When brokerages look away from advisers’ shady pasts
There are no second acts in American life unless you are a stock broker. Then, there can be third and fourth acts, too.
Some brokers who get fired have no trouble getting a new job the next day. Others move from firm to firm, despite having regulatory troubles or mounting complaints from customers.
They may cause future problems for investors and their new firms, says Wall Street’s self-funded regulator, the Financial Industry Regulatory Authority. It has started looking closely at those who already have complaints in their past.
Lawyers and investor advocates say some brokers are allowed to stay in the business long after they have caused harm.
Consider former Beverly Hills-based broker Bambi Holzer. She racked up 64 complaints from customers, roughly 60 of them after 2001. Five different firms hired her in that time and it took years for FINRA, which oversees 630,000 brokers, to target her.
Now, the past is nipping at Holzer’s heels. FINRA filed a disciplinary action against her for allegedly selling risky, illiquid privately issued securities to clients who couldn’t afford to lose their money. Holzer also allegedly lied on regulatory forms, says FINRA.
Her lawyer has said Holzer did not know that certain securities she sold would later be revealed as fraudulent. Nor was she responsible for details on her regulatory forms, which a former firm’s staff prepared, he said.
The case, while extreme, illustrates what lawyers say is a recurring problem on Wall Street: firms that prize a broker’s potential to beef up their bottom lines, despite the broker’s risk of spelling trouble for clients.
Even isolated cases pose a risk to investors, lawyers say. What’s more, the firms could have to defend themselves against regulators’ allegations of not properly supervising the brokers.
“You scratch your head and say, ‘What are these firms thinking?'” said Philip Aidikoff, a securities lawyer in Beverly Hills, California, who represents investors.
A solution can’t come soon enough, say lawyers for investors. “I’ve come across this fact pattern many times in the past 10 years,” said Jason Doss, president of the Public Investors Arbitration Bar Association, a group of lawyers who represent investors in securities arbitration cases.
To compound matters, investors, who typically have no idea why their brokers are moving on, follow them – usually to smaller firms that are happy to pick up the extra revenue, even from brokers who pose a risk, Doss said.
MORE THAN SUBTLE
There are often big hints that a broker could spell trouble for investors. One broker’s road to ruin kicked off with being fired in 2001 by Paine Webber, now part of UBS AG, for making misleading statements about a customer, according to a disclosure report.
The broker, Debbie Saleh, immediately found another job at Wachovia Securities Inc., now part of Wells Fargo & Co., and then another at Wedbush Securities in 2004, according to regulatory filings. A Wells Fargo spokeswoman said the company does not comment on former employees, and a Wedbush spokesman did not return a call requesting comment.
Saleh neither admitted nor denied FINRA’s allegations, according to a settlement.
But the problems that led to her firing in 2001 were a sign of things to come: FINRA threw Saleh out of the industry in 2009, partly because of misleading addresses and account histories she sent to insurance companies that helped her carry out a pattern of sales practice abuses, such as buying and selling variable annuities for one client 17 times in two years, FINRA said. Efforts to locate Saleh were not successful.
TOO MUCH TRUST
Sometimes even just one regulatory disclosure can say a lot. A unit of Lincoln National Corp. hired former New Jersey broker Hugh Hunsinger, Jr. in 2001, two months after he stepped down from another firm where he allegedly used stationery and business cards that falsely said he was a certified financial planner, among other things, according to a regulatory disclosure. FINRA slapped Hunsinger with a $5,000 fine. He neither admitted nor denied the allegations.
The dishonesty would play out on a bigger scale years later: In August, Hunsinger plead guilty to stealing nearly $1.4 million from accounts he managed for his parents, according to the New Jersey Attorney General’s office. He will be sentenced on Friday and faces possible prison time.
A Lincoln spokeswoman did not respond to a call and email requesting comment.
The cases are raising questions about whether some problem brokers are lingering in the industry for too long.
But FINRA defends its record. It has barred nearly 2,300 brokers since 2008 and continues to “aggressively investigate” brokers who may have engaged in serious misconduct, said Susan Axelrod, FINRA’s head of regulatory operations.
Nonetheless, the regulator established a program earlier this year to expedite investigations and disciplinary cases against certain problem brokers, she said. “We wanted to make sure higher-risk brokers were moving to the front of the line,” Axelrod told Reuters.
Throwing out bad apples early is the key to keeping the industry clean, said Barbara Roper, investor protection director for the Consumer Federation of America.
“There isn’t some God-given right to work in the securities business,” Roper said. “We have licensing requirements, in part, so licenses can be taken away.”