Though barred, rogue brokers often find work
regulators say there is a shortfall of data for investors when it comes to such cases.
Keeping track of rogue brokers is a tricky business, particularly when they leave or are booted from the confines of the securities industry, but keep peddling financial products.
Take, for example, Jeffrey Forrest, who no longer sells securities through a broker-dealer.
His broker-dealer asked him to leave in 2006 after he had made improper sales of a hedge fund that spurred lawsuits from investors.
Two years later, the Securities and Ex-change Commission sued Mr. Forrest for failing to disclose hundreds of thousands of dollars in fees he gained from the hedge fund, which blew up in 2007.
The SEC suit sought to stop him from working in the investment advisory business.
Yet, Mr. Forrest is licensed to sell insurance in California and continues to run a registered investment advisory firm, WealthWise LLC of San Luis Obispo, Calif., which manages $26 million in assets.
Regulators are taking action against him, but the case is moving slowly and may go unnoticed by investors.
Mr. Forrest’s story highlights a host of vexing issues in securities regulation that interferes with its primary goal: protecting investors.
“If you’re kicked out of one channel, you should be bumped from all,” said Richard Nummi, a director with Accounting and Compliance International of New York. “I don’t think [advisers] should be allowed to shop for venues.”
Insurance companies, in particular, haven’t been aggressive in kicking producers with potentially problematic histories to the curb, industry executives and lawyers said.
For example, despite the SEC’s action against Mr. Forrest and a recent loss of an $8.8 million securities arbitration claim against him, major insurance companies such as Pacific Life Insurance Co. of Newport Beach, Calif., have licensed him to sell life insurance.
In fact, Pacific Life, which owned the broker-dealer, Associated Securities Corp. of El Segundo, Calif., where he worked when he sold his clients the volatile hedge fund, authorized him to sell insurance in January, a month before the SEC issued a preliminary judgment to stop him from working in the industry.
When contacted, Pacific Life said it is reconsidering its relationship with Mr. Forrest.
“I appreciate you letting us know that there is still an appointment out there for Jeffrey Forrest,” said Tennyson Oyler, a Pacific Life spokes-man.
“We are taking steps to make sure that we revoke Mr. Forrest’s appointment to sell any and all Pacific Life products,” he said.
Additionally, a handful of other major insurance companies in 2007 and 2008 gave Mr. Forrest the authority to sell life insurance, including Aviva Life and Annuity Co. of Des Moines, Iowa, Genworth Life and Annuity Co. of Richmond, Va., Lincoln National Life Insurance Co. of Hartford, Conn., and Prudential Annuities Life Assurance Corp. of Shelton, Conn.
That was well after he left Associated Securities in October 2006, when executives simply “asked [him] to move on,” according to transcripts from the arbitration hearing.
In a statement, Aviva said, “While we cannot discuss issues concerning specific individuals, we are currently reviewing the circumstances around this situation.”
A spokeswoman for Prudential said that the company continues to monitor and review disciplinary actions against agents who sell Prudential products.
Securities regulators recognize that there is often a shortfall of information for investors when it comes to ex-brokers like Mr. Forrest.
Just last month, Financial Industry Regulatory Authority Inc. chief executive Rick Ketchum said that the Washington- and New York-based self-regulator needs to expand its effort to keep public the records of rogue brokers.
As it now stands, the records of brokers usually are pulled from the Finra database two years after they leave the business, regardless of how good or bad their history is.
Mr. Ketchum has estimated that the records of more than 15,000 brokers who left the securities business because of trouble with regulators are not publicly available to investors. He also said that some of those brokers have been involved in the frauds that have come to light during the market’s recent collapse.
“Individuals previously barred by Finra and other securities regulators have surfaced in a number of recent frauds [and are] responsible for millions lost by unsuspecting investors,” Mr. Ketchum said in a published statement.
Meanwhile, Mr. Forrest’s records are not on Finra’s website under its BrokerCheck service.
Finra has filed a proposal with the SEC to expand the service.
BOGUS HEDGE FUNDS
Mr. Forrest’s scheme appears similar to the dozens of bogus hedge funds and Ponzi schemes that began to blow up in 2007, most notably, of course, the $65 billion fraud committed by Bernard L. Madoff. Un-scrup-u-lous advisers held out the phony investments as dependable, predictable and with little or no volatility.
In 2005 and 2006, Mr. Forrest, who was a top producer with Associated Securities, advised 60 clients to invest $40 million in a hedge fund that collapsed the next year.
According to a recent arbitration decision in which he and Associated Securities were found liable, Mr. Forrest pitched the fund, the Apex Equity Options Fund, as a safe, secure and liquid investment.
A three-person Finra panel in March decided that Mr. Forrest defrauded and deceived investors in that transaction, in which he collected hundreds of thousands of dollars in fees.
Associated Securities was deemed liable because it allegedly did not properly supervise him. The firm has appealed the arbitrators’ decision, and that appeal will be decided by a federal judge on June 1.
Securities arbitration awards are almost never overturned on appeal, according to securities lawyers.
Mr. Forrest did not return phone calls to comment.