Herbert H. Hafen (also known as Elias Herbert Hafen and as E. Herbert Niggebrugge) of New York New York a stockbroker and investment adviser representative formerly registered with Wells Fargo Clearing Services LLC and Morgan Stanley has been charged by Securities and Exchange Commission (SEC) in a Complaint alleging that Hafen engaged in a fraudulent scheme in which he stole $1,600,000.00 in funds from investors and then concealed it to keep investors from discovering his fraud. Securities and Exchange Commission v. E. Herbert Hafen Civil Action No. 1:19-cv-08234 (Sept. 4, 2019).
According to the Complaint, between July of 2011 and April of 2018, during which time Hafen was employed by securities broker dealers Morgan Stanley and Wells Fargo Clearing Services LLC, Hafen concocted a fraudulent investment scheme in which he victimized eleven investors; and deceived those investors while acting as their fiduciary to conceal his misappropriation of their funds.
Allegedly, customers met with Hafen to seek his advice about their investment portfolios at Morgan Stanley or Wells Fargo. During this time, Hafen positioned outside investments including high-yield investment funds containing guarantee returns. The securities broker dealers neither offered those purported investments nor authorized them to be recommended or sold by Hafen. SEC alleged that Hafen convinced investors that the outside investments, which he touted as safe and secure, would generate better returns than what was available to customers through Morgan Stanley or Wells Fargo. Allegedly, customers acted on Hafen’s advice, liquidating their brokerage and retirement accounts to transfer money to Hafen for this purported investment fund.
The Complaint stated that the outside investments Hafen described to customers did not exist. Hafen instead took the customers’ money to fund his lavish lifestyle, pay off his credit cards, and buy property including a home and car. Allegedly, Hafen raked in more than $1,600,000.00 from eleven customers. Only $650,000 has been repaid, according to SEC.
For example, between July of 2011 and January of 2018, Customer A – an elderly widow – had allegedly been instructed by Hafen to transfer money from her retirement account to her bank and subsequently to Hafen’s account for purported investments. Customer A was persuaded by Hafen to transfer a total of $325,000.00 to Hafen over the ensuing seven years. Instead of using Customer A’s funds as intended, Hafen took $100,000.00 to pay down his credit card bills and to pay back another customer.
SEC alleged that in 2018, Hafen created a bogus account statement to make it seem as though Customer A’s individual retirement account balance equaled $300,000.00. The Complaint stated that unbeknownst to Customer A, her account was only worth $150,000.00. Allegedly, Hafen made the false account statements to keep Customer A from discovering his fraudulent actions and to keep the fraudulent scheme alive.
SEC indicated that Hafen’s fraud was detected by Wells Fargo when Hafen received a payment directly from a customer’s investment account. Apparently, Hafen was discharged by Wells Fargo on August 21, 2018 because of admitting to the securities broker dealer that he was involved in undisclosed and unapproved outside financial transactions. The Complaint alleges that Hafen’s conduct was violative of Securities Exchange Act of 1934 Section 10(b), SEC Rule 10b-5 and Investment Advisers Act Sections 206(1) and 206(2).
In a parallel matter, the Department of Justice reported that Hafen pleaded guilty to one count of felony investment adviser fraud. Case No. 1:19cr637 (S.D.N.Y. Sept. 4, 2019). Hafen is scheduled to be sentenced in January 2020 and faces a maximum of five years behind bars.
Financial Industry Regulatory Authority (FINRA) Public Disclosure additionally reveals that Hafen has been barred from associating with any FINRA member in any capacity based upon allegations that Hafen neglected to respond to FINRA’s request for his information. Case No. 2018059821901 (Feb. 1, 2019). Hafen was at first suspended by FINRA on November 23, 2018 for failure to comply. He failed to seek the termination of his suspension within three months of being notified about it which resulted in FINRA’s imposition of a bar on February 1, 2019.
Also, on May 9, 2019, a customer initiated investment related complaint regarding Hafen’s conduct was settled for $430,000.00 in damages supported by accusations that between July of 2011 and January of 2018, when Hafen was associated with Morgan Stanley, the customer’s funds had been stolen.
