NEW YORK — FSC Securities Corp. last month was taken to task in an NASD arbitration panel decision.
The five-year-old case involved a broker, Scott B. Hollenbeck, whose prior employment record included being discharged as chief financial officer of a church organization, allegedly for embezzlement.
In a July 2 decision, the three-member arbitration panel said that Atlanta-based FSC’s “management ineptness was broad” and that the firm ignored red flags that he was “selling away.” FSC created “an extremely cozy environment for a man bent on defrauding his customers,” according to the decision.
The vast majority of such decisions from arbitrators give few details about the history or reasoning of the claim, therefore making the decision against FSC on behalf of six former clients very much out of the ordinary, industry lawyers said.
The arbitration panel unanimously agreed that FSC failed to supervise Mr. Hollenbeck “at numerous points along the case continuum.”
FSC has been ordered to pay his clients $299,000, plus interest, as well as $284,000 in lawyer’s fees.
The panel also ordered FSC, which is a part of the
AIG Advisor Group Inc. of Phoenix, to pay $104,000 in undisclosed “costs” to the claimants.
Meanwhile, Mr. Hollenbeck, who wasn’t named in the claim, has a series of other legal problems. Along with others, he faces both criminal and civil charges for his involvement in an alleged Ponzi scheme involving the sale of investments in billboards from 2001 to 2004.
Mr. Hollenbeck, who was based in Kernersville, N.C., had two tenures of affiliation with FSC. The first was from June 1996 to December 2000, and the second was from August 2001 until May 2002.
Calls to Mr. Hollenbeck’s lawyer, Scott Holmes, weren’t returned.
According to the arbitration panel’s decision, FSC should have never hired him in the first place, as his record of previous employment was riddled with warning signs, including allegations of a “bogus business” and “forgery” at another broker-dealer.
FSC is “aggressively pursuing all available remedies at this time,” said John Pluhowski, an
AIG Advisor Group spokesman.
“We are extremely disappointed in the panel’s award and do not agree with the majority of the panel’s conclusions,” he said “We are surprised in the panel’s decision to include non-clients in the award.”
Two aspects of the arbitrators’ decision stand out, said Kalju Nekvasil, the attorney for the six clients and a partner at Goodman & Nekvasil PA of Clearwater, Fla.
The first is the “the finding that [a brokerage firm has] the duty to warn its customers when it fires brokers for misconduct,” he said.
“The other point is, what duty do firms have to investigate a rep’s background?” Mr. Nekvasil said.
The standard policy of Washington-based NASD — whose merger with the regulatory arm of the
New York Stock Exchange late last month created the
Financial Industry Regulatory Authority Inc. of New York and Washington, the brokerage industry’s self-regulator — mandated that broker-dealers check with all employers over the previous three years when hiring a representative, he said. Firms must also check a broker’s compliance record.
‘Stunningly inadequate’
Two of the panel members expressed disbelief over the industry rule mandating only a three-year window to check brokers’ employment.
“The industry through the [Securities and Exchange Commission] and NASD has made great strides over the years to improve its oversight and protection of all investors, particularly the ‘little guy,’ an appellation easily pinned to investors in this case. Accordingly, the two public arbitrators on the case found the industry’s three-year minimum standard for background checks for new hires stunningly inadequate,” according to the decision.
“At the same time, the panel did not believe the SEC intended for this guideline to be blindly followed, ignoring issues further back in a person’s background that begged to be explored,” according to the decision.
“In this instance, [FSC] elected to ignore Hollenbeck’s longest tenured position, about 10 years with a school/church as its chief financial officer and from where he was discharged for — among other things — embezzling.”
