Independent broker-dealer a magnet for brokers from troubled firms

Thirty-one of 37 brokers came from firms Finra had expelled

By Mason Braswell

Jun 4, 2014 @ 12:01 am (Updated 5:53 pm) EST

Broker-dealers, Finra, BrokerCheck, disclosure events, John Thomas Financial
Kevin Carreno, IAA Financial's part-owner and general counsel (Photo by Timothy Healy)

At a time when regulators are keeping a close eye on brokers that move from one problem firm to another, IAA Financial may attract attention.

Of the 37 Finra-registered brokers at the firm, 31 have been with at least one brokerage firm that had been expelled by regulators, according to an analysis of Financial Industry Regulatory Authority Inc. registration records. Edward Cofrancesco, chairman of IAA Financial, said the firm had 45 brokers, but could not explain why the other eight brokers did not show up on Finra's records.

On average, each of the 31 brokers had worked at three defunct firms. Seven brokers, meanwhile, had worked at five or more firms that were expelled from the industry by Finra.

Several IAA Financial brokers came from broker-dealers such as John Thomas Financial Inc. or EKN Financial Services Inc., both of which were kicked out of the securities industry after incurring multiple customer complaints and accusations of fraud.

Other brokers joined IAA Financial after leaving GunnAllen Financial Inc., which had around 400 brokers at the time it was shut down by Finra in 2010 for not meeting capital requirements.

Being associated with an expelled firm is not itself a ground for sanction. But over the past year, Finra has been increasing its focus on brokers affiliated with firms shut down for regulatory violations.

This year, the industry's self-regulator formed a six-member team to focus on what it calls “high-risk” brokers.

Finra spokeswoman Nancy Condon declined to comment on IAA Financial.

But in an e-mail, she wrote: “Finra is sensitive to the potential risks posed by brokers who formerly worked at one or more firms that have been expelled by Finra.”

“Finra keeps close tabs on this small but potentially high-risk group of registered persons — and the firms that hire them — using a combination of methods, including sophisticated data-mining analytics and near-real-time analysis of incoming tips, complaints and ongoing field examinations,” she added.

Jamie Mongiovi, director of communications for the Office of Financial Regulation in Florida, where IAA Financial is based, said the state hasn't taken any action against the firm and is not investigating it.

DEFENDS HIRING

IAA Financial's general counsel, Kevin Carreno, defends the company's hiring practices.

Some of the brokers in question may have worked briefly at their previous firms and may have left them even before they were shut down or expelled, he said.

Those brokers, Mr. Carreno said, should not be penalized for working at firms at which they had no decision-making authority.

“If these people shouldn't be working in the industry, don't you think Finra has the authority to take that action right now?” he added.

Mr. Carreno declined to comment on whether IAA Financial is the subject of any pending Finra investigations.

Of the 37 Finra-registered brokers at IAA Financial, 20 — or around 54% — had at least one disclosure event on their public BrokerCheck record. That compares with an industry average of about 12%, according to Finra.

Disclosure events include, but are not limited to, customer complaints with more than $5,000 in alleged damages, arrests, bankruptcies or liens.

The 20 IAA Financial brokers have an average of four disclosure events each.

To be sure, not all disclosure events are found to have merit or wind up in award against the broker.

Moreover, many brokers may be subject of a customer complaint against a firm, although they may not have been named directly by the investor. That must still be reported on their record, according to Finra rules.

Mr. Carreno downplayed the significance of certain disclosure events.

“They're impossible to remove and in some cases there's just no basis,” he said.

A number of the IAA Financial brokers have moved around among several expelled firms before landing at IAA Financial.

The firm's chief executive, David Weinberger, for example, has been with four expelled firms over his 17-year career, including most recently GunnAllen.

Another IAA Financial broker, Salvatore Clark, has been with six firms that were expelled from the industry. He has been with 14 firms over his 18-year career and has racked up 16 disclosure events.

Just because a broker worked at a firm that faced expulsion does not mean that broker was involved in the circumstances that led to the expulsion.

RED FLAG

Moving firms multiple times in a career can be a red flag, according to Robert Rex, an attorney who works with Dickenson Murphy Rex & Sloan and has represented investors against brokerages such as John Thomas Financial.

Finra expelled that firm in October amid allegations of fraud with regard to the sale of a penny stock.

“It still astounds me that there isn't more public awareness that you can get records on these people before you give them money,” he said. “If you look at somebody and they moved every 11 months for the past 15 years, you're probably not going to want to give them your nest egg.”

Eric Gretchyn, who previously was with John Thomas Financial, has been registered with 17 firms over his 12 years in the industry before joining IAA Financial in February, according to Finra records. He has had three disclosure events on his record.

Mr. Weinberger and other brokers at IAA Financial referred requests for comment to Mr. Carreno.

The general counsel, however, declined to comment on their behalf.

He said the firm had looked at its brokers' backgrounds and sent all required employment forms to regulators.

Mr. Carreno, who is a part owner in IAA Financial, also serves as the small firm representative on Finra's Board of Governors.

FRICTION WITH FINRA

He has a history of disputes with Finra.

In 2009, Finra sent him a Wells Notice, warning him that he was about to be charged with violating a restriction agreement and with not being properly licensed while he was chief operating officer at now-defunct Empire Financial Group Inc.

Mr. Carreno claimed that the Wells Notice was intended to stop his pending appointment as head of Florida's Office of Financial Regulation.

Finra officials opposed his Florida appointment, he claimed, due to a series of earlier run-ins that he had with the SRO's staff.

In 2011, a hearing panel dismissed the case against Mr. Carreno.

IAA Financial previously operated as CBG Financial Group Inc. and Cheevers Hand & Angeline Inc.

It was renamed last October when it was purchased by Pecunia Management, a holding company owned by Mr. Cofrancesco.

Pecunia Management, which Mr. Cofrancesco described to Finra as an “inactive holding company,” also owns a sister firm of IAA Financial known as International Assets Advisory.

International Assets Advisory, which shares a logo with IAA Financial, has around 100 registered brokers, according to Mr. Cofrancesco. At least 17 of the brokers had previously been at firms that were shut down or expelled.

Mr. Carreno, who is also the general counsel for International Assets Advisory and a part owner, declined to comment about that firm's hiring practices as well.

International Assets Advisory, which is based in Orlando, Fla., has a total of seven regulatory events and arbitrations on its record, according to BrokerCheck. However, Mr. Cofrancesco pointed out that the disclosures span 32 years and the last event was from 2000. "It far exceeds our peer group in terms of exemplary regulatory conduct," he said.

An earlier version of this story misstated David Weinberger's most recent employer before IAA Financial. It was GunnAllen Financial Inc., not John Thomas Financial. The story also incorrectly reported Frank Bluestein's penalty in connection with a $74 million Ponzi scheme. Mr. Bluestein was not criminally charged or sentenced relating to the Ponzi scheme. The story also misstated the average number of disclosure events on the records of IAA brokers with such events. It is four, not between two or three. The story also had erroneous information on the background of two brokers. Salvatore Clark has worked in the securities business for 18 years, not 14. Eric Gretchyn has worked at 17 firms, not 16.

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