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The Explainer: Failure to communicate

  • By Charles Pelkey
  • Published Dec. 9, 2010
  • Updated Dec. 16, 2010 at 8:12 PM EST

Q.Dear Explainer,
I was floored by the story of the oblivious driver who hit – and nearly killed – a cyclist and won’t be charged with a felony because he’s a successful stock broker.

What, me worry?

I’m in the financial services industry and am licensed. I have long been under the impression that you pretty much had to report any criminal charges against you ─ misdemeanor or felony ─ even if you’re not yet convicted. Even if he pleads to misdemeanor charges, won’t he face sanction?

More importantly, what’s the status of the case?
Randy

A.Dear Randy,
Well, let’s start with your last question, since talking about a pending criminal matter is a little more up my alley than is securities regulation.

As we mentioned before, investment banker Martin Joel Erzinger was charged in connection with an alleged hit-and-run incident, which took place on July 3 of this year. According to police reports, Erzinger was driving eastbound on Colorado Highway 6 when he drifted into a clearly marked bike lane and struck Steven Milo, who was riding a rented bike in that bike lane. (You can read the full details in the November 17th Explainer.)

Following the rather remarkable statement by Eagle County District Attorney Mark Hurlbert that he would be willing to drop the felony charge of leaving the scene of any accident that has resulted in “injury to, serious bodily injury to, or death of any person,” because of the adverse impact it would have on the defendant’s future as a wealth fund manager, the case quite deservedly received national attention.

Hurlbert has proposed that Erzinger should plead guilty to two misdemeanor charges – careless driving and failure to notify police of an accident – in exchange for the dropping of the felony charge.

Milo, an anesthesiologist who works as part of the Mount Sinai School of Medicine’s liver transplant team in New York, has objected to the deal. His attorney, Harold Haddon, has filed an objection to the proposed plea bargain, citing Colorado Revised Statutes § 24-4.1-301, that state’s law drafted to assure “the rights of victims and witnesses to crimes.” When the Colorado Legislature passed that provision it clearly stated the intent of the law was to ensure that

“… all victims and witnesses to crimes are honored and protected by law enforcement agencies, prosecutors and judges in a manner no less vigorous than the protection afforded criminal defendants.”

Among those rights is the opportunity for victims to be heard at any court proceeding and to be informed of any plea bargain that offers a defendant the chance to enter a guilty plea to a lesser charge.

The Vail victim gets his (first) day in court

Well, it appears that Dr. Milo will have that opportunity. All three sides in this case – the prosecution, the defense and the victim – are slated to appear at a hearing schedule in District Court in Eagle, Colorado, on Thursday, December 16 at 2:00 p.m.

It will be at that hearing that the judge will have the opportunity to hear arguments and testimony from all sides in the case. It is my understanding that Dr. Milo will make the trip from New York to testify. Erzinger, the defendant, will be there and, of course, so will the County Attorney who proposed the deal.

In most jurisdictions, the judge’s power to reject a plea bargain is limited to those situations in which the plea bargain includes, as one of its terms, an agreed-upon sentence. The prosecutor usually has unlimited discretion to dismiss a charge (for example, the felony charge in this case), and so the judge wouldn’t usually have the power to reject this aspect of the plea bargain. However, the felony charge is still out there. It’s not been dismissed and the prosecutor may be playing it carefully, considering the backlash his earlier comments triggered.

It’s likely that if the judge accepts the plea agreement, Erzinger will enter guilty pleas to both misdemeanor offenses and that will essentially be the end of the criminal matter. If the judge rejects the agreement, then Erzinger is likely to enter not guilty pleas to all charges – including that felony – and we can expect to see a trial in the matter.

I think I may show up next Thursday, just to see how this one shakes out. And hey, if you happen to be riding your bike in the neighborhood, or maybe want to take an early break from skiing in Vail, the courthouse is located at 885 Chambers Avenue, in Eagle. A lot of bikes – and bike geeks – might be nice.

The duty to report

So, now to your original question. As you recall, County Attorney Hurlbert noted that “felony convictions have some pretty serious job implications for someone in Mr. Erzinger’s profession.” In an effort to soften those “serious job implications,” Mr. Hulbert offered Mr. Erzinger a plea deal.

But wait! Certainly, Hulbert is right; felony convictions do impact the career of someone in Erzinger’s line of work. But a look at the rules suggest that felony charges do, too. So does a failure to report either to regulatory authorities in Erzinger’s profession.

Mr. Erzinger is a successful wealth fund manager at Morgan Stanley Smith Barney in Denver. He’s earned a spot on Barron’s list of the country’s top 1,000 financial advisers. He manages more than a billion dollars in assets for the firm, overseeing a fund that, as I understand it, requires a minimum buy-in of $5 million.

Now, despite the financial industry’s rather turbulent recent history, the position of financial advisor is regarded as a position of trust. His work is regulated by a combination of federal laws and financial industry requirements. The federal government regulates the industry through the Securities and Exchange Commission. The 1938 amendments to the original Securities and Exchange Act of 1934 allows the industry to regulate itself – subject to SEC oversight – through something known as a self-regulatory organization (SRO).

Originally, the industry’s SRO was the National Association of Securities Dealers (NASD). Since 2007, that role has been filled by something known as the Financial Industry Regulatory Authority (FINRA). FINRA is not a governmental agency. It is an organization authorized by statute to exercise some form of regulation over its industry, but it is not considered what lawyers call “a state actor.” (In cycling terms, FINRA is the USADA of the money business.)

FINRA and the SEC have deservedly come in for their share of criticism lately, particularly in light of the fact that both missed Bernie Madoff’s huge $65 billion Ponzi scheme and all of the other screw-ups at major brokerage firms, but they continue to be the industry’s chief regulators. They have rules and those rules should be followed. Those rules are designed to protect investors.

If you, for example, had a spare $5 million stashed in your mattress and decided that you wanted to put your money to work for you, you might want to know just who that person is you’re handing that little nest egg off to. Now, other than going to Morgan Stanley Smith Barney in Denver and asking what you might do with your spare cash, you could do a little due diligence and check in with FINRA to find out if, say Mr. Erzinger, is a trustworthy fellow.

FINRA has a host of reporting requirements with which both firms and individual brokers must comply. Indeed, FINRA has the authority to levy fines against those who don’t comply. Among those reporting requirements is the timely updating of something known as the U4 form.

According to FINRA rules, those forms must be updated within 30 days of “an event.” By event, FINRA means anything that would constitute a change in a broker’s self-reported status. The form asks a host of business-related questions, focusing on the types of trading, location of business, height, weight and even eye and hair color.

But in there, too, is section 14. Specifically, 14(A)(1)(a) and 14(A)(1)(b) go directly to the heart of the Erzinger matter:

14A.
(1) Have you ever:
(a) been convicted of or pled guilty or nolo contendere (“no contest”) in a domestic, foreign, or military court to any felony?
(b) been charged with any felony?

(The italicized emphasis is theirs, not mine)

The rule also requires the reporting of misdemeanor charges and convictions when those violations would have a direct impact on the work of a broker. But the U4 requires the listing of all felony charges, whether they result in a conviction or not.

We know, in fact, that Erzinger has been charged with a felony on August 2nd. His FINRA U4 form should have been updated by September 2. As of today (December 9, 2010), his FINRA “Broker Check” status (which can be accessed using a search at www.FINRA.org) reports no “events” that warrant disclosure.

From my (limited) knowledge of securities law, it appears that he’s violated the rules of his profession and could be subject to penalties. In light of his original violation on Highway 6, Mr. Erzinger’s behavior might best be summed up by that classic line from “Cool Hand Luke” first uttered by the prison captain played by Strother Martin (and later mocked by Paul Newman’s title character, Luke):

“What we’ve got here is failure to communicate.”

Twice, it seems.

Charles
Special thanks to University of Illinois criminal law professor Eric Johnson for his input on this column.


“The Explainer” is a regular feature on VeloNews.com. If you have a question related to the sport of cycling that our editors might be able to answer, feel free to send your query to CPelkey@CompetitorGroup.com and we’ll take a stab at answering. Not all letters will be published and some questions may be combined with those of other readers. Please include your full name and hometown.


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