A Pennsylvania broker who's under federal indictment for fraudulent sales of illiquid alternative investments (i.e., nontraded real estate investment trusts) is the poster boy for all that Sen. Elizabeth Warren and her supporters believe is wrong with the financial advice industry.
Ms. Warren has drawn the extreme ire of financial services executives and advisers for
pressing them to do a better job of running bad brokers out of the business.
The financial services business is inherently conservative, and its executives and advisers just want to be left alone to go about their business as they always have. They loathe being told what to do, particularly by a female Democrat from Massachusetts.
ALMOST A DOZEN FIRMS
To silence these critics, all Ms. Warren has to do is point to the case of Anthony Diaz, a former broker
who was barred from the securities industry last year by the
Financial Industry Regulatory Authority Inc. and is currently facing six federal charges of wire fraud.
Mr. Diaz worked at almost a dozen firms in his 15-year career. His firm, Financial Planners Group of America, was based in Monroe County, Pa.
Since he started as a securities salesman in 2000, Mr. Diaz's “relationship was terminated by, or [he] was permitted to resign from, six of the 11 financial investment firms at which he worked over his 15 years in the securities industry,” according to the federal indictment filed last month in U.S. District Court for the Middle District of Pennsylvania in Scranton.
RED FLAG
Jumping from firm to firm is a long-standing and well-known indication that a broker is a problem. Firms routinely push brokers they don't want around out the door. The industry has to improve its policing of such advisers.
(Related: Advisory firms are on the hook for hiring bad brokers)
Mr. Diaz's Finra BrokerCheck report is also a mind-bending 86 pages long. Why would any firm take such risk on a broker with this type of history?
For the commish, of course. Nontraded REITs typically pay brokers 7% commission and their broker-dealers another 1% to 2%. Is it any wonder that some brokers would abuse clients to earn such a lofty payout?
His practice also focused on the sale of other high-commission products, according to the complaint Finra filed against Mr. Diaz last year. From March 2010 through May 2011, he “induced approximately 80 customers to enter into variable annuity exchanges, often subject to significant surrender charges, without a reasonable basis for recommending those exchanges,” Finra alleged.
From February 2007 through February 2010, he “falsely told” seven clients that investments in REITs were either “guaranteed or guaranteed to pay certain amounts of interest,” according to the Finra complaint.
And in a particularly chilling detail for the brokerage industry, the U.S. Attorney for the Middle District of Pennsylvania filed criminal charges against Mr. Diaz for allegedly lying about the suitability of alternative investments for his clients.
This is significant. For years, ethically challenged brokers have pushed the suitability limits. These tactics include lying about a client's net worth in order to sell them high-risk, high-commission private placements or illiquid REITs.
Now the Department of Justice is laser-focused on suitability in its indictment against Mr. Diaz. Will other federal indictments of this nature against brokers follow?
“These alternative investment products have specific 'suitability requirements' related to net worth, liquid net worth and/or income,” according to the federal indictment. “To effectuate sales of these alternative investment products in compliance with these suitability requirements, and in furtherance of his scheme to defraud, [Mr.] Diaz instructed clients to sign blank documents or partially completed documents.
“[Mr.] Diaz then provided false information on these documents concerning his clients' net worth, income, risk tolerance and/or investment experience in order to make it appear that these clients met the net worth and/or income requirements to invest in these products,” the indictment states.
“In addition, [Mr.] Diaz placed his clients in these investments regardless of their age, net worth and income, and did so without inquiring as to the clients' risk tolerance and investment goals and objectives or in contravention of his client's wishes,” according to the indictment.
Mr. Diaz's attorney, Darren Gelber, said, “Mr. Diaz is confident that all clients were advised of risks and signed the appropriate disclosure forms. For the government to sustain the charges, it has to prove a deliberate intent to defraud.”
On his LinkedIn page, Mr. Diaz says he is a commercial real estate agent, entrepreneur, investor and world traveler.
Mr. Diaz will not be globe-trotting next month, however. His trial is scheduled to begin in federal court in Scranton in July.
