Last year authorities charged a now-barred advisor with running a $2 million Ponzi scheme, whose victims included a former police officer, a retired teacher and a church pastor.
Phil Donnahue Williamson has since pleaded guilty and will serve 57 months in prison, according to court documents. Meanwhile, his victims have been picking up the pieces of their shattered retirement dreams. Paulette Thomas, a retired postal worker who invested $100,000 with him, is seeking damages from MML Investor Services, his former employer.
"We certainly believe the buck stops at MML," says Dave Neuman, a securities fraud attorney at Israels & Neuman, who is representing Thomas in the arbitration case.
Neuman says Williamson was able to take advantage of his client due to his position at MML and the firm's lax supervision.
Thomas' case, which is pending in arbitration, raises a fundamental question: When it comes to a rogue broker's actions, where does the buck stop?
LINES OF RESPONSIBILITY
"The battle is over the adequacy of the supervisory system. Should the firm have known?" says Scott Ilgenfritz, a Tampa, Fla.-based attorney who is not affiliated with the case.
Attorneys say that, in arbitration cases such as this one, firms typically deny they are responsible for a rogue broker's illegal – and often covert – actions. However, lawyers representing the aggrieved investor can counter that the firm has a fundamental responsibility to monitor its registered representatives.
Ilgenfritz says a potential counter-argument by the plaintiff's attorney could be: "He's your agent, your responsibility. You put him in a position where he had these business cards and could get customers."
Neuman says that's precisely what happened here.
Williamson was registered with MML from 2003 to 2007, according to FINRA BrokerCheck records. He was previously registered with AXA Advisors, and later with OneAmerica Securities and Hartford Equity Sales Company, which discharged him in 2012, according to BrokerCheck records.
It was in 2007 that Williamson started his Ponzi scheme, according to authorities.
A spokesman for MML declined to comment. This is not MML's first brush with a former client victimized in a Ponzi scheme. In 2013, an arbitration panel ordered MML to pay $1.1 million to Karen Lamoreaux, whose MML broker had invested in an unregistered security that turned out to be a Ponzi scheme.
In 2007, Thomas came into a small windfall – $100,000 – after refinancing a property she owned, according to a recent interview with Thomas. Wanting to invest the money for her retirement, she called her financial advisor.
In a meeting at Thomas' Miami home, her advisor introduced her to Williamson, his coworker at MML Investor Services.
During that meeting, Williamson presented Thomas with his investment idea, Sterling Investment Fund, according to arbitration documents filed by Thomas and her attorney. Williamson represented the fund, which invested in real estate properties in Florida and Georgia, as a "sure thing" that "can't lose."
Williamson didn't present any documents about the properties the fund invested in; he explained it verbally, Thomas says.
"He was a very likeable guy. He presented himself as being trustworthy," says Thomas, who ended her relationship with her advisor when he moved to another brokerage firm. He is not named in the pending arbitration case.
"What I typically hear from clients like Paulette is that she got this great referral from her advisor, whom she trusted. That trust was projected onto Mr. Williamson," Neuman says.
That trust turned out to be badly misplaced, as Williamson's fund was in fact a Ponzi scheme, according to the SEC.
From 2007 to 2014, Williamson, now 48, raised over $2 million through his scheme, the SEC says. He told clients including Thomas that he was investing their money in real estate properties and another real estate-related private pool, Allied Mortgage Investment Fund, and assured them a yearly return of 8% to 12%, authorities say.
Complicating matters, Williamson did not set out to create a Ponzi scheme, according to Jeffrey Weiner, a Miami-based defense attorney who represented Williamson in criminal proceedings.
"The bottom line is that, as certain investments did not pan out, Mr. Williamson, attempted to salvage the investments by continuing other investments. He pled guilty to, and acknowledged responsibility for, a Ponzi scheme – but that was not his original intent," Weiner says.
The former Miami-based advisor met his investors through coworkers and existing clients, and also at financial seminars hosted by various churches, authorities say. Some of these clients received legitimate returns on their investment; others received fake account statements.
"[Thomas] was getting periodic statements showing her investment plus interest. We now know that it was simply made up," Neuman says.
Thomas occasionally spoke with Williamson on the phone, but did not meet with her in person after the first contact in her home.
"Mr. Williamson would tell me that my investment was safe and that I would be able to get it back, my initial investment plus interest. He would tell me that each time we spoke. He never said that I could lose my investment," Thomas says.
In fact, Williamson used approximately $750,000 of his clients' money to cover his personal expenses, such as school tuition for his children, and to make payments on his BMW car, the SEC says.
In 2015, authorities charged Williamson with fraud. In June, he settled charges with the SEC, which barred him from the industry, and in August he pleaded guilty to charges brought by the U.S. Attorney's Office for the Southern District of Florida, according to court documents. In addition to serving time in prison, he was also ordered to pay the SEC about $760,000.
Thomas, seeing the news of his arrest, tried calling Williamson. Unable to reach him, she started looking for an attorney.
Firms have a responsibility to monitor their registered representatives – and establishing that they failed to fulfill that responsibility is necessary to winning arbitration cases such as Thomas', attorneys say.
"The firms have many tools to do this, such as branch site audits or reaching out to random customers," says Lars Soreide, a Pompano Beach, Fla.-based attorney who is not affiliated with Thomas' case. "They can follow the flow of money from accounts. They can ask, 'Why is this money exiting the firm?'"
Evidence that a firm failed to properly supervise a broker can come to light during the so-called discovery process, when attorneys procure documents, such as emails and reports, that detail the firm's actions or lack thereof.
"All you have to do is argue that they didn't adequately supervise the broker. In discovery, you have to find things that would trigger red flags that they didn't fully investigate," Soreide says.
Imagine, he says, a broker who has low production but drives a Ferrari, or one with unusual outside business disclosures. Circumstances such as those might call for additional scrutiny by the employing firm.
"That's why [the Thomas case is] an easier case," Soreide says. "You don't have the question of whether the investment is suitable, because it's a scam."
These types of cases often settle rather than go to an award, attorneys say.
"I've probably represented over 200 victims of Ponzi schemes, either in court or FINRA arbitration," Neuman says. "The vast majority settled."
WHERE THE BUCK STOPS
Neuman says Williamson was able to take advantage of his client because of his position; if Williamson hadn't been registered with MML, then his coworker wouldn't have made the introduction, and Williamson wouldn't have appeared as trustworthy, he says.
Weiner, Williamson's attorney, says his client will begin serving his prison sentence in February.
"He feels terrible about this. This is not at all what he intended. He understands the incredible hardship that will accrue to his investors," Weiner says.
He adds that Williamson cooperated fully with authorities, contributing to a leaner sentence than is typical in such cases.
Thomas, meanwhile, is still seeking damages from MML to restore the $100,000 she lost. She says she doesn't work with a financial advisor now and only sticks to traditional investments, such as mutual funds. Williamson, she says, failed in his duty as a financial advisor.
"I'll put it to you this way,” she says. “I'm a widow, and I have a pension. But part of that [$100,000 investment] was to enhance my retirement. It hurts a lot."
- FINRA's New Target: Broker Culture
- SEC Says J.P. Morgan Misled Clients on Broker Comp
- Advisor Charged With Participating in $13M Pump-and-Dump Scheme