Fidelity Brokerage Services, headquartered in Smithfield, Rhode Island was censured, fined $500,000, and ordered to pay customers restitution of $529,270 plus interest after consenting to findings that the firm had failed to prevent or detect conversion of more than $1,000,000 from nine Fidelity customers by a convicted felon; and failed to establish and maintain adequate supervisory systems and procedures to achieve compliance with securities laws, regulations and rules, or adequately review and monitor transmittal of funds from customer accounts to outside entities. Letter of Acceptance, Waiver and Consent, No. 2014041374401 (Dec. 18, 2015).
According to the AWC, from 2006 through 2013, Lisa A. Lewis had pretended to be a Fidelity broker and converted more than $1,000,000 from the accounts of nine Fidelity customers, where eight of the nine customers were senior citizens. The customers were actually formerly associated with other brokerage firms from which Lewis was terminated amid allegations of improper borrowing from customers and check kiting. Lewis reportedly informed her former customers among other victims that she was employed with Fidelity, where she urged such customers to establish accounts at the firm. Lewis was never employed with Fidelity, unbeknownst to the customers.
The AWC noted that in the course of carrying out her scheme posing as a Fidelity broker, Lewis was able to obtain personal information about her customers, and changed account preferences to divert communications from such accounts to her own email. Lewis also reportedly created joint accounts where she listed herself as a co-owner – unbeknownst to customers and without their approval.
The AWC stated that once Lewis had established in excess of fifty individual and joint accounts at Fidelity, she converted funds from accounts for her own personal benefit – first by transferring funds from customers’ individual accounts into the joint accounts with Lewis – and then transferring funds to a bank account that Lewis owned. Lewis reportedly utilized other methods of converting funds as well.
According to the AWC, Fidelity had failed to detect or reasonably follow up on red flags associated with Lewis’ scheme, such as the fact that Lewis’ victims were not related to each other; that all individual and joint accounts in their names at Fidelity had shared one or more elements of common customer information associated with Lewis (e.g. e-mail, physical address, phone number); and that all of the joint accounts listed Lewis as a beneficial owner. FINRA found that Fidelity lacked the proper protocol to detect such commonalities across the unrelated accounts.
Further, the AWC stated that money movements in accounts entailed a consistent pattern of transfers from customers’ individual accounts to joint owners, where transfers were subsequently effected into accounts controlled by Lewis. FINRA found that the firm overlooked red flags during telephone conversations, where Lewis would impersonate customers to facilitate illicit fund transfers.
In one case, despite a fund-transfer request being elevated to supervisors within Fidelity, it was not appropriately elevated for further investigation by the firm’s compliance or risk departments despite various red flags associated with the transaction (e.g. a blind fax used to initiate the transfer, senior customer seemingly appearing unaware of the purpose of the transaction, Lewis stating that the purpose of the transfer was to purchase stock in an investment club that was not even formed and did not have its own account). The AWC reported that despite the red flags, Fidelity never followed up after the fund transfer to verify that the stock was actually purchased or that the investment club was ever established like Lewis had claimed.
The AWC stated that in March 2012, within days of the aforementioned blind flax and telephone calls, Fidelity’s common-email alert system had identified fifty-one accounts that were associated with Lewis’ e-mail address. The alert reportedly listed thirty-five different surnames associated with these accounts (which included Lewis’), with a combined portfolio value of $7,700,000. Yet, given the firm’s limited resources dedicated to reviewing these alerts and backlog, such alerts identifying Lewis-related accounts were not reviewed by Fidelity until April 2013 (more than one month after they were generated). The AWC indicated that it was not until at least another month that the issue was followed-up on, after which point another financial institution detected Lewis’ scheme.
FINRA found that as a consequence of Fidelity failing to establish and maintain a supervisory system designed to detect and prevent fraudulent activity in the accounts at the firm such as those effected by Lewis, and for Fidelity’s failure to adequately follow up on the red flags pertaining to Lewis’ misconduct, Fidelity violated NASD Rule 3010 and FINRA Rule 2010.
The AWC indicated that Fidelity was also found to have violated NASD Rule 3012(a)(2)(B)(i) and FINRA Rule 2010 as a consequence of their supervisory control policies and procedures not being reasonably designed to review and monitor transmittals of funds due to failing to provide for detection or review of numerous transfers of funds from unrelated accounts to a common outside destination.
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. FINRA Conduct Rule 3010 specifically provides that each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision shall rest with the member.
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