Stockbrokers who go rogue and start to sell risky products promising high returns without the knowledge or approval of their broker-dealer employers are engaging in a practice known as “selling away,” that is a top concern for state securities regulators.
Selling away is a common infraction, according to The North American Securities Administrators Association, or NASAA. In its 2011 survey of state securities enforcement officials, NASAA ranked selling away eighth among the top 10 violations of the securities industry that do not involve fraud, according to a report in Investment News.
Increased Enforcement Actions for Selling Away
This year NASAA reported 54 enforcement actions against registered members of the securities industry for selling away, the report said. This is double the 26 selling away deficiencies listed in a 2010 report from NASAA on broker-dealers.
Moreover, the former brokers of quite a few independent firms — including Edward Jones, Raymond James Financial Services Inc. and Woodbury Financial Services Inc. – are being investigated by states for their alleged selling-away activities.
Brokers who engage in selling away usually operate in small offices far away from the headquarters of their broker-dealer firm. Typically, there is no branch manager at the satellite office to monitor the conduct of the brokers on a daily basis, making is easy for them to sell financial products that the firm does not know about and did not approve. Often, these rogue sales wind up harming clients’ investment portfolios.
The FBI is scrutinizing two former Edward Jones brokers based in South Dakota who allegedly played a part in a selling-away case involving investment in an alleged Ponzi scheme run by Gibraltar Partners Inc., a New York money management firm.
The Securities and Exchange Commission, or SEC, also has selling away in its sights. In April, the SEC charged Thomas Keough, a Massachusetts broker once affiliated with Raymond James, as well as his fellow sales agent David Affeldt, with selling unregistered promissory notes for subprime auto lender Inofin Inc. in an illegal scheme that bled $110 million from hundreds of investors.
The people who bought the promissory notes were promised returns of 9 percent to 15 percent, the SEC complaint said. Keough and Affeldt allegedly pulled in about $500,000 in referral fees between 2004 and 2009, the complaint said.
Stiff Federal Court Penalties
The federal courts have meted out stiff penalties. Joshua Gould, a former broker for Woodbury Financial based in St. Louis, was sentenced in July to 97 months in prison by a federal judge in Missouri for a variety of violations, including selling unregistered securities through private businesses. Gould was responsible for investing $750,000 for the benefit of Coral Mortgage Bankers Corp. of Englewood, N.J., among other charges, according to a cease and desist order from the Missouri Secretary of State.
While neither Edward Jones, Raymond James nor Woodbury Financial are facing regulatory consequences, clients can and have filed lawsuits in securities arbitration because of the brokers’ alleged actions. The SEC has noted in administrative proceedings that broker-dealers have a legal duty to supervise their remotes brokers.
An Edward Jones spokesman said a client brought the matter of selling away through Gibraltar Partners to the firm’s attention in March. As a result of its Edward Jones’ own investigation, during which it learned about the criminal investigation of Gibraltar Partners, it fired the South Dakota brokers.
A group of investors sued Gibraltar Partners in U.S. District Court in the Southern District of New York in June, alleging that it was running a Ponzi scheme along with other firms, including Rahfco Funds LP. The plaintiffs are seeking $100 million in damages. Edward Jones was not named in the suit.
According to the report in Investment News, some state officials have attributed the increase in selling away to fallout from the credit and financial crisis that grew severe in late 2008 with the collapse of the investment bank Lehman Brothers.
At the time, brokers had clients who were unhappy with the investment options out there after the financial crisis hit. Looking to supplement their income, brokers went outside the traditional market, trying to find alternative products, state regulators have said.
Guiliano Law Firm
The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, 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. For more information contact us at (877) SEC-ATTY.