Firm failed to properly oversee a rep who allegedly duped two Florida municipalities, says SEC
First Allied Securities Inc. has agreed to pay $2 million to settle charges that it failed to supervise a broker who allegedly engaged in a high-risk trading strategy that involved churning the accounts of two municipal clients in Florida.
The Securities and Exchange Commission announced today that First Allied agreed to pay $1.5 million in disgorgement and interest, along with a fine of $500,000.
First Allied, which has 828 independent contractor reps, is owned by Advanced Equities Financial Corp.
The SEC settlement order stemmed from the firm's supervision of Harold H. Jaschke, a rep with First Allied from June 2005 to August 2008.
During that time, the commission alleges that Mr. Jaschke conducted hundreds of short-term trades of long-term, zero-coupon U.S. Treasury bonds known as STRIPS. He made the trades in the accounts of the two Florida municipalities without the full knowledge or authorization of his customers, according to the SEC.
Near the end of last year, the securities regulator charged Mr. Jaschke with churning client accounts and making unauthorized and unsuitable trades for the two institutional clients — the city of Kissimmee and the Toho Water Authority — resulting in commissions of $14.2 million.
First Allied's supervision of the rep was confused and inadequate, and its supervision of Mr. Jaschke's e-mail correspondence was simply not up to snuff, the SEC said in its settlement order.
First Allied's former vice president of supervision, Jeffrey C. Young, was “unsure” whether to contact the municipal clients in 2006 when first notified of “abnormal trading” in client accounts, the SEC said. Ultimately, First Allied's senior management decided not to send notification of the reports to the municipal clients, the settlement order stated.
Meanwhile, Mr. Jaschke routinely used his personal e-mail account to correspond with clients, the SEC said. The commission claims First Allied should have been aware of the rep's conduct because he used the same e-mail account to correspond with supervisors and senior management.
In December, a lawyer for Mr. Jaschke told InvestmentNews he was going to contend the charges in court.
As part of today's settlement, First Allied also agreed to hire an independent consultant to review its supervisory policies and procedures.
In a statement, First Allied said it had previously set aside reserves for the settlement, so the firm's financial condition and future operations would not be adversely affected.
“After considering the surrounding circumstances, the current regulatory environment, and the expense and uncertainty associated with litigation, the firm decided it was in its best interest to settle the matter,” the statement said.
