Oppenheimer has drawn a multi-million dollar fine from the
Financial Industry Regulatory Authority Inc., which said the firm failed to act on “numerous red flags” as one of its brokers was excessively trading customer accounts and siphoning off nearly $3 million from his clients.
The firm agreed to pay a $2.5 million fine and $1.25 million in restitution to customers to settle charges that its lax supervision allowed former broker Mark Hotton to carry out his scheme from 2005 to 2009, according to a
letter of settlement from Finra's department of enforcement.
“As a result of Oppenheimer's failure to supervise [Mr.] Hotton, his customers suffered millions of dollars in losses,” Finra wrote in the settlement.
Last October, Mr. Hotton was sentenced to 34 months in prison for his role in a separate fraud case where he was accused of stealing money from the producers of a Broadway show, “Rebecca The Musical.”
Finra said the firm failed to supervise Mr. Hotton in “multiple respects,” according to a statement. First, the firm failed to properly vet Mr. Hotton before hiring him; he already had 12 reportable events on his record, including criminal charges and seven customer complaints.
In addition, shortly after Mr. Hotton joined the firm, his business partners sued him for defrauding them out of several million dollars, Finra said. Oppenheimer investigated the business partners' claims but wrongly concluded the allegations predated Mr. Hotton's joining the firm, and did not put him under any additional supervision, according to the settlement.
In addition, the firm failed to identify transactions in which Mr. Hotton directed customer funds to outside business activities that had been disclosed to the firm, Finra said. He ultimately transferred more than $2.9 million into bank accounts he controlled, Finra said.
Oppenheimer also failed to take action to restrict Mr. Hotton's trading despite the fact that analysts in the firm's surveillance group presented spreadsheets to senior management showing them that Mr. Hotton had excessively traded in multiple customer accounts.
Finra did not name any individuals in the settlement.
“Firms must ensure that they implement supervisory systems that are reasonably designed to both identify and respond to red flags that may indicate broker misconduct," Brad Bennet, Finra's chief of enforcement, said in a statement.
Oppenheimer has already paid more than $6 million to resolve customer arbitration cases related to its supervision of Mr. Hotton.
As part of the settlement, Oppenheimer agreed to hire an independent consultant to review the firm's supervisory procedures.
Finra also said that from 2005 to 2013, Oppenheimer failed to file updates to its brokers' records for at least 320 instances where arbitration and other legal matters should have been disclosed.
“As a result, regulators, the investing public and other member firms were unaware of serious allegations made against Oppenheimer's current and former registered representatives, including [Mr.] Hotton,” according to the settlement.
A spokesman for Oppenheimer, Tom Walek, said that the firm has “significantly enhanced its policies regarding hiring and supervision of brokers and timely regulatory filings.”
Oppenheimer has recently been subject of other multimillion dollar fines related to supervision, including a
$20 million settlement with the Securities and Exchange Commission and the U.S. Department of the Treasury's Financial Crimes Enforcement Network to address charges that it failed to detect and report suspicious trades in penny stocks and a
$1.4 million Finra fine over similar allegations.
The firm's head of retail, Robert Okin, is
currently under investigation by the Securities and Exchange Commission, according to his publicly available
BrokerCheck report. He has denied any possible violation of securities laws, he wrote in the report.
