“Sometimes a financial crime is simple: The Stockbroker just steals the client’s money.”
Many times stockbrokers steal client funds by simply forging letters of authorization, directing that funds be transferred from the customer account to another account controlled by the broker. In other cases, brokers have established phantom accounts at other institutions where the broker is shown as a joint account holder, and which is used as a depository for funds siphoned out of the customer’s actual account, which then the broker simply steals. Sometimes to conceal these withdrawals, a broker may change the customer’s address, diverting the actual statements from ever reaching the customer, and then manufacture their own phony statements to send to the customer instead.
Others examples of stockbroker theft include the broker borrowing money from a customer, giving the customer an IOU or a promissory note that is never paid back. A stockbroker may recommend a non-existent security or non-existent investment fund, establish a bank account under the issuer’s name, manufacture false customer statements, and simply pocket the customer’s investment.
One ploy, includes a customer receiving an unsolicited withdrawal check from their brokerage account, and when the customer calls to ask about the check, the broker claims it was a mistake and asks the customer to send the check directly back to the broker, who then deposits it into another account upon receipt.
The sums can be substantial. In 2014, FINRA’s disciplinary-action database revealed at least 50 disciplinary actions involving misappropriation or conversion of funds. These actions do not include or only partially include instances where a stockbroker is permanently barred by FINRA, not for stealing customer funds, but for failing to cooperate with FINRA’s investigation of the stockbroker stealing customer funds.
Such conduct is not new, and brokerage firms that discover their brokers are stealing money or obtaining unauthorized loans from customers often seek to conceal these acts from regulators and customers for fear that they may have to pay the customers back, or that they are legally responsible for the conduct of the brokers.
Notable Cases
In one case, a broker forged approximately twenty illegal transfers through which she stole hundreds of thousands of dollars from more than a dozen customers. Upon discovery by the brokerage firm, as the customers started to complain, the broker was quickly “terminated.” However, according to the brokerage firm, at least according to what the firm told regulators, the broker was terminated because of “signature discrepancies.”
In August 2011, FINRA announced a $500,000 fine paid by Citigroup for its failure to supervise a registered broker in its Palo Alto, California office. Over an eight-year period this broker misappropriated about $850,000 from at least 22 Citigroup customers, including elderly and infirm customers. According to FINRA, this broker “used her knowledge of Citigroup’s lax supervisory practices at the branch to take advantage of some of the firm’s most vulnerable customers, including the elderly. Citigroup had reason to know what she was doing and could have stopped her.”
Basis for Liability
While brokers who steal money are often judgment proof or on their way to jail, the brokerage firms who employ them are liable for the acts of their registered representatives, even though they did not “authorize” them to outright steal from their customers. Their liability arises from their unequivocal duty “to establish, maintain and enforce an adequate supervisory system to detect and prevent misconduct.” FINRA Rule 3012 regarding the establishment of a Supervisory Control System specifically requires all firms: to establish, maintain and enforce written supervisory control policies and procedures that, among other things, include procedures that are reasonably designed to review and monitor the transmittal of funds (e.g., wires or checks) or securities:
- from customer accounts to third-party accounts (i.e., a transmittal that would result in a change of beneficial ownership);
- from customer accounts to outside entities (e.g., banks, investment companies);
from customer accounts to locations other than a customer’s primary residence (e.g., post office box, “in care of” accounts, alternate address); and - between customers and registered representatives (including the hand-delivery of checks).
NASD Rule 3012 (Supervisory Control System) and Incorporated NYSE Rule 401, See also, Regulatory Notice 09-64 (Nov. 2009) (“FINRA firms must have and enforce policies and procedures governing the withdrawal or transmittal of funds or assets from customer accounts, including instructions froman investment adviser or other third party purporting to act on behalf of the customer”); FINRA Regulatory Notice 12-05 (Jan. 2012) (“firms must have adequate policies and procedures to review and monitor all disbursements it makes from customers’ accounts, including but not limited to third-party accounts, outside entities or an address other than the customer’s primary address”); FINRA Department of Enforcement v. Ameriprise, Letter of Acceptance Waiver & Consent, No. 2010-02515730 (March 1, 2013)(Ameriprise fined $750,000 for Failing to Supervise and have reasonable supervisory systems in place to monitor wire transfer requests and the transmittal of customer funds to third-party accounts).
FINRA also suggests that a firm’s policies and procedures should include procedures that are reasonably designed to, among other things: verify that any third party who purports to be acting on behalf of a customer, including any family member, third-party investment advisor or money manager, has been authorized by the customer to take the action in question,” and that “this typically, requires firms to verify that a valid power of attorney has been executed by the customer and that actions taken by the third party are within the scope of the authority conveyed.” Regulatory Notice 09-64 at 3 (Nov. 2009).
Accordingly, customers who have had their funds stolen or misappropriated by their stockbrokers, or even by third parties, may be able to recover their funds by bringing an action against their brokerage firm.
Guiliano Law Group
Our practice is limited to the representation of investors. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you. There is never any charge for a consultation or an evaluation of your claim. For more information, contact us at (877) SEC-ATTY.
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