Lincoln Financial Advisors Corp. has been ordered by a Finra arbitration panel to pay $4.43 million in damages and interest to roughly two dozen former clients who alleged that an ex-managing director at the firm was involved in a “selling away” scheme.
A three-person
Financial Industry Regulatory Authority Inc. panel ruled Sept. 27 that Lincoln Financial Advisors was “negligent in not preventing” the actions of Scott Gordon, who, while registered with Lincoln, was raising money from investors for an outside business.
Selling away is industry shorthand for brokers' offering a product to clients without the broker-dealer's knowledge or approval. Some broker-dealers allow their reps to have outside businesses, as long as the activity is disclosed.
According to the Finra arbitrator's decision, Mr. Gordon became chief executive of a software development company, Healthright Inc., in 2005, while he was affiliated with Lincoln. He identified himself as working for Healthright in Lincoln e-mails, the panel said, and eventually began using a footer on his Lincoln e-mail account that referred to him as chairman and CEO of Healthright, and included the company's address and phone number, the ruling said.
Lincoln, however, failed to keep close track of Mr. Gordon's outside work, the panel ruled. Mr. Gordon told Lincoln of his job at Healthright when he submitted an outside-business-activity disclosure form to the company, but Lincoln did not approve or deny the request, according to the panel's decision.
The claimants in the matter are Healthright and Grant Gifford, an investor in the company. In May 2006, Mr. Gordon was no longer the CEO of Healthright. A month later, Mr. Gifford attended his first board-of-directors meeting for the company and “discovered that misstatements and omissions had been made by Mr. Gordon, and in addition, there had been certain irregularities in the management and operations of Healthright,” the panel said in its decision.
The Finra arbitrators found that Lincoln's “negligence caused the loss of claimants' investments in Healthright.”
The panel ordered Lincoln to pay Mr. Gifford $300,000 plus interest of $66,000 and Healthright $3.33 million plus interest of $733,000. About two dozen investors had invested in Healthright through Mr. Gordon. The dispute involved investments in common stock, limited partnerships and private equities issued by Healthright.
Lincoln fired Mr. Gordon, who joined the firm in 1997 and rose to managing director. He was fired in September 2006. Finra barred him from the securities industry in 2008. Mr. Gordon could not be reached to comment.
“It's a matter of corporate policy that we don't comment” on arbitration decisions, said Eric Samansky, a spokesman for Lincoln.
Lincoln Financial Advisors had $318 million in revenue last year, according to its filings with the Securities and Exchange Commission.
