The three founders of LPL Financial subsidiary Concord Equity Group Advisors have been ordered to pay more than $1.5 million in restitution and penalties for allegedly hiding commissions, in a settlement with the SEC.
Clients fell victim to the Matawan, N.J., RIA firm's secret fee-deal between 2008 and 2011, according to the SEC. Concord clients include other RIAs, family offices, bank trust and wealth management divisions, CPAs, law firms, insurance companies and regional brokerages.
What's unclear is whether Concord's founders also hid this practice from LPL Financial, the largest independent broker-dealer in the country. LPL acquired Concord in 2011. At that time, "the commission-sharing arrangement was terminated in connection with the acquisition," according to the SEC filing.
Two years later in 2013, LPL quietly fired all three of the firm's co-founders named in the SEC case -- Lee Argush, Alan Gavornik and Nicholas Mariniello -- although the three men's biographies still appear on the Concord website. The bios identify each as "executive managing director," along with their defunct LPL email addresses. Each held an ownership stake in the company. Gavornik was also an executive at Linsco, which combined with Private Ledger to form LPL in 1989.
An LPL representative declined to say whether or not LPL was aware of the firm's alleged practice of hiding commissions before it made the purchase.
"LPL is pleased that the SEC order makes clear that this matter arose prior to the acquisition in 2011," LPL spokeswoman Amanda Keating wrote in an email.
None of the three men returned calls to their homes.
'SKELETONS IN THE CLOSET'
Though LPL was not named or fined in the case, the firm had $23 million in regulatory and compliance costs in the third quarter -- $18 million more than it had expected. Those costs helped depress the firm's profits for that quarter to $33.3 million from $37.6 million for the same period last year.
LPL also experienced a drop in profits of 4.4% in the second quarter partially due to increased regulatory costs.
LPL has managed to grow quickly in large part by buying up independent firms that it often knows little to nothing about, says securities lawyer Robert Rex of Rex Securities Law in Boca Raton, Fla.
"LPL has just been hit with so much of this over the past three to four years," Rex says. "We've had lots of cases against LPL because they gather these guys up who aren't used to being supervised. If there are skeletons in the closet, they don't find out about it until later."
LPL declined to respond to Rex's comments.
$1 MILLION IN COMMISSIONS
In the Concord case, the firm entered into an agreement with a related broker-dealer named Tore Services in 2008 to execute trades for Concord clients, according to the SEC. The three cofounders also were officers of Tore, which had no employees and was located in the same building as was Concord, court documents show.
Argush, Gavornik and Mariniello, through Tore, received "referral fees" of between 3 cents and 5 cents per executed share on trades that should have cost Concord clients just a penny, the SEC charges.
In this way, the three men collected $1,005,000 in commissions.
"This commission-sharing arrangement represented a conflict of interest because Concord and Respondents (who were fiduciaries) were incentivized to encourage Concords clients to execute trades through [Tore] so that they could share in a portion of the execution commission," according to the SEC filing. "Yet, Respondents failed to adequately disclose the commission-sharing arrangement in Concords Forms ADV Part II, or otherwise inform Concords clients of the conflict."
For this failure to accurately and completely fill out the firm's SEC filings, the commission suspended Gavornik, Concord's former compliance officer and president, from holding positions in the industry for a year.
The commission also censured Argush and Mariniello.
Each of the three men was also ordered to pay penalties of $150,000, beyond the $1.15 million in restitution.
Argush built the web-based asset management and advisory platform that Concord marketed to its clients and ultimately served as the firm's CEO, CFO and chief technology officer, according to the SEC documents. Mariniello, who handled marketing and sales for the firm in its early years, later became president.
Gavornik's bio on Concord's website says he was a "member of the prestigious Linsco management team, assembled in the mid-1980s to build the industry's preeminent financial services company."
Argush's bio says that earlier in his career he founded a St. Petersburg, Russia-based company called GATE Corporation that ran "a multi-regional over-the-counter ruble option marketplace" that was "an early product innovator in Russia's hyperinflationary economy" operating among a network of Russian commercial banks "stretching from Moscow and St. Petersburg to Siberia."
Through Keating, LPL declined to say why all three men's biographies remain on Concord's website, given that none have been employed by the IBD since 2013.
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