LPL settles barred rep case as compliance expenses top $30M
LPL Financial settled a FINRA arbitration case filed by a former client of a barred ex-advisor, as its regulatory expenses reached a three-year high at $31 million in 2018.
The No. 1 independent broker-dealer resolved the claims filed against the firm by a client of Thomas J. Borruso about six months before an arbitrator found him liable for an award of $250,000 in compensatory damages on April 16, according to a public award document.
LPL paid $195,305 to settle Clifford L. Gelman’s allegations against the firm on Oct. 1, FINRA BrokerCheck shows. Gelman had sought more than $5.5 million on allegations of fraud, failure to supervise, negligent misrepresentation and breaches of contract and fiduciary duty.
The IBD agreed to pay civil fines of up to $26 million in May 2018 under an agreement with state regulators involving sales of unregistered securities. Since 2013, LPL has paid $145 million in compliance, legal and regulatory expenses, with such costs jumping by 63% in the last year alone.
An increase in captive insurance coverage “to match the growth of our business” served as a primary driver, said spokesman Jeff Mochal in an email. He declined to comment on the arbitration case or to add to CFO Matthew Audette’s remark on the firm’s last earnings call that a “matter” not fully eligible for captive coverage boosted fourth-quarter regulatory costs.
The arbitration case revolved around “various securities including SunEdison stock,” according to the award document, referring to the previously soaring shares in a solar energy firm that filed for bankruptcy protection in 2016. Borruso didn’t answer the allegations or file an appearance.
Gelman’s case alleged that Borruso had invested his retirement savings in “speculative stocks unsuitable to his investment goals” in June 2015, placing nearly all of the savings “in a single stock without approval,” according to allegations listed in the advisor’s BrokerCheck.
Efforts to reach Borruso were unsuccessful. The lawyer who represented Gelman did not respond to requests for comment.
LPL and Wexford Financial Strategies, a Melville, New York-based affiliated practice, fired Borruso in July 2016 after he faced three tax liens totaling more than $60,000 that year, BrokerCheck shows. Borruso’s eight-year career included less than two years with LPL.
Gelman had initially named Wexford and its CEO, Scott Zuckerman, as respondents. They were later dismissed from the case, which Gelman had filed in March 2018 after originally submitting a complaint to the Commodity Futures Trading Commission in January 2017.
FINRA barred Borruso earlier in 2017 after he failed to request termination of a suspension, according to BrokerCheck. In the decision this month, the New York-based arbitrator found Borruso liable for compensatory damages plus interest and $10,000 in attorney fees.
LPL’s regulatory expenses have resumed in 2019. In March, the firm agreed to pay $9.3 million in restitution and interest as one of 79 firms to self-report 12b-1 fees that the SEC said the companies charged on higher-priced mutual fund share classes without adequate disclosure.
Mochal noted that LPL’s settlement covers an eight-month period in 2014, with client restitution representing fewer than 10 basis points of LPL’s advisory revenues over the span of the SEC’s self-reporting program, and an estimated average payment of $126 per account.
“LPL continually looks for ways to enhance disclosures as the industry and regulatory environment changes,” Mochal said in a statement at the time.
In the fourth quarter, LPL’s net income jumped by 88% year-over-year to $120.3 million while compliance spending nearly doubled to $9.6 million, according to the firm. In his prepared remarks, Audette also noted that the costs rose by about $2 million on a sequential basis.
“The increase was primarily driven by a matter for which a portion of the expense was not eligible for captive coverage,” Audette said, adding that regulatory costs are “inherently difficult to predict” due to variation in timing and insurance coverage.