When you learn about a massive broker fraud case about several ripped-off financiers, it is a great reminder to consider your own circumstances or financial advisor.
To put it differently, how much do you know your broker or advisor? In December alone, brokerage companies confessed (without denying or admitting guilt) to a total $2.4 million in fines and more than half of the sum arose from poor guidance of advisors that caused harm to investors, as per the newest rundown of enforcement activities from FINRA, an acronym for Financial Industry Regulatory Authority.
FINRA is a self-regulatory association for around 630,000 agents/brokers — a few of whom are also enrolled with the SEC (Securities and Exchange Commission) as brokers — and the companies that recruit them.
EVERY YEAR, APPROXIMATELY 50% INVESTORS BECOME VICTIMS OF SCAM, AS PER A STUDY FROM THE STANFORD CENTER ON LONGEVITY AND THE FINRA INVESTOR EDUCATION FOUNDATION.
While that entails all kinds of schemes and frauds, 16.5% of investors considered for the research were found to be a victim of investment fraud.
Recently, the SEC directed Woodbridge Group of Companies, a real estate investment agency, and its previous owner to reimburse $1 billion in fine and reimbursement for ill-gotten gains linked to a suspected fraud concerning 8,400 retail financiers.
Yet individual cases of supposed wrongdoing do not always involve substantial dollar numbers, and many of the allegations, inquiries and settled cases gain little notice.
Apart from financial companies getting penalized for lack of useful supervision, agents can also be charged or rusticated from working with companies for a specified period or banned completely.
In a case covered in the recent monthly FINRA roundup, an agent was banned due to an assortment of suspected offenses, such as using customer funds for himself and trying to conceal it.
As per FINRA’s reports, San Diego’s Kyle Patrick Harrington switched about $20,000 in funds from a client and got involved in undisclosed confidential securities transactions with numerous other investors, in addition to making false declarations and giving fake documents to his boss as well as to FINRA.
Especially, FINRA’s Findings state this in mid-2012, Harrington switched $19,874 of a client’s funds in an account he possessed and had his associate forge documents to aid the transfer.
When authorities started questioning him in 2016 about the incident, he asked the customer to sign a letter declaring she had paid him to reside at his vacation house in 2012, FINRA papers reveal. (She disagreed.) Initially, he said to FINRA that the money was because the client rented his holiday home but later changed his statement and stated it was for investment management fees.
The client notified FINRA that she thought the money was moved to her individual retirement accounts.
In November 2016, an internal inspection in Harrington’s then-employer, National Securities Corp., revealed the suspicious move and he was sacked, FINRA reports show.
FINRA told Harrington to not reveal his private transactions in securities, which is required by brokers. Those dealings led to an arbitration claim from one financier that prompted the National Securities Corp. to pay $105,000 for resolving the case as per FINRA reports.
Apart from getting banned in the business, Harrington was instructed to pay $105,000 to refund National Securities Corp for the allegation and to give $190,974 in disgorgement (ill-gotten profits) into FINRA.
In 2011, Harrington had to quit from another company as it was discovered that he had failed to reveal personal insolvency, according to the FINRA documents. As a result, his supervisors banned him from working with any brokerage for 30 days in 2012.
After National Securities sacked him in November 2016, Aurora Capital in Bridgehampton, New York, employed him until last year.
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“As a firm, where we think it’s appropriate, we believe in second chances, and in the majority of cases that doctrine works for all sides,” Jeff Margolis, Aurora Capital president, wrote in an email to CNBC. He explained Harrington was put under improved supervision and clients were contacted to assess their satisfaction.
“Eventually it became clear that although we had no major difficulties with him throughout his tenure with us, the issues raised by the regulators prior to his joining this firm were likely to be insurmountable and he and we mutually agreed he would leave the company,” Margolis said, adding that Harrington resigned voluntarily.
Harrington, for his part, told CNBC that he disagrees with FINRA’s findings, including that he defended himself in the FINRA situation rather than selecting a lawyer due to the possible high cost.
“They couldn’t be more wrong,” Harrington said. “But as soon as they spend a number of resources on finding out all about you, they’re likely to find something — at least something in their minds.”
Nevertheless, he has moved on in his life and is now conducting a youth sports academy, he said.
In a separate instance on FINRA’s monthly rundown, broker was justified for not exposing to his company a string of private securities transactions that resulted in two customers losing the majority of their money.
Without denying or admitting guilt, Seth Andrew Nannini of Charlotte, North Carolina, accepted the sanctions, including a four-month ban from functioning as an agent and $7,500 in reimbursement to a customer.
FINRA documents allege that between 2011 and 2012, Nannini solicited two customers of his company — Capital Investment Group in Raleigh — to invest a total of $290,000 in a biotech company. The findings state he moved among their clients’ funds to an IRA held elsewhere, which made it more challenging for the company to know more about the investment.
He allegedly spent $1,500 of his own money from the venture without disclosing it, which also violates FINRA rules.
The biotech firm went bankrupt before it could repay investors. One of Nannini’s customers received only $788 of their first $70,000 he invested as part of the firm’s bankruptcy proceedings, FINRA documents state. Another customer was able to get $72,500 after filing an arbitration claim and settling with the firm, Nannini and additional parties, the records show.
Andy Penry, an attorney Together with the Raleigh law firm of Penry Riemann who represented Nannini from the FINRA proceedings, said of the agreement reached, “I believe both my customer and FINRA are content with the outcome.”
Penry also said that Nannini intends to stay in business if he is capable, after his suspension lifts in May. Nannini remains recorded on FINRA’s Broker Check as employed by Capital Investment Group.
Tom Barron has Bachelors Degree from Michigan State, MBA from University of Miami and worked as equities trader for Bank of America. When he is covering investment news, he is spending time with his family. Hobbies include golf and travel.