Florida investor sues firms over adviser wire fraud

Some custodians bolster oversight of third-party account transfer requests

Feb 28, 2010 @ 12:01 am

By Jed Horowitz

A Florida investor is suing TD Ameritrade Inc. for allegedly allowing a financial adviser to steal more than $2.3 million from her brokerage accounts by forging her signature on nine wire transfer requests.

The adviser, Edward T. Stein, also allegedly transferred funds from other bank and brokerage accounts to accounts he fraudulently opened in Carolyn Travis Gilson's name at TD Bank NA using photocopied signatures. He then drained the accounts, according to the complaint.

In total, Mr. Stein allegedly stole more than $11 million from Ms. Gilson, according to Michael Shafir, an associate at Broad & Cassel in Miami, which is representing her.

The case, initially filed in a Florida circuit court in late January and moved at TD Ameritrade and TD Bank's request to federal court last week, is the latest to allege illegal wire transfers by an investment adviser as a key method for advancing fraud. Such cases, twinned with increased post-Madoff scrutiny of custodians by regulators, have led custodians such as The Charles Schwab Corp. to broadly increase their surveillance of money transfer requests.

The suit was filed on behalf of Ms. Gilson and two investment vehicles she controlled after Mr. Stein pleaded guilty to criminal- and civil-fraud charges last year.

Mr. Stein, who was sentenced this month to a nine-year prison term, admitted to securities and wire fraud related to a Ponzi scheme involving entities he controlled, including the Gemini hedge fund, Prima Capital Management Corp. and DSP LLC.

Ms. Gilson, who was introduced to Mr. Stein by a childhood friend, declined to invest in his funds. She did, however, allow Mr. Stein to “make limited, authorized investments on her behalf” through the TD Ameritrade accounts she opened at his urging in late 2008, according to the complaint.

The complaints allege numerous violations of the Uniform Commercial Code, including its “know-your-customer” and “due-care” rules.

“Despite the fact that nine transfers, occurring over less than 90 days, dissipated virtually the entire balance of Gilson's Ameritrade account, and despite the fact that eight of the nine transfers were directed to unknown third parties, Ameritrade took no steps to verify the purported transfer requests” in violation of its own internal policies, the complaint charged.

Mr. Stein authorized the transfers using “obviously identical, unlawfully photocopied and reproduced facsimile of Gilson's signatures,” the complaint says. The investor was unaware of the transfers because he arranged for the account statements to be sent directly to him, the complaint states.

TD Bank, whose parent owns almost 45% of TD Ameritrade, allowed Mr. Stein to open three accounts using forged signatures and data that included an incorrect age and driver's license number — “glaring errors” that would have been apparent to TD Bank upon a simple credit background check, the complaint says.

Mr. Stein, who used his own address and was an authorized signatory on the primary account, subsequently used Ms. Gilson's transferred funds to purchase a $1.6 million condominium apartment in Manhattan and to advance his Ponzi scheme, the complaint alleges.

Ms. Gilson's suit is notable because it directly implicates TD Ameritrade and TD Bank in an alleged fraud by an adviser. There is little point in suing Mr. Stein because his estate is in receivership and because a court-imposed stay prevents such an action, said Jonathan Etra, a partner at Broad & Cassell.

Ms. Gilson claims to have lost more money than any of Mr. Stein's other victims.

Rebecca Acevedo, a spokeswoman for TD Bank, said the bank couldn't comment because it hadn't had time to review the facts of the case.

Neil Baritz, a lawyer for TD Ameritrade, did not respond to several calls for comment.

Kristin Petrick, a spokeswoman for TD Ameritrade, declined to comment. Last month, without referring to the case, she said the firm's RIA custody unit has been taking “extra steps and precautions ... which could include contacting an end-client directly if, for example, we see multiple third-party wire transfers or other potential red flags.”

TD Ameritrade isn't the first brokerage firm to step up its scrutiny of wire transfers.

Schwab recently informed registered investment advisers that it has begun calling some of their clients to verify wire transfers.

In January, the Securities and Exchange Commission sued Steven Salutric, owner of Results One Financial LLC, for stealing $2 million from 17 clients, in part by forging client signatures on withdrawal requests from their Schwab accounts.

“We are aware of the SEC's charges against Mr. Salutric and are working with them and the court-appointed receiver to help investors recover their monies from the responsible parties,” Schwab spokeswoman Alison Wertheim wrote in an e-mail. “We consider this to be a very serious matter, and notified Results One in January that we would be terminating our relationship with them.”

Ms. Wertheim said the case was not connected to Schwab's decision to begin verifying wire transfers.

“Schwab has always had the authority to contact end-clients, and this new, more structured wire authentication process was in the works well before the Salutric incident,” she wrote in an e-mail.

E-mail Jed Horowitz at jhorowitz@investmentnews.com.

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