How long will it take to sort out LPL's next Ponzi arbitration mess?
The legal fallout from one disgraced former LPL Financial advisor's Ponzi scheme is coming to an end. Another is just beginning.
The two resolved cases, involving the nation’s largest independent broker-dealer, show the complexity, expense and time involved with such struggles. As the often-elderly victims wait, sometimes for years, the firms, arbitrators and attorneys untangle a thicket of liability issues in FINRA’s vast network of nonpublic tribunals.
LPL is facing the last client claim in former registered representative Charles Caleb Fackrell’s case — one that has already required it to pay $2.3 million. Now, clients of another barred LPL ex-rep have filed at least 25 pending FINRA arbitration cases after five other settlements for a combined $150,000.
In one case, three clients of now-incarcerated ex-LPL advisor Charles Caleb Fackrell are still seeking compensatory damages five years after LPL terminated him and more than three years after he pleaded guilty to defrauding 20 clients for $1.4 million. There may yet be even more cases.
“They keep coming out of the woodwork,” says David Gaba of Compass Law Group, who, alongside Patricia Vannoy of the Mattson Ricketts Law Firm, has represented the victims of Fackrell’s admitted scam victimizing a small North Carolina town outside Winston-Salem.
Their case went into hearings in November ahead of any potential award, according to a filing by LPL in U.S. District Court for the Western District of North Carolina.
The hearings took place just after more clients filed claims against the other ex-advisor, James T. Booth, who pleaded guilty on Oct. 22 to securities fraud. Federal prosecutors in New York said Booth bilked 40 clients for $4.9 million in a six-year scheme. LPL fired him in May, a year after he affiliated with the firm under its acquisition of the assets of National Planning Holdings.
Booth convinced clients “that he would deliver solid and secure returns on their investments,” Manhattan U.S. Attorney Geoffrey Berman said in a statement. “Instead, Booth delivered lies and deceit.”
Booth’s lawyer didn’t respond to requests for comment. Representatives for LPL declined to comment on his case or that of Fackrell. Representatives for Jackson National Life Insurance, the parent of the shuttered NPH firm Invest Financial, didn’t respond to requests for comment.
LPL’s expenses for regulatory, compliance or legal matters have amounted to more than $165 million since 2013, according to its public earnings reports. For example, It agreed to settlements of $26 million with state regulators in 2018 and $9.3 million with the SEC in March.
Meanwhile, regulators in North Carolina and Washington states slapped LPL with $297,000 in total penalties in respective 2016 and 2017 actions for its supervision of Fackrell. To date, his case has also cost LPL five settlements for $1.3 million and three arbitration awards of nearly $660,000, according to FINRA BrokerCheck.
Such amounts don’t look like much when stacked up against the net income of $439 million LPL earned on revenue of $5.19 billion last year. The figures likely appear much differently, however, to former clients of Fackrell seeking compensatory and punitive damages, costs and attorney fees.
The claimants who reached the hearing stage of the proceedings last month are 70-year-old Loretta Whisenhunt, a former Taco Bell manager; Peggy and Duane Long, blue-collar retirees in their 70s; and Willie Bates, an officer in the Yadkinville Police Department who is close to retirement.
Fackrell, 40, allegedly used a fictitious investment vehicle he called “Robin Hood” to gain control of clients’ money for personal expenses and Ponzi-style payments. LPL included the clients’ claim in a filing seeking to compel the incarcerated former rep’s testimony in the arbitration.
In at least one other case, firm has argued Fackrell deceived LPL — along with his family and colleagues — while carrying out the scam.
But the clients’ claim states that LPL had means of detecting the risky investments, unauthorized wire transfers and several other “illegal and bizarre” transactions.
“LPL should have been on notice at least by 2011 of his absurd and unsuitable behavior and advice,” the statement of claim says. “LPL would have picked up on Mr. Fackrell’s erratic behavior if they had simply spoken with him, examined his office on a regular basis, and taken other minimal supervisory actions.”
Fackrell’s detailed CRD report shows that he hasn’t contributed to any of the settlements or awards. In an affidavit from an earlier case obtained by Financial Planning in 2017, Fackrell attributed his conduct to not taking his medication for bipolar disorder and post-traumatic stress disorder.
“I’m not taking any partial responsibility. I’m telling you that — I did the crimes. That’s ... that’s period,” Fackrell said in testimony via telephone in the April 2017 hearing. “Now, partial credit, I do think LPL definitely had a responsibility in making sure that I was under regulations, and do I feel they did that? No, I don’t.”
The cases filed by clients of the other former advisor, Booth, likely haven’t reached any hearings. LPL discharged Booth in May, alleging he admitted to misappropriation of client money for “personal and business use," according to BrokerCheck.
Since then, the former clients have filed at least 30 cases, with five of them already receiving settlements. The clients allege Booth used their money “to support a Ponzi scheme using multiple shell companies,” according to summaries listed on BrokerCheck.
While it’s not immediately clear how much the clients are seeking and who may be liable for their cases, the newest came after Booth pleaded guilty in New York’s Southern District. An unsealed indictment from September refers to LPL as “Firm-1” and Invest Financial as “Firm-2.”
Booth, 74, told clients at his Norwalk, Connecticut-based practice to write checks or wire money to an entity called “Insurance Trends” that he controlled, according to the indictment. After luring the victims with “false promises of safe investments with high returns,” Booth used their money to make redemption payments to other clients or for other uses, the document states.
The victims included a recently widowed older woman who invested more than $600,000 of her late husband’s pension with Insurance Trends, according to investigators. Booth promised she would make $1 million by the time she was 100 years old, investigators say.
But it remains to be seen whether he, LPL or another entity will be held liable for the 25 pending cases. Often, by the time they're caught, fraudsters just no longer have any money to make such payments. So far, according to his detailed BrokerCheck file, Booth hasn’t contributed a penny to the settlements.