One advisor is in jail,
None of these three separate cases involving previously-dinged advisors came to light until, investigators say, the advisors hurt peoples’ finances significantly or physically harmed them. And, for all the blemishes already present on the advisors’ FINRA BrokerCheck records, the public database’s information about the alleged crimes is spotty at best and altogether absent in some respects.
The recent cases shine a light on what consumer advocates call an endemic oversight problem in wealth management. As evidence, they note that regulators are slow to catch fraudsters and other criminals; firms aren’t required to supervise advisors tightly enough to prevent schemes and crimes before they happen, even when a registered representative has a history of black marks; and BrokerCheck, held up as the one place clients can go to see their advisor’s regulatory record, often doesn’t record violations until long after an advisor is accused of wrongdoing.
FINRA currently is awaiting SEC approval for a
“If they cannot clean up the ranks of these worst of the worst, then they're falling far short of what they're supposed to do as a regulator,” Bagramian says.
Susan Light, a former chief counsel of enforcement with FINRA who now represents broker-dealers as a partner with Katten Muchin Rosenman, says it’s not so simple.
“It can be difficult for the industry to detect bad actors precisely because bad actors try mightily not to get caught,” Light said in an email. “Whether it is the brokerage firm, the regulator or the public, everyone is fully aligned in making sure that the bad broker no longer works in the industry.”
Three cases, regulators tardy
The three separate cases display the risks involved when the system misses some alleged wrongdoers. In their immediate wake, deficiencies in BrokerCheck’s public database are leaving users uninformed about basic details of some of the accused reps and firms while raising questions as to why their prior records didn’t seem to prompt greater scrutiny.
Take the case of ex-SA Stone Wealth Management broker Gregory Frank Estes. He was arrested
Estes, 56, spent 10 years on probation; before the child sex abuse charges, he had been scheduled to be removed from the Texas Public Sex Offender
Estes didn’t respond to a call to his office. As of Jan. 22, Estes is no longer registered with SA Stone, a midsize independent wealth manager owned by international financial services firm StoneX. Representatives for the firm didn’t respond to requests for comment.
Another former rep, Keith Todd Ashley, is behind bars
The midsize independent firm where Ashley worked, Parkland Securities, fired him on Oct. 28, citing undisclosed outside business activities, BrokerCheck shows. The database also lists a felony forgery charge against Ashley, 48, in 1991 that was later dismissed. After an FBI officer’s testimony last month, a federal judge ruled that Ashley should remain incarcerated based on his prior criminal history and “a serious risk” he could try to obstruct justice.
Ashley’s lawyer, James Whalen, says he plans to appeal the incarceration ruling; he has noted that Ashley is presumed innocent until proven guilty. Representatives for Parkland didn’t respond to a request for comment.
The third distinct case — a trio of
“GPB will vigorously defend itself against these false allegations and is confident the evidence will clearly show that GPB has acted in good faith managing its clients’ investments,” GPB spokesman Linden Zakula said in a statement. He noted the firm has agreed to an independent monitor requested by the SEC over the businesses it owns and manages.
Schneider, 52, GPB founder David Gentile and former GPB managing partner Jeffrey Lash have each pleaded not guilty. The same defendants, as well as GPB’s onetime offering broker-dealer Axiom Capital Management and its former CEO, Mark Martino, are also fighting a pair of class action fraud lawsuits in the Western District of Texas filed by GPB’s investors.
On their BrokerChecks,
Representatives for the firms didn’t respond to requests for comment; neither did attorneys for Axiom, Schneider and Martino, who isn’t facing charges under the GPB cases
The difficulty of catching fraudsters
The push by industry and regulators to crack down on advisor malfeasance “is just not working,” according to attorney Joe Peiffer of Peiffer Wolf Carr Kane & Conway, which is pursuing civil and arbitration cases against GPB and wealth managers that sold the private equity products.
“I’m waiting for the day that FINRA shows up to a case before I do,” Peiffer says.
Representatives for the SEC declined to comment. Andrew DeSouza, a spokesman for FINRA, said in an email that the regulator “can’t comment beyond what is on an individual or firm’s BrokerCheck profile.” He cites two recent rulemakings as adding to “our existing exam and risk-monitoring programs which focuses on firms with a pattern of hiring, and failing to supervise registered representatives with significant histories of misconduct.”
“Ridding the industry of bad actors remains one of our top
There will always be fraudsters who manage to evade detection. The industry and regulators “can't prevent all bad things from happening,” says Christine Lazaro, director of the Securities Arbitration Clinic at the St. John’s University School of Law.
Still, FINRA could set more required standards for firms’ heightened supervision procedures over advisors with prior records rather than its current “principles-based”
“There's still an issue with investors understanding the use of BrokerCheck, and to the extent that they're getting recommendations from friends and family or places like that, they're not checking BrokerCheck,” Lazaro says.
Given the limitations of BrokerCheck, investors should do their own homework on advisors, says John Hanson, a former FBI special agent specializing in white-collar crimes who is now a managing partner with accounting firm BDO. He notes charges such as murder would show up in a Google search and a presumption of innocence often prevents firms and regulators from making fraud investigations and allegations public. It’s difficult to outsmart a determined fraudster, however.
“Almost in every single case, the investor looking back was like, ‘Why was I stupid, how did I not see this?’” Hanson says. “What people forget is that, in these schemes, you are dealing with con artists. You are dealing with people who are exceptionally good at selling you.”
New rule?
FINRA’s new proposed
The measure and another
“Heightened supervision is a common topic where we see a few themes where firms may get it a little bit incorrect,” McCafferty said. The three main problems, according to McCafferty, are “boilerplate” procedures that should be part of firms’ routine supervision, plans that aren’t enforced, and policies that aren’t tailored to a rep’s specific record.
I’m waiting for the day that FINRA shows up to a case before I do.
To try to reduce the harmful impact of bad actors under the rule, firms that meet certain thresholds of serious disclosures at the corporate level and among their reps would have to set aside restricted deposit accounts that could also cover arbitration claims if they’re left unpaid. Out of 3,582 member firms in 2018, 61 of them, or 1.7%, would have met the preliminary criteria, according to the rule.
Some consumer advocates have welcomed the proposal as a positive, if flawed, step forward. Others, like Better Markets’ Bagramian, describe it as too narrow in scope with too many chances for firms to avoid the requirements and too little public disclosure of which specific firms are under restrictions.
In the absence of stronger regulations, experts say, one fix is for more firms to adopt best practices already in place for many firms.
Required two-week vacations are one example. When a fraudster financial advisor is forced to take a vacation, they can’t be in the office to assuage clients’ doubts about phony or erroneous account statements, or tell them not to worry because their money is on the way. Instead, any concerned clients’ calls go to a supervisor or another staff member who could detect the problem and report the case to the brokerage firm and authorities.
Other common heightened supervision procedures discussed at the FINRA panel last fall include: Creating an enhanced plan on top of those imposed by certain state regulators when reps switch firms; tracking which brokers are garnering sales-related client complaints each quarter; identifying big changes in the mix of products and services sold by the advisor; ongoing credit checks on reps with financial disclosures; reviewing all of the reps’ emails and even asking to login to their personal email to search for the names of clients.
Melinda Wolfe, chief compliance officer of midsize wealth manager Kovack Securities, suggested that no brokerage firm is on its own as the first line of defense.
“Talk to your peers,” Wolfe said. Especially after the SEC’s Regulation Best Interest went into effect last year, it’s beneficial “to have a few peers in firms that are similar to yours that you can commiserate with and talk to and come up with solutions together,” she said.
