L.A.’s Wedbush charged with failing to supervise stockbroker who SEC says was involved in penny-stock scam
Los Angeles Times
L.A.’s biggest stockbrokerage ignored or didn’t properly investigate warning signs that one of its brokers was pushing clients to invest in a pump-and-dump scheme, the Securities and Exchange Commission alleged Tuesday.
The commission charged Wedbush Inc., based in downtown Los Angeles, with failing to properly supervise a former broker who it alleges received kickbacks from the scheme’s organizers in exchange for recommending her clients invest in certain stocks and engage in trades aimed at manipulating their prices.
In a statement, SEC officials called broker Timary Delorme’s conduct abusive and called Wedbush a “recidivist,” noting that this is the commission’s second action against the firm this year.
The charges mark the latest in a spate of regulatory actions against Wedbush, which in the last six months has paid more than $1.5 million in fines and penalties related to allegations of misconduct from the SEC, the Financial Industry Regulatory Authority and other regulators.
“Brokerage firms play an important role in protecting retail investors from abusive conduct by brokers like Delorme,” said Marc Berger, director of the SEC’s New York Regional Office, which is supervising the investigation. “This case sends a clear message that we will not tolerate broker-dealers that fail to exercise appropriate supervision over employees.”
Wedbush spokeswoman Natalie Svider said the firm would not comment on pending litigation. She said the firm’s president, Ed Wedbush, who founded the firm in 1955, no longer speaks to the media.
The SEC alleged that Delorme, 59, a Costa Mesa resident who had worked at Wedbush since 1976, was in cahoots with Izak Zirk Engelbrecht, an Ohio man who was sentenced last year to 12 years in federal prison after pleading guilty to securities fraud.
Their connection spanned from 2008 through 2014, the commission alleged.
Engelbrecht engaged in so-called pump-and-dumps, in which parties work to inflate the price of a stock then sell shares before prices fall. He dealt in penny stocks, thinly traded securities of little-known companies.
No specific penny stocks were named in the SEC’s order, which calls for a hearing on the matter and demands that Wedbush answer the commission’s charges within 20 days. The order does not specify potential penalties.
Delorme, according to the SEC, bought shares of companies that were part of those schemes, which helped inflate the stock prices and made it appear that the stocks were actively traded. In exchange, Engelbrecht paid kickbacks to Delorme’s husband, the SEC alleged.
In a separate settlement announced Tuesday, the SEC fined Delorme $50,000 and barred her from working in the securities industry, though she did not admit wrongdoing.
Delorme told The Times on Tuesday that she cooperated with the federal investigation into Engelbrecht, was not charged with any criminal violations and received no kickbacks. She said her husband and some friends had investments with Engelbrecht’s companies but said, “I never sold this to my clients.”
Wedbush knew for more than a year that Delorme was connected to fraudulent stock transactions but allowed her practices to continue, the SEC alleged in its charges against the firm.
Specifically, the commission said a supervisor in 2012 reviewed an email from Delorme to a customer involved in the pump-and-dump scheme that outlined the customer’s “efforts to assist in inflating the price of penny stocks.”
Also that year, two customers filed complaints with the Financial Industry Regulatory Authority, an agency that regulates broker-dealers, alleging Delorme and the firm made manipulative transactions in related securities.
The fact that Delorme’s business with Engelbrecht was able to continue, according to the SEC, shows the firm’s supervisory systems “lacked any reasonable coherent structure” for investigating potential market manipulation and that there was “confusion as to whose responsibility it is to conduct investigations.”
Wedbush has been hit with several regulatory actions of late, including one handed down by the SEC last month. In that action, Wedbush agreed to pay $1 million to settle charges that it had significantly underestimated the amount of cash it needed to hold in an account to pay customers if the firm collapsed.
The SEC in that action said Wedbush has a history of compliance problems, noting the firm has been the subject of numerous recent regulatory actions and until recently did not have “adequate personnel for a regulated entity of its size and import.”
Phil Aidikoff, a Beverly Hills attorney who handles securities matters and has represented clients who have sued Wedbush, said the firm has a history of failing to investigate potential problems.
“When there’s a red flag that occurs, most brokerage firms take those very seriously and do what they can to investigate and control those situations,” he said. “For whatever reason, there seems to be a lack of that kind of diligence at Wedbush. And I think that’s a business decision.”