Growing up on a dairy farm in Owen, Wis., Mark Schley always dreamed of running his own cattle ranch. He envisioned sprawling land, a barn and a rustic home for his family.
His wife Susan had also been raised on a farm and shared his dream. It was in their blood. And when he came up with a plan to make that dream come true by becoming a financial advisor and vastly boosting his earning power, she went along. Schley, then 29, gave up his job as a supervisor in sales support at Wagner Spray Tech in Minneapolis and took a job as a broker trainee back in Wisconsin, at the Eau Claire branch of Piper Jaffray, leaving Susan and their children Nate, 4, and Hannah, 2, at home. That was in January 2005.
In a few months, he figured, he would have his Series 7, Susan would sell their home in Minneapolis, the family would be reunited and Schley would start building the book of business that would enable him to purchase that Norman Rockwell lifestyle he and Susan wanted. Schley, who was staying with relatives in Eau Claire, threw himself into his new career. In April, he failed the Series 7 exam on his first attempt. He redoubled his efforts, hitting the books for four hours every night for the next month, before retaking the exam on May 4, 2005.
On that day, Schley's dream collapsed. Tapping a few keys on a computer keyboard, he retrieved his score on the Series 7 from the NASD terminal. The result: a just-failing 69. Citing an arrangement agreed upon after he failed the first exam, Piper fired Schley from the training program. To support his family, he rushed the sale of the house in Minneapolis, accepting a mediocre bid, and cashed out an old 401(k) plan. “Suddenly, I saw my dreams slipping away,” he says. “It was a real mess.”
And, it turns out, it was a mess that never should have happened. On Jan. 5, 2006, Schley and 1,881 other would-be Series 7-holders learned that there had been a huge mistake: They had, in fact, passed the exam, but, due to a software error, the system had not calculated their scores correctly. “We apologize for the problems this caused for the individuals and firms affected,” NASD Chairman and CEO Robert Glauber said in a press release. And while it also stated that it had begun contacting those individuals immediately, some of the victims complained that they received a form letter two weeks after the announced foul-up.
Tales of Woe
There's no telling how many career plans were derailed, how many families suffered or how much potential income was lost. But Schley is one of at least 15 people (the latest count) who intend to prove in court that NASD's error caused them harm. They have joined a class action, filed on Oct. 31, 2006, that seeks at least $5 million for persons who took the Series 7 between Oct. 1, 2004 and Dec. 20, 2005 and received failing grades in error.
“There's a certain moral responsibility that comes with handling someone's livelihood,” says Gerald Martin of Barrett Johnston & Parsley in Nashville, Tenn., and a lead attorney for the class. “NASD is not acting within the scope of the best interest of the public.”
NASD has downplayed the impact of the software error, noting that it only affected a small percentage of the 60,500 people who took the test during the period covered by the class action. And, it says, the errors only affected those who were barely passing.
EDS, the software company that scores the exam, was also named as a defendant. NASD signed a 10-year deal for EDS to score the Series 7 in 1998. NASD says it is working on upgrading the technology in early 2007. EDS declined several requests for comment.
That's little consolation for Schley, who says he's in the hole more than $90,000 since failing the exam. He says NASD made an offer of $15,000 to withdraw the complaint. Steven Berk, class counsel and an attorney at Cuneo Gilbert & LaDuca in Washington, D.C., called the NASD response “really snide” considering it is a pass/fail exam. In other words, the guy who gets a 70 on the test is no different than the guy who gets a perfect score, Berk says. NASD officials declined to comment on the ongoing litigation.
Jason Plunkett, a former UBS trainee in Atlanta, is another plaintiff. He took the Series 7 on Nov. 15, 2004 and scored a 69. He was promptly fired, despite his manager's efforts to convince the legal department to make an exception in his case. Plunkett was out of work for three months, then worked briefly at Merrill before ending up at AIG SunAmerica Capital Services in Alpharetta, Ga. According to NASD's Broker Check Web site, Plunkett has since been granted his Series 7 license.
William Lowe, another UBS trainee, was fired after spending four months studying for the exam. He was out of work for close to nine months. (At UBS, trainees who don't pass the test on their first try are fired). There are no records that indicate that he went on to pass the exam.
There's also Jennifer Hester, a former Merrill Lynch trainee who was fired from her job at a branch in Leawood, Kan. She took the test on May 4, 2005 and was fired the next day when the branch manager learned of her failing grade. As a result, Hester lost an opportunity to work at the nation's top brokerage firm, forfeited wages and an auspicious start to a career in financial consulting. She has since landed a job with UMB Financial Services in Kansas City.
Merrill says it doesn't have a set company policy regarding Series 7 testing. The decision to retain or fire a trainee after he or she fails the exam is “at the discretion of the complex manager,” says Merrill spokeswoman Jennifer Grigas. But most brokers believe that failing the Series 7 means termination. A lucky few, like Schley, are given a second chance.
Linda Cutler, a former senior associate at Ryan Beck, was a rare third-time Series 7-exam taker when she rode the subway from her home in Brooklyn into Manhattan to take the test on Feb. 7, 2005. As a mutual funds marketing specialist, she did not need the credential (although it was strongly encouraged), but she says she was promised a promotion and a year-end bonus that would triple the previous year's if she got her license. After failing twice in the previous nine months, the 35-year-old Cutler burned the midnight oil to make sure she passed this time. The 10 seconds it took for the system to calculate her score that day seemed like an eternity, she recalls.
She got a 68. Teary-eyed and shaken, Cutler parked herself on a bench outside the building and cried. She then phoned her boss to deliver the bad news. “I was devastated,” Cutler, a member of the class, says. After two days of wondering what the future held, Ryan Beck asked her to resign. “I lost my job. It ruined my life.” It took her five months to find a new job with New York-based Rochdale Investment Management.
Her first gig after Ryan Beck was a temp job at PIMCO that paid one-third her old salary. Other temp assignments, for which Cutler says she was overqualified, followed. Finally, in October 2006, she landed at a major New York brokerage firm, where she works as a mutual fund marketer and has had her license reinstated. She's back on her feet, but still miffed over the emotional and financial ordeal she went through. “We're not just numbers in a computer,” Cutler says. “The NASD needs to be more sensitive to the fact that people's lives have been affected by these tests. They had an opportunity to do the right thing and they didn't step up to the plate.”
For others, the impact was more emotional than financial. Timothy Wallin, 25, was a trainee fresh out of college with GCG Financial, an independent broker/dealer affiliated with Securian Financial Services, when he flunked the Series 7 in January 2005. He says he felt humiliated.
“As a young man, it's very traumatic to cope with a failure like that,” says his father, Thomas Wallin. “He had to start his career with a cloud hanging over his head. It made him look real bad.” The Wallins scrapped the road trip they had planned to celebrate Timothy's new career as a broker and, the elder Wallin says, his son “sucked it up” and passed the exam a few weeks later.
And Schley? He says his losses are still mounting. When the NASD disclosed the tabulation errors last January, the self-regulatory body promised to correct individual records in its CRD database to remove the incorrect failing grades. It also promised that any affected individual who is not currently associated with a firm will be afforded a two-year period that started Feb. 1, 2006 to re-associate without having to retake the Series 7 exam.
As of December, Schley's CRD had not been corrected and he has been unable to affiliate with another firm. Piper was purchased by UBS last April and the new branch management told Schley that he would have to re-interview to get his trainee slot back. “I can't get my license without employment, and I can't get employment without a license,” he says. Scarred by his experience, Schley says he's reluctant to jump back into the securities industry. “There's a level of trust and respect that was lost after such a traumatic experience,” he says. While he doesn't blame Piper for what happened, he's not sure if he wants to be in an industry that treats its own people so carelessly.
For now, Schley has given up on becoming a rep and using his earnings to fund the ranch of his dreams. He took over his sister's real estate-management business, but the pay is far less than what he would have earned as a financial advisor. He has purchased a farm — a real fixer-upper — for which he had to take out a home-improvement loan. There are no animals in the barn yet. And he is still struggling to make ends meet. “My damages continue to rise every day,” he says.
Meanwhile, NASD is fighting the class action. On Dec. 15, it filed a motion to dismiss the suit, claiming “absolute immunity,” because administering the exam is part of its regulatory function as granted by the SEC.
Essentially, NASD is arguing that the immunity granted to government agencies extends to entities that act on behalf of government agencies, as it does when it carries out the licensing requirements of the SEC. “Long-established precedent establishes that when SROs perform regulatory duties that would otherwise be performed by a government agency — such as the administration of qualifications examinations — the SROs enjoy a comparable immunity from suits based on those duties,” according to NASD's motion to dismiss the Schley case.
Attorneys for the plaintiffs say NASD is not protected under the sovereign immunity section of the law. “This is a ministerial act that doesn't satisfy the test for the purpose of absolute immunity,” Berk says. He says the error was not part of a discretionary decision-making process for which the immunity protection is intended, but a simple administrative snafu.
Debra Speyer, a securities attorney in Philadelphia who represents investors and registered reps in claims against brokerage firms and is not affiliated with either side, says the immunity defense is bogus. “It's a private organization, therefore, there is no immunity,” she says, adding that the NASD claims government-agency status under the law only when it's convenient. For example, she says, when a broker in an arbitration case chooses to plead the Fifth Amendment, NASD will revoke the broker's license for not cooperating on grounds that it is a private organization and not bound by federal criminal rules. But as a government agency, the broker would be entitled to due process. “They can't have it both ways,” she says.
The next step is a status conference, scheduled for Jan. 17, 2007 by Judge John Bates of the U.S. District Court in Washington, D.C., at which time the discovery phase may begin. The plaintiffs “have a lot of hurdles to climb,” says Speyer, but she believes it is a winnable case. For all the “failure to supervise” penalties the NASD has dished out in recent years, maybe it's time it got one of its own.