From time to time, this column focuses on firms and individuals in the investment advice business who continue to screw up — those who seem destined to repeat the past and harm investors, damage their own reputations or both.
It can be maddening.
Watch the financial advice business long enough, and the same questions arise after a regulator flags a firm or individual.
How could the
Financial Industry Regulatory Authority Inc. or the Securities and Exchange Commission have allowed this broker's unethical selling to continue, even though he had been in trouble before? How does a firm, which previously had paid hefty fines over similar issues, continue to fail to give appropriate discounts to clients or properly oversee the sales of a top producer?
In other words, how do firms and brokers or executives continue to make the same sorts of mistakes — over and over again — while Finra and the SEC consistently miss the transgression?
Take the case of Wedbush Securities Inc. and its owner and founder Edward Wedbush.
Last Monday, NYSE Regulation, the Big Board's regulatory subsidiary, lobbed a complaint at the firm and its owner, alleging the basis for the lawsuit "involves the knowing and systemic failure by Wedbush Securities Inc. to oversee and supervise the trading activities of its principal, Edward W. Wedbush."
Keeping in mind that the firm and Mr. Wedbush "have a long history of disciplinary actions related to supervisory deficiencies," Mr. Wedbush "spent several hours each trading day actively managing and trading in more than 70 accounts,"
according to the complaint. He also held limited power of attorney over accounts for his wife, sister, brother, other relatives and friends, as well as a Wedbush director, a firm employee and the spouse of another employee.
The firm never bothered to watch over these trades in any serious manner, opening the door for "potential conflicts of interest and potential manipulative activity," NYSE Regulation alleges. Ignoring rules requiring the supervision of trade order entry, execution or allocation fails to protect customers against "cherry picking," according to NYSE Regulation. That's when traders choose to allocate the best performing transactions to their own accounts.
There was ample opportunity for Mr. Wedbush to fudge the numbers in the accounts, according to the complaint. At the end of the day, long after trade executions had been completed, Mr. Wedbush and an employee, under Mr. Wedbush's direction, aggregated the shares bought or sold, and conducted a volume-weighted average price calculation, according to the complaint. Mr. Wedbush would then determine which of the accounts would be assigned each execution, but his method for determining the allocations was not disclosed, documented or supervised, the lawsuit alleges.
"Mr. Wedbush had the unchecked ability to grant the preferential treatment, including to himself and his family, with no effective mechanism at the firm to ensure that the allocations were made fairly," according to the complaint.
The "abject failure" to supervise Mr. Wedbush's trading "continued for years," according to the complaint. A key reason was the firm's and Mr. Wedbush's "refusal to devote the resources required to do so," the complaint alleges. Opened in 1955, the firm has over 400 registered reps and reported total shareholder equity of $259 million at the end of June,
according to its most recent filing with the SEC.
To be fair, this matter had been on Finra's radar a few years ago.
According to the complaint, Finra worked with NYSE Regulation in the preliminary stages of the investigation of Wedbush back in 2014 and 2015 before handing off the matter to NYSE at the start of 2016. And Finra, along with the Nasdaq Stock Market Inc., just last year said it had fined Wedbush Securities $675,000 for supervisory violations in another matter, this time connected to a client's redemption and trading of leveraged exchange-traded funds.
In its complaint, the NYSE cites three separate instances going back more than a decade of fines totaling $4.1 million stemming from supervisory failures. The SEC in 2016
upheld a Finra order that fined Mr. Wedbush $50,000 "for extensive and widespread supervisory deficiencies related to regulatory filings," according to the complaint. He was suspended as a principal for 31 days.
A spokeswoman for Wedbush, Natalie Svider, said the firm had no comment about the NYSE Regulation lawsuit.
Phil Aidikoff, a veteran plaintiff's attorney who has filed many arbitration complaints over the years on behalf of investors against Wedbush Securities and cross-examined Mr. Wedbush a handful of times, said firms are willing to pay individual fines rather than change the way they do business.
"The reality is, at some point you would think the regulators would say, enough!" he said. "But we don't see that. We see individual cases going through the system with restitution and that are financial. Eventually those get paid. But as long as it is fines and the like it's a big 'so what.'
"It's just the way [Wedbush Securities does] business," Mr. Aidikoff said. "Look at the enforcement action over the years. When does somebody say this is just wrong?
"The notion that you can allocate trades at the end of the day is astounding to me," he said. "Trades are trades. You are supposed to create an accurate record. Brokers can't decide what value to give to the purchase or sale of securities at the end of the day. The trade has to be accurately registered in the account when it occurs."
Like I said, maddening.
