A federal court for the District Court for the Central District of Illinois entered an injunction against Timothy J.Roth, of Urbana, Illinois, a stockbroker with the NJ based firm Comprehensive Capital Management, Inc. for stealing more than $16 million of his clients’ mutual fund shares, liquidating the shares, and sending the ill-gotten gains to various accounts and companies under his control.
The judgment permanently enjoins Roth from violating the antifraud provisions of the federal securities laws. Roth consented to the judgment.
The SEC Complaint
According to the civil complaint filed by the SEC from October 2010 through February 2011, Roth stole more than $16 million worth of mutual fund shares from several employee deferred compensation plans for whom he provided investment advice.
The SEC alleges that Roth, who worked out of CCM’s office near Urbana, Illinois, secretly caused the Plans’ mutual fund shares to be transferred to an account under his control, even though no such transfer had been requested or authorized by the Plans or the Plans’ participants.
The SEC alleges that after selling the Plans’ shares, Roth funneled the cash proceeds to various accounts and companies under his control or for his benefit. According to the SEC’s complaint, at the time he was engaging in his scheme, Roth did not tell the Plans or their participants about the transfers. Instead, Roth sent them bogus account statements that deliberately omitted his surreptitious transfer of the mutual fund shares. Thus, the account statements overstated the Plans’ account holdings and concealed Roth’s theft.
As a result of his conduct, the SEC’s complaint charged Roth with violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and with aiding and abetting violations of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940, and Rule 206(4)-2 thereunder.
In a parallel criminal proceeding arising out of the same facts that were the subject of the SEC’s civil action against him, Roth pled guilty in October 2011 to one count of mail fraud and one count of money laundering. On January 31, 2013, Roth was sentenced to 151 months of incarceration and was ordered to pay $16,151,964 in restitution to his victims. Based on Roth’s conviction and the $16 million in restitution ordered against him, the Court has also entered an order granting the Commission’s motion to dismiss its monetary claims against Roth.
Roth’s victims however are unlikely to ever collect their $16 million.
This conduct, commonly referred to as “selling away,” takes place when the registered representative sells securities outside, or at least without the required approval of the broker-dealer, and is the most frequently committed violation by off-site registered representatives. NASD Notice to Members 86-85, Compliance with NASD Rules of Fair Practice in the Employment and Supervision of Off-Site Personnel (Sept. 1986).
Roth apparently operated what is known in the securities industry as a franchise office, wherein the broker pays all the expenses, in consideration for a higher commission pay-out. However, there is no on-site supervision at these geographically dispersed, remote locations. As such, the broker-dealer , is also substantially unable to directly supervise the sales practices or activities conducted at these “independent” offices.
As at least one commentator has suggested, the structure of non-traditional firms has made it inherently difficult for such broker-dealers to properly design, implement, and maintain a supervisory structure capable of preventing selling away cases. In fact, the United States Securities Exchange Commission has found that the “mere existence of a remote office where a registered representative is engaging in outside business activity constitutes a red flag where, by nature of the business, the representative creates a potential vehicle by which he may carry out or conceal violations of the securities laws.” P. Michaels, Arbitration of Trading Away Cases Against Non-Traditional Broker-Dealers, Securities Arbitration 2002 (PLI), Volume I at 621(quoting, In the Matter of Prospera Financial Services, Inc., 73 S.E.C. 935 at 6 (Sept. 26, 2000)).
In March 2004, the SEC issued Staff Legal Bulletin No. 17, concerning: Remote Office Supervision, and expressing the Staff’s concern that:
Some broker-dealer firms have geographically dispersed offices staffed by only a few people, and many are not subject to onsite supervision. Their distance from compliance and supervisory personnel can make it easier for registered representatives (representatives) and other employees in these offices to carry out and conceal violations of the securities laws
Staff Legal Bulletin No. 17 (March 19, 2004).
Courts and securities arbitration panels, in identical circumstances, have long held brokerage firms responsible for the conduct of their registered representatives in “selling away” cases based upon the broker-dealer’s failure to supervise. See, e.g., Hunt v. Miller, 908 F.2d 1210 (4th Cir. 1990); Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873 (7th Cir. 1992)(firm liable for agent’s selling away activities); Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990)(same); State Security Insurance Co. v. Burgos, 583 N.E.2d 547, 557 (Ill. 1991)(liability for firm where broker acted with apparent authority); Salmon v. New England Securities Corp., FINRA Arb. No. 01-06935 ($1.4 million award against member for associated persons “selling away” third party notes); Sleight v. Centaurus Financial, FINRA Arb. No. 10-00536; Brezden v. Associated Securities Corp., FINRA Arb. No. 07-03054 (reasoned award against member for failure to supervise agent’s selling away activties); Chandler v. FSC Corporation, NASD Arb. No. 05-0443, (reasoned award against member for failure to supervise agent’s unauthorized selling away); Battle v. Northeast Securities, Inc., NASD Arb. No. 06-04110, (same)(reasoned award); Dobison v. Jospehthal, Lyons & Ross, Inc., NASD Arbitration No. 96-00963 (arbitration award against brokerage firm for broker’s selling away of unregistered notes and warrants).
Securities regulators have also taken the same approach and routinely hold broker-dealers responsible for the “failure to supervise,” when their representatives engage in this outside activity. In Re DBCC (No. 5) v. Charles E. French, Complaint No. 5940026, May 18, 1995 (sanctions against member for selling away activity of broker); Siriani v. United States Securities & Exchange Commission, 677 F.2d 1284 (9th Cir. 1982); Stoiber v. Securities & Exchange Commission, 161 F.3d 745 (D.C. Cir. 1998).
Accordingly victims of Timothy J. Roth may have claims against Comprehensive Capital Management, Inc. based upon, among other things, its failure to supervise Mr. Roth.
Guiliano Law Group
The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. If you own the common stock of TradeStation and purchased your shares before April 21, 2011, and wish to learn more about these claims, contact us at (877) SEC-ATTY