The feds have given investors a fresh warning to use FINRA's BrokerCheck tool before turning assets over to a financial professional, following the sentencing of a rogue former broker on wire fraud charges.
This week, a U.S. district judge sentenced Jeffrey Knutsen of Bellingham, Wash., to more than four years in federal prison for a long-running embezzlement scheme through which he bilked investors out of more than a quarter-million dollars, withdrawing the money from their brokerage accounts and depositing the checks into his own account.
All this after having been barred from the industry by FINRA years earlier for running a similar scam.
Knutsen's attorney, Peter Avenia, a federal public defender based in Seattle, declined to comment on the particulars of the case, but provided a brief emailed statement:
"Although Mr. Knutsen was hoping for a shorter sentence, he accepts responsibility for his offense and sincerely apologizes to those he has harmed," Avenia wrote.
The federal complaint against Knutsen describes a several-year period, running at least from October 2005 through April 2013, when Knutsen ran an unlicensed advisory practice and misappropriated funds from 26 clients' accounts through a series of fraudulent activities.
In July 2005, FINRA's predecessor organization, the National Association of Securities Dealers, had barred Knutsen from any future association with a member of the industry regulator. That incident was reported in FINRA's BrokerCheck, but was not known by Knutsen's clients, many of whom were elderly; they allowed him to move their accounts from LPL, where he had been a registered rep, to discount online brokerages.
"If somebody is off the radar screen then the bottom line is it depends on the vigilance of the client," says Duane Thompson, senior policy analyst at the fiduciary training firm fi360. "But how many people are going to think about going online and checking a broker's record?"
WARNING FOR INVESTORS
In announcing the sentence, the Justice Department highlighted BrokerCheck as an easy, online tool to investigate the disciplinary history of a broker -- but noted that many of Knutsen's clients did not know much about the how the brokerage industry works.
"This fraud damaged the elderly victims emotionally as well as financially," acting U.S. Attorney Annette Hayes said in a statement announcing the sentence. "They trusted Jeffrey Knutsen to honestly invest their savings so they could enjoy a secure retirement. Now they are betrayed and wary as they try to safeguard any savings they have left."
The earlier FINRA ban stemmed from a complaint lodged by a customer who had accused Knutsen of withdrawing nearly $90,000 from a brokerage account and using it to pay down his personal debts.
Without admitting or denying guilt in that case, Knutsen accepted the industry ban, but did not report it (nor the embezzlement) to his clients.
Instead, around the time the FINRA action was pending, Knutsen convinced many account holders to shift funds from LPL to the online brokerages TD Ameritrade and, later, E*Trade, according to the federal complaint.
Knutsen opened accounts at the online brokerages on behalf of his customers, but "maintained the account user names and passwords and retained full access and control over the customer accounts, including check-writing privileges," according to the complaint.
Knutsen was not registered as a representative of either TD Ameritrade or E*Trade, and his name was absent from the clients' account profiles.
Knutsen proceeded to execute hundreds of unauthorized trades to siphon out hundreds of thousands of dollars from clients' accounts -- amounts far exceeding the management fees he had outlined when he initially convinced the clients to move to the online brokerages, according to the complaint.
Alarmed by a dwindling account, a client contacted TD Ameritrade in late 2012. Ameritrade began an investigation, identified other accounts that Knutsen appeared to control, and began notifying those clients that it was barring Knutsen from accessing their holdings. Knutsen then persuaded some of those clients to move their accounts to E*Trade, falsely explaining the notices as an attempt on TD Ameritrade's part to force him to join the firm.
Also in late 2012, an elderly couple that had been working with Knutsen notified local police that they believed they were being scammed. The FBI would later join the investigation.
In addition to a 51-month term in federal prison, U.S. District Judge James L. Robart sentenced Knutsen to three years of supervised release and ordered him to pay $251,892 in restitution.
At Knutsen's sentencing, Robart said of the case, "This is a crime of greed -- pure unadulterated greed -- plain and simple."
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