse, Schmidt submitted five compliance questionnaires to LPL from 2009 to 2014 in which he falsely denied borrowing funds from any LPL customer and failed to disclose the Hawaii real estate investment or vacation rental property.
Further, FINRA’s Department of Enforcement initiated an investigation into Schmidt’s business dealings to ascertain whether he borrowed funds from customs and operated a vacation rental property. In connection with this investigation, FINRA sent Schmidt a request dated February 13, 2015, to obtain documents and information for the investigation. According to FINRA, Schmidt acknowledged receipt of FINRA’s Rule 8210 request and informed staff he would not cooperate with FINRA’s investigation.
Based upon the foregoing alleged misconduct, FINRA asserted Schmidt violated several financial industry rules and regulations, including but not limited to NASD Conduct Rules 2370 and 3030, as well as FINRA Rules 2010, 3240, 3270 and 8210. For example, FINRA Rule 3240 prohibits registered persons from borrowing money from or lending money to any customer unless: 1) the representative’s employing member firm has written procedures allowing borrowing from or lending to customers; 2) the borrowing or lending meets at least one of the conditions specified in Rule 3240(a)(2); and 3) the registered person notifies the firm of the borrowing or lending arrangement and obtains pre-approval in writing. A violation of FINRA Rule 3240 also constitutes a violation of FINRA Rule 2010, which requires associated persons to observe high standards of commercial honor and just and equitable principals of trade.
Lufrano Law, LLC is a national securities litigation firm and has experience representing investors who have investment disputes with brokers and broker-dealers. If you suffered losses investing with Schmidt through LPL, you may be eligible to bring a FINRA arbitration claim to recover your investment losses. Please complete our online form or contact one of our attorneys at (800) 627-2179 for a free consultation.