Despite intense pressure from regulators to tighten recruiting standards for brokers with marks on their records, these bad apples are still being hired by new firms, recent cases illustrate.
The problem is compounded by an industry practice that condones silence from broker-dealers when a registered representative leaves under a cloud, attorneys and regulators said. It's better to keep mum about a suspicious broker to limit any potential damage to the firm, industry attorneys and observers said.
The result is that these bad brokers can damage both clients and firms, industry observers say.
Take Jeffrey Southard, a recent example, who last month was barred from the securities business by the New Jersey Bureau of Securities because he stole $1.3 million from 16 elderly clients.
In 2003, after facing allegations of selling unregistered securities and mixing client money with his own, Mr. Southard left American Express Financial Advisors and joined Gunn-Allen Financial Inc.
According to the New Jersey regulators' order to revoke Mr. Southard's license, American Express Financial Advisors, now
Ameriprise Financial Inc. of Minneapolis, came up short in disclosing potential problems involving the broker.
"Ameriprise made no contact with clients to alert them to the nature of Southard's departure," the New Jersey order states. "In fact, none of Southard's clients at Ameriprise received a letter even confirming that Southard had left the firm at all."
He deceived his clients about his switch to GunnAllen Financial Inc. of Tampa, Fla., the order states. Mr. Southard "told his clients that he was leaving and could do better elsewhere. In response, many of his Ameriprise clients transferred their investments to GunnAllen" when he joined the firm in December 2003.
From that date until this year, Mr. Southard continued to deceive his clients by selling phony bonds labeled as tax-free investments.
Along with barring him from the business, the New Jersey Bureau of Securities last month ordered him to pay restitution to his clients and fined him $50,000.
Opinions are mixed as to whether the issue of such brokers' carrying problems to a new firm is becoming more or less prevalent, regulators and lawyers said.
"I think it happens a lot less than it used to," said Fred Joseph, president of the Washington-based North American Securities Administrators Association Inc. Over the past five to seven years, both the state regulators and the New York and Washington-based
Financial Industry Regulatory Authority Inc. have scrutinized more closely brokers' employment and -termination records when a rep changes firms, sources said.
"I don't think the problem is as bad as it used to be," said Mr. Joseph, who is also commissioner of the Colorado Division of Securities. Broker-dealers "know they are on the hook" if they fail to supervise a broker, he said.
One attorney who represents clients in cases against broker-dealers disagrees.
"I've done a number of arbitration cases involving brokers who've been terminated or fired and leave one firm under a cloud and proceeded to rip off a number of people [somewhere else]," said Brian Smiley, president of the Public Investors Arbitration Bar Association of Norman, Okla., and a partner with Smiley Bishop & Porter LLP of Atlanta.
Broker-dealers often "don't blow the whistle loud enough" when a broker who faces some suspicions leaves, carrying clients with him, he said. "In the past few years, we've seen more of it than ever before."
If a firm suspects a broker of wrongdoing and the rep leaves, the standard practice is to look at the rep's other clients and see if there is anything suspicious, said one attorney at a major independent broker-dealer who asked not to be identified.
Firms eventually are faced with a decision either to hunker down to prepare to defend themselves against potential lawsuits or arbitration claims by investors, or to reach out to clients and try to resolve the issue, the attorney said.
"It's not an explosion of cases, but it does happen," the attorney said.
Another case involving a rep who left one firm amid allegations of wrongdoing to join another broker-dealer surfaced last month when
LPL Financial of Boston and a former broker lost a $1.8 million arbitration claim.
According to the arbitration's statement of claim, which was filed last year, the clients, Ronald May and Kathryn Chapman, are siblings whose parents died when they were young children in the early 1990s.
In violation of industry rules, the broker, Michael McClellan of Bakersfield, Calif., set himself up as both trustee and broker of the parents' estate, which was in a
trust.
According to the statement of claim, he joined LPL in 1983, before the 1989 merger of two firms to create the company. At the time, Mr. McClellan already had marks on his record, including an NASD — now Finra — action involving improper outside securities transactions and a report on his termination statement that he mixed client funds with his own.
From 1990 to 2006, he stole $921,000 from the siblings'
trust, according to the suit.
After months of stalling his clients, Mr. McClellan admitted his wrongdoing in April 2007.
At that time, he met with Mr. May and Ms. Chapman, and admitted that he spent all the money and that the
trust was worthless, according to the suit.
In a tearful confession, he told the brother and sister, "I'm a crook, and I stole all your money," the lawsuit said.
E-mail Bruce Kelly at [email protected].
