Archive for the ‘Lack of Supervision’ Category

Charting New Territory

Friday, May 22nd, 2009

For the first time, a federal grand jury has indicted a stockbroker - David McFadden, formerly of Securities America, Inc. - for allegedly conspiring to defraud elderly investors.   Jessica Papini of the Wall Street Journal has covered the story.  Her latest piece in the WSJ reads in part as follows:

“This is a very unusual case,” said Joseph Fogel of Fogel & Associates, who isn’t involved in the case. In prior cases where brokers were charged with placing their clients in unsuitable investments or misrepresenting returns, firms paid the investors’ money back and were fined.

According to the complaint, McFadden made misrepresentations and omissions related to his qualifications, the diversification of stocks, and the potential investment returns.  This included telling clients he was a certified public accountant (CPA) although he hasn’t been licensed as such since 1987.   

In another impressive article, Ted Griggs of The Advocate, also following the McFadden story, wrote that McFadden also told his clients that his firm, Diversified Financial Services, employed other CPA’s as well. 

McFadden’s alleged unsuitable investment scheme is said to have cost his retired clients millions of dollars. In 2006, the NASD (now know as FINRA) fined Securities America and barred McFadden from the industry. And now, if he is convicted in the federal case, McFadden faces up to five years in prision and a fine of up to $250,000. 

So, the securities regulators and law enforcement are trying to set a new precedent:

This prosecution provides a warning to all brokers that, in egregious cases of customer fraud, sanctions may not end with Finra’s barring the broker from the securities industry, but may, instead, end up with jail time,” said James Eccleston, head of the securities group at Shaheen, Novoselsky, Staat, Filipowski & Eccleston PC.

But as the securities fraud battle continues, brokers will continue to misrepresent and omit material facts in order to gain your business.  It is the investor’s job to check out the broker and his firm and decide whether they are legit or not.  Ask Investor’s Watchdog for help— IW will uncover all customer complaints, and review the broker’s education and employment credentials for you.

Not Enough Cops on the Beat

Thursday, October 23rd, 2008

Eric Lichtblau, David Johnston and Ron Nixon wrote a great article for and the New York Times business feed.  It talks about the F.B.I’s struggle to investigate the current wave of fraud cases, due to a large cut in the criminal investigation work force. (more…)

FINRA Disciplines Five Firms

Tuesday, March 4th, 2008

The Financial Industry Regulatory Authority (FINRA) has disciplined five broker-dealers for “mutual fund sales and supervisory violations.”  The firms all failed to give mutual fund customers commission discounts to which they were entitled.  The five firms are Prudential Securities, Inc., Pruco Securities, Inc., UBS Financial Services, Merrill Lynch, and Wells Fargo.   (more…)

SEC Tags Morgan Stanley for Lack of Supervision

Wednesday, December 19th, 2007

The Securities and Exchange Commission (SEC) has charged two former Morgan Stanley DW, Inc. (MSDW) financial advisors, Darryl A. Goldstein and Christopher O’Donnell, with engaging in a fraudulent market timing scheme. “Market timing” refers to the practice of short term buying, selling, and exchanging of mutual fund shares in order to exploit inefficiencies in mutual fund pricing.  According to the SEC, “the conduct occurred from January 2002 until August 2003 and generated approximately $1 million in net commissions or asset-based fees for the defendants.”  According to the SEC, the defendants concealed their illegal activity by opening and trading in multiple brokerage accounts (122 total), using different financial advisor identification numbers (11 total), and trading through variable annuity contracts (64 total). (more…)

Action Against A.G. Edwards Reveals Why Investors Need Independent Protection

Friday, December 7th, 2007

On December 5, 2007 Massachusetts Secretary of the Commonwealth William Galvin filed an enforcement action against A.G. Edwards & Sons, Inc. that reveals the central flaw in the securities industry’s system of self-regulation.  Every brokerage firm is required to have a system of compliance controls designed to detect and prevent violations of the securities laws. 

The system assumes that each layer of management will keep an eye out for potential customer abuse and act promptly to stop it.  (more…)

Wachovia Slapped on the Wrist for Conflicts of Interest

Monday, December 3rd, 2007

Four years after the analyst conflict of interest scandal that rocked Wall Street and led to actions against ten of the world’s biggest brokerage firms, the Financial Industry Regulatory Authority (”FINRA“) has found that Wachovia Capital Markets engaged in the same kind of conduct.

FINRA found that from March 2004 to July 2007, Wachovia failed to adequately disclose its relationship to companies on which it issued ”buy” recommendations.  (more…)

Investors Cannot Count on Regulators for Protection

Tuesday, November 13th, 2007

The SEC and FINRA (the Financial Industry Regulatory Authority) have announced an initiative to assist broker-dealer compliance officers.  According to the SEC’s press release the SEC and FINRA will be holding a seminar at SEC headquarters and regional seminars nationwide in which they hope to help compliance officers “ensure effective communication about compliance risks, maintain effective compliance controls, and foster strong compliance programs within their firms.”   

While more education can’t hurt, and FINRA certainly needs all the good publicity it can get given the damage that its membership (brokerage firms) does to the investing public daily, no investor should take any comfort in this development.  Think about what the need for such a program means.  It means that current compliance is below par.  It always has been, and will continue that way even after these seminars.   

Consider it from the point of view of someone running one of the major wirehouses on Wall Street.  You are the head of a publicly traded company.  Your job is to maximize return to the shareholders.  More money in the door means a higher stock price. 

Let’s say you are deciding whether to do something that would bring a massive new source of revenue into the firm, but which the compliance department says is just beyond the line of propriety.  Here’s your thinking.  On the one hand, we might get away with it.  The SEC is a small agency.  Motivated.  Dedicated.  Smart.  But small.  Its broker-dealer examination staff is a small division within that small agency.  If no one makes any noise, the chances that we’ll get caught by the SEC are very small. 

Then there is FINRA.  FINRA is a new name for what used to be called the National Association of Securities Dealers.  The old name was more accurate.  FINRA is really a trade group for stockbrokers.  So, we might get away with it.  If so, we get all that money.   

On the other hand, we might get caught.  If we get caught, the worst that will happen to us is a fine that will seem stiff to the public but which will be so small in comparison to the revenue we bring in that it doesn’t even bear considering.  They might get an injunction against us telling us to stop it.  But no one is going to jail, and the violation will pass from the public consciousness before the weekend.  Then we’ll be able to get back to looking for the next scheme to pump up firm revenue.   

What to do?  What to do?    

The problem is not that the compliance directors don’t know the rules.  The problem is that the leaders of brokerage firms favor strong producers (commission generators) over diligent compliance efforts (investor protection).  When the two conflict, more money always beats less money.   

Investors must take independent action to protect themselves.Counting on the regulators for protection is insanely optimistic.  Trusting the securities industry buys a one way, express ticket to a Medicaid nursing home.