The SEC sanctioned Florida-based 1st Discount Brokerage and a former executive vice president for failing to supervise an advisor who was found to be running a Ponzi scheme.
1st Discount is an independent broker-dealer that works with more than 200 financial advisors.
Both 1st Discount and the former executive vice president, Michael Fisher, accepted the SEC’s offer of settlement without admitting or denying its findings.
1st Discount did not immediately return calls for comment. Fisher could not be reached.
The regulatory agency sought civil penalties of $40,000 from the firm and $10,000 from Fisher.
The advisor who ran the Ponzi scheme, Michael Park, worked in Tennessee and had already pleaded guilty to wire and mail fraud charges brought by the U.S. Attorney General’s office, according to the SEC.
In that criminal plea, Park “admitted to operating a fraudulent scheme from 2001 to 2008 that defrauded 28 investors in excess of $8.6 million,” according to SEC filings.
He allegedly misappropriated customers’ funds to pay for his own “extravagant lifestyle,” including private school tuition for his kids, according to the SEC. In September 2010, Park was sentenced to 96 months in prison.
And this was not Park’s first run-in with regulators.
Before his connection with 1st Discount, Park was terminated from two different broker-dealers after customer complaints.
In one case, he had received loans from customers without the firm’s permission. In the other, he forged a client’s signature on a letter “instructing the firm to charge a $3,500 loss to the client,” according to SEC filings.
In the most recent case at 1st Discount, the SEC claimed the broker-dealer “did not have policies and procedures reasonably designed to detect and prevent violations” like Park’s. And if it did, the fraud would likely have been uncovered, according to the SEC. A specific area where 1st Discount failed was its lack of policies for reviewing DBA accounts (doing business as) of its registered reps.
The SEC said 1st Discount also had no policies requiring compliance auditors. Moreover, the firm failed to follow through on some of the procedures that it did officially have, such as unannounced audits.
Michael Fisher had the responsibility of overseeing the company’s “Heightened Supervision Committee,” according to the SEC.
As such, he had the responsibility for having a system in place to implement the firm’s policies and procedures. Had this happened, the SEC says, several red flags would have been raised.
Lee Conrad writes for Bank Investment Consultant.
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