ARBITRATION PANEL SAYS FSC SECURITIES IS A COZY PLACE FOR FRAUD
by Lawrence C. Melton, Esq., email@example.com
THE HAYES LAW FIRM, www.dhayeslaw.com, 1-866-332-3567 toll free
Last week an arbitration panel of the NASD (now FINRA) said that FSC Securities created "an extremely cozy environment for a man bent on defrauding his customers." The panel said "Respondent's [FSC Securities] management ineptness was broad," and that FSC took a "laissez-faire approach to supervision." See, In the matter of James M. Chandler, et al. v. FSC Securities Corporation, NASD Dispute Resolution, Case No: 05-0443 (July 2, 2007). The award is available at https://www.finra.org/ArbitrationMediation/ResourcesforParties/FINRAArbitrationAwardsOnline/index.htm
See also, Bruce Kelly, Panel: Firm was 'cozy' place for fraud, InvestmentNews.com, July 26, 2007. https://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070730/FREE/70730009&ht=
The case in question was a "selling away" case. Selling away occurs when a registered representative of a broker-dealer sells financial products not authorized by the broker-dealer. Selling away cases always turn into failure to supervise cases. Here, Hollenbeck was working for FSC and running his own insurance office on the side. FSC overlooked several red flags that Mr. Hollenbeck was selling away. Hollenbeck was constantly asking FSC to make his insurance office into an FSC branch. This should have alerted FSC that Hollenbeck may have been selling away out of his insurance office. The other red flag was a number of liquidations of variable annuities that were not blotted. FSC should have discovered this blotting omission. In the matter of James M. Chandler, et al. v. FSC Securities Corporation, NASD Dispute Resolution, Case No: 05-0443 (July 2, 2007).
Moreover, Hollenbeck was a recidivist offender. When hiring Hollenbeck, FSC Securities ignored his longest tenured position, about 10 years with a school/church as its chief financial officer and from where he was discharged for embezzling. In the matter of James M. Chandler, et al. v. FSC Securities Corporation, NASD Dispute Resolution, Case No: 05-0443 (July 2, 2007).
And once FSC Securities suspended and discharged Hollenbeck, they did not take strong enough measures to warn Hollenbeck's customers against potential scams. In the matter of James M. Chandler, et al. v. FSC Securities Corporation, NASD Dispute Resolution, Case No: 05-0443 (July 2, 2007).
FAILURE TO SUPERVISE
The supervisory responsibilities of broker-dealer firms has been an issue of considerable importance in recent months. Major broker-dealers, such as Morgan Stanley, Wachovia, Raymond James and others have been hit with heavy fines for supervisory oversights.
JUNE 21, 2007: NASD FINED WACHOVIA $2 MILLION FOR FAILURE TO SUPERVISE
On June 21, 2007, the NASD fined Wachovia Securities $2 million for failing to adequately supervise its fee-based brokerage business. (See NASD News Release: NASD Fines Wachovia Securities $2 Million for Fee-Based Account Violations, June 21, 2007).
A brokerage account can either be fee-based or commission-based. In fee-based accounts, customers are charged an annual fee. In commission-based accounts, customers are charged for each transaction. If you make a lot of transactions, you should be in a fee-based account. If you rarely make any transactions, you should be in a commission-based account.
Wachovia offers a fee-based brokerage account called a "Pilot Plus." Wachovia did not have an adequate supervisory system to monitor its Pilot Plus accounts. A lot of the customers in Pilot Plus accounts, held those accounts for several years without making any trades. Yet they still had to pay an annual fee. Wachovia should have recognized this and moved those customers into commission based accounts. (See NASD News Release: NASD Fines Wachovia Securities $2 Million for Fee-Based Account Violations, June 21, 2007).
In addition, due to supervisory oversight, many Pilot Plus customers were accidentally charged twice for Class A shares of mutual funds. When you buy Class A shares, you pay a front-end sales charge or "load" at the time of purchase. Wachovia was inappropriately charging account fees on Class A shares for which the customer had already paid a sales load. The NASD viewed this as duplicative charges. (See NASD News Release: NASD Fines Wachovia Securities $2 Million for Fee-Based Account Violations, June 21, 2007).
JUNE 15, 2007: NYSE FINED MORGAN STANLEY $500 THOUSAND FOR FAILURE TO SUPERVISE
On June 15, 2007, the New York Stock Exchange fined Morgan Stanley $500,000 for failing to supervise a group of registered representative in its midtown Manhattan office. (See Darla Mercado, Morgan fined for faulty oversight, InvestmentNews.com, June 15, 2007).
Morgan Stanley's failure to supervise lead to a number of consequences. The brokers recommended unsuitable investments to retirees. Customer complaints erroneously reported. The branch manager knew there were court-ordered restrictions on certain guardian accounts for injured children, and yet did not tell his employees. There was improper supervision of block trades. The firm failed to retain and review e-mails from its registered reps. (See Darla Mercado, Morgan fined for faulty oversight, InvestmentNews.com, June 15, 2007).
JUNE 6, 2007: NASD FINED CITIGROUP $3 MILLION FOR FAILURE TO SUPERVISE
On June 6, 2007, the NASD fined Citigroup Global Markets, Inc., $3 million for its failure to adequately supervise a team of brokers based in Charlotte, NC, who used misleading sales materials during dozens of seminars and meetings for hundreds of employees of BellSouth Corporation. Most of the employees were early retirees. The employees cashed out their pensions and 401(k) accounts, and invested these proceeds with Citigroup. More than 400 BellSouth employees opened over 1,100 accounts with the Citigroup brokers. (See NASD News Release: Citigroup Global Markets to Pay Over $15 Million to Settle Charges Relating to Misleading Documents and Inadequate Disclosure in Retirement Seminars, Meeting for BellSouth Employees, June 6, 2007).
The Citigroup employees essentially perpetrated a 72T scam. Brokers frequently tell retirees that they can take an unreasonably high level of annual withdrawals from their IRA without depleting their principal. This presupposes the market will grow at a steady rate. Of course, in reality, the market often declines for extended periods of time. The broker may tell the client, the market return is 10 %, and we are taking out 8 %, so your money will grow and we will not have to touch your principal. Some time later the market goes down, and you are still taking withdrawals at a high level. This will eventually lead to the depletion of your principal investment. Of course, the broker did not convey this possibility to you when you first set up the 72(T) withdrawals.
Please view my June 7, 2007 blog entitled "NASD Fines Citigroup Over $15 Million For 72T Scam."
FEBRUARY 21, 2007: NASD FINED RAYMOND JAMES $2.75 MILLION FOR FAILURE TO SUPERVISE
On February 21, 2007, the NASD fined Raymond James Financial Serves, Inc. of St. Petersburg, Florida, $2.75 million for failing to maintain adequate supervisory system to oversee the sales activities of over one thousand of its branch managers working throughout the United States. (See NASD News Release: NASD Fines Raymond James Financial Services, Inc. $2.75 Million for Lax Supervision of Producing Branch Managers, February 21, 2007).
Donna Vogt, a Raymond James producing manager in Cambellsport, Wisconsin, was permanently barred. Vogt treated her customers as a homogeneous group, regardless of age, income, experience or objectives. Basically, she recommended unsuitable mutual funds and variable annuities to a number of elderly and retired customers. (See NASD News Release: NASD Fines Raymond James Financial Services, Inc. $2.75 Million for Lax Supervision of Producing Branch Managers, February 21, 2007).
FEBRUARY 5, 2007: NASD FINED FIDELITY $3.75 MILLION FOR FAILURE TO SUPERVISE
On February 5, 2007, the NASD fined Fidelity-Affiliated Brokers $3.75 Million for failing to assign registered supervisors to 1,000 individuals, failing to retain emails and other electronic recordkeeping failures. Fidelity Distributors Corporation, the principal underwriter of the Fidelity family of mutual funds, failed to supervise for compliance with ethics, conflicts of interest policies in connection with gifts and entertainment. The individuals who worked as traders for FMR Co., the investment advisor to the Fidelity family of funds, received gifts and entertainment valued at hundreds of thousands of dollars from employees of brokerage firms who sought business from FMR Co. (See NASD News Release: NASD Fines Four Fidelity-Affiliated Broker-Dealers $3.75 Million for Registration, Supervision and Email Retention Violations, February 5, 2007).
THE HAYES LAW FIRM, www.dhayeslaw.com, 1-866-332-3567 toll free
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