Florida-based brokerage firm 1st Discount Brokerage Inc. has been censured and fined $40,000 by the Securities and Exchange Commission (SEC) for its failure to supervise a broker who defrauded investors of nearly $9 million.
In addition, Michael R. Fisher, executive-vice president of the firm at the time, was ordered to pay $10,000, according to the SEC order dated Jan. 23. Fisher was also suspended from association in a supervisory capacity with any broker, dealer, or investment adviser for nine months.
Settlement Agreement Reached
The civil penalties were levied pursuant to a settlement agreement through which the firm consented to entry of the order containing the SEC’s findings, but without admitting or denying them.
1st Discount Brokerage Inc
The firm has more than 80 offices and over 200 independent financial consultants and has been registered with the SEC as a broker-dealer since 1995, and as an investment adviser since 2007.
Fisher served as 1st Discount’s executive-vice president from September 2004 through May 2008. He had primary responsibility for the oversight of the firm’s Heightened Supervisory Committee (HSC), which was created by 1st Discount to reduce exposure to inappropriate broker conduct that might otherwise go undetected, according the firm’s sales management manual.
1st Discount & Fisher Failure to Supervise Michael J. Park
Both 1st Discount and Fisher failed to reasonably supervise Michael J. Park, a former broker who operated a Ponzi scheme in violation of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities and Exchange Act of 1934, as well as Rule 10b-5.
From 2002 to 2008, while Park was a registered broker associated with First Discount, his Ponzi scheme bled investors of almost $9 million.
The SEC order states that 1st Discount did not have policies and procedures reasonably designed to detect and prevent violations of the securities laws by brokers like Park. Had 1st Discount established adequate supervisory procedures, it likely would have uncovered Park’s fraud.
Specifically, 1st Discount should have instituted reasonable policies and procedures for the review of the “doing business as” accounts of its brokers.
If 1st Discount had been monitoring these accounts, there is a good chance that it would have noticed a substantial influx of money from the firm’s customers into Park’s business account, which he used to conduct his Ponzi scheme, the order says.
The firm also neglected to implement a policy to have its compliance auditors review the reports of previous compliance auditors. Had 1st Discount implemented reasonable policies and procedures in this area, the auditors would surely have discovered that Park was not identifying himself as being associated with the firm.
As it was, the auditors were unable to identify this recurring behavior. Park took steps to conceal his association with 1st Discount from customers so they could not alert the firm to his suspicious investment scheme, the order says.
1st Discount Failed to Fulfill Their Own Requirements
The firm never conducted unannounced audits in the Nashville office – the office where Park worked. If 1st Discount had followed its own procedure, it’s very likely that Park’s Ponzi scheme would have been uncovered.
Regarding Fisher
From 2004 to 2008, he had responsibility for oversight of the HSC, the order says. As such, Fisher was obligated to have a system in place to periodically review all the activities of 1st Discount’s brokers according to the firm’s policies.
If Fisher had met his responsibility and developed a system for periodic reviews, the HSC would have discovered that Park’s activities generated red flags galore.
The Red Flags
The red flags included Park’s efforts to hide his association with 1st Discount, a customer who complained that Park engaged in unauthorized trading, and shrinking commissions, the order says.
Any follow up by the HSC as to the shrinking commissions would have presumably focused on Park’s remaining customer accounts and the HSC would have been likely to contact those customers, many of whom were victims of Park’s Ponzi scheme.
Because of Fisher’s failure to implement the firm’s policies and procedures regarding the periodic review of all activities of 1st Discounts brokers, he failed to supervise Park in order to prevent and detect his illegal conduct.
Park was employed by 1st Discount from August 2002 to June 2008. The SEC has already disciplined Park, entering a judgment by consent in October 2008 that permanently barred Park from associating with any broker, dealer, or investment adviser.
Park Pled Guilty
Moreover, in early 2009, Park pled guilty to wire and mail fraud charges brought by the U.S. Attorney’s Office for the Middle District of Tennessee. In his plea, Park admitted to operating a scheme that defrauded 28 investors of more than $8.6 million. He was sentenced to a 96-month prison term in September 2010.
Public Disclosure Records
More details on Park’s disciplinary history can be found in the public disclosure records of Financial Industry Regulatory Authority (FINRA). The records show that before joining 1st Discount, Park received three customer complaints during his employment with the brokerage firm where he worked from July 1995 to June 1998. Two of the complaints alleged excessive commissions and margin interest on unsuitable trades. This former firm fired him after it received a complaint that he had received loans from two customers without the firm’s permission.
The brokerage firm where Park worked from January 1999 to February 2000 fired him after he forged a client’s signature on a letter of authorization instructing the firm to charge a $3,500 loss to the client. 1st Discount hired him about two and half years later.
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