Regulatory group wants names of 30 ex-JPMorgan advisors accused of ‘suspicious activity’
State regulators are stepping in where FINRA says it cannot tread.
A recent disciplinary action by FINRA against J.P. Morgan Securities revealed that the industry regulator will not be investigating 30 former JPMorgan advisors accused of engaging in “suspicious activity.” For some of the advisors, the allegations include stealing client and company funds, and altering and forging documents.
In response, state regulators want the names of those 30 advisors and its membership organization, the North American Securities Administrators Association, has requested them from FINRA on behalf of the states, says Joe Borg, the association’s head of enforcement and director of the Alabama Securities Commission. FINRA declined to comment.
“We are looking at” how JPMorgan handled its supervision of advisors and if there are any ramifications state regulators should follow up on, Borg says. “Officially, this does concern us.”
FINRA fined JPMorgan $1.1 million last month for failing to disclose, as required under FINRA rules, 89 internal investigations against its employees between 2012 and 2018. JPMorgan’s failure to disclose those investigations presented “significant risk,” according to FINRA. The 89 cases include 13 registered representatives accused of stealing money from customers and another five accused of taking money from the bank itself, according to the settlement agreement that JPMorgan signed with FINRA in the case. The regulator did not specify how many other cases involve alleged forgery, altering documents or other transgressions. JPMorgan did not respond to questions about the investigations or the advisors.
The timeline of those investigations covers the period when former JPMorgan advisor Johnny Burris became a whistleblower against the bank, alleging wrongdoing. The FINRA fine against the firm followed an investigation by Financial Planning on the regulator’s failure to take action against managers at JPMorgan.
Most of the unreported investigations were of advisors who worked for JPMorgan’s private bank, where Burris worked with many of his former managers who allegedly took part in a retaliatory scheme against him. Another regulator, the Occupational Safety and Health Administration, concluded that the bank’s treatment of Burris amounted to retaliation. Financial Planning has identified several former managers of Burris whom he accuses of taking part in retaliation against him; Burris’ case is not addressed in the action and Financial Planning could not determine if they are included in any of the 89 undisclosed investigations.
At least two of Burris’ managers have left JPMorgan and do not have termination notices on their publicly available FINRA BrokerCheck reports. One of them, Deborah Valenzuela, is now a regional sales manager for UnionBanc in Los Angeles. Another, Laya Gavin, is a real estate agent in Arizona. Gavin wrote up client complaints that the bank falsely claimed were composed by Burris’ clients themselves, and JPMorgan used those complaints against Burris in his failed wrongful termination arbitration. FINRA took private disciplinary action against Gavin, issuing her a letter of caution for her misrepresentation regarding the client letters, a year after she left JPMorgan.
Undisclosed in FINRA’s announcement of the fine was the fact that another 36 former JPMorgan advisors moved to other firms before the regulator learned of the internal investigations into their behavior -- depriving the hiring firms of vital details on the brokers’ work histories, according to the settlement letter. Since those 36 people are still working for FINRA-registered firms, FINRA is free to investigate them. A spokeswoman declined to say if it is doing so. NASAA has requested the names of those 36 advisors, Borg says.
If any of those advisors harmed investors and if the advisors are subject to state regulation (RIAs managing less than $100 million in client assets are regulated by their states), then those states could pursue cases against them. Advisors with larger sums under management are registered with the SEC. Under the current regulatory structure, brokers may drop their FINRA licenses to become registered investment advisors under the oversight of state regulators or the SEC. A spokesman for the commission declined to say if it will investigate these advisors.
In his role with the state of Alabama, Borg says he has requested the names from FINRA. As part of his role at NASAA, he and his NASAA colleagues can distribute the names and associated details of each case to relevant state regulators.
FINRA requires firms to inform it within 30 days of any investigation that follows the termination of an advisor. However, JPMorgan waited an average of two years to disclose the 89 cases to FINRA which, in some instances, prevented the regulator from pursuing its own inquiries into alleged wrongdoing. FINRA’s oversight of its members expires two years after those members drop their FINRA registrations.
“I think those 30 names absolutely should be passed on to other regulators,” says Lisa Braganca, a former SEC branch chief in Chicago for the agency’s enforcement division who now represents clients in FINRA arbitration. “They are talking about unauthorized trading, but also misappropriation of customer and company funds. … That is not OK.”
FINRA rules require that firms disclose internal investigations even when advisors are allowed to resign voluntarily, the settlement letter with the bank says. Most of the investigations JPMorgan did not disclose properly involved registered representatives who “voluntarily resigned after they became the subject of an internal review or where the firm began the internal review after the registered representative was terminated,” the settlement letter says.
States are right to be concerned about the 30 unnamed advisors FINRA cannot pursue, says Benjamin Edwards, director of the investor protection clinic and a law professor at the University of Nevada, Las Vegas.
“Our fragmented structure for regulating investment advice means that bad people can hop around with different registration statuses selling different kinds of products and running different kinds of frauds,” Edwards says. That might mean they drop their FINRA registrations to work as RIAs or sell insurance products, he says. “It’s very important that we identify bad actors and get them out of the industry -- and out of every corner of the industry.”
An SEC spokesman declined to comment when asked if the commission has requested the names of the former advisors from FINRA. A FINRA spokeswoman also declined to comment.
“If my insurance broker who sold me life insurance had been engaged in stealing money from customers, when maybe he was in a different business, do I care?” asks Braganca, the former SEC official. “Yeah, I care. I care a lot.”