Nearly two years after a former financial advisor settled a state's case alleging he bilked clients for millions of dollars, he faces 10 felony fraud counts.
Ronald W. Hannes, an advisor with Advisor Group's Woodbury Financial Services, steered $2.9 million to himself from at least 19 clients by having them make out checks to his Spokane, Washington-based practice and simply seizing the money rather than making the promised investments in bonds and unit investment trusts,
The allegations represent a "classic selling away case," according to Israels & Neuman attorney David Neuman, who gained familiarity with Hannes from former clients who approached him about their losses a couple of years ago. "Selling away" refers to transactions made outside the supervision of a brokerage or advisory firm without the knowledge of their compliance teams. Hannes sold clients on "short-term, high-yield" bond products, the indictment states.
"The money was going directly to [Hannes' practice] and then he just deposited the money in his own account," Neuman said.
Hannes' attorney, Phillip Wetzel, said he and his client are reviewing the allegations and will respond at a later time. Despite
Woodbury has paid restitution to the affected clients.
"The advisor was terminated for cause, and Advisor Group made its clients whole," spokesman Donald Cutler said in a statement.
Since Woodbury terminated
Washington's Securities Division usually sends one or two cases each to the feds and to county prosecutors each year, according to Chief of Enforcement Brian Guerard. Unlike federal antifraud rules, the state's law doesn't require authorities to prove that an advisor displayed an intention to break the law, he pointed out. Guerard's team keeps such factors in mind when considering whether to refer a potential criminal case, along with the sheer amount of alleged losses and whether the investors were from outside the state.
"In the Hannes matter, we reached out to the FBI Spokane office soon after we received the complaint file from FINRA because the investment loss appeared high, there were out-of-state investors and there was a high likelihood of mail and wire fraud," Guerard said in an email.
Federal prosecutors don't discuss their investigations in pending cases, but Neuman said there are two possible factors that led to the gap in time between the state and federal cases. First, the pandemic delayed many cases in 2020 as authorities figured out how to conduct them remotely. Additionally, the federal prosecutors often give themselves and defendants time to pursue a plea deal since very few cases of this type ever go to trial, Neuman said.
"I suspect there was some negotiation, and perhaps they just couldn't come to a consensus as to a sentencing recommendation," he said.
An indictment adds "a little more teeth to your case" for clients seeking restitution in arbitration or other litigation, Neuman adds. With Woodbury providing restitution to clients who said they lost money, they'll avoid the fate of other alleged victims who
Hannes had been carrying out the "extensive, long-term fraud" for 16 years, up until his 2019 termination from Woodbury, according to the state's case. Pitching investors on returns of 5% to 7% with the possibility of rolling the bonds or unit investment trusts into new vehicles at the end of their purported 2- and 5-year terms, Hannes took the clients' checks to Hannes Financial Services and used their money for "unknown purposes," according to investigators.
He goaded them into maintaining their investments with phony account statements, investigators say. The scheme only came undone in November 2019, when a married couple who were longtime clients decided to go to a new advisor and couldn't find the checks they wrote reflected in their official Woodbury statements, according to investigators.
Federal agents arrested the former 33-year veteran advisor on July 26, prior to his arraignment and release on bond. His judge set a date next month for a pretrial conference and hearings beginning on Oct. 3, court records show.
The case represents just one out of the many popping up throughout the country each week. For example, a federal judge in Philadelphia
Fraudsters evade detection for long periods because they become skilled at "lulling investors into believing that their investments are doing great," said Guerard of the Washington Securities unit. Advisors have supplied some of its most promising tips in recent years, he said.
"If they ever have a gut reaction that something doesn't make sense, I recommend that they file a complaint with a state securities regulator, because they could be right," Guerard said. "They could be helping other investors — not just their clients, but others as well."
