Securities America seeks to force $18M lawsuit into FINRA arbitration

Register now

Barred ex-financial advisor Hector May told his clients to keep using their home equity line of credit for living expenses rather than making any withdrawals — despite a loan balance of $350,000.

“DO NOTHING SELL NOTHING MOVE NOTHING,” May wrote in a February 2018 email, according to a lawsuit later filed by the former clients. “Selling and getting out of the market is not the thing to do.”

The following month, the U.S. Department of Justice disclosed a criminal investigation involving May. Securities America fired him, citing an allegation of misappropriation of client assets. By then, the family’s brokerage accounts had dwindled to $50,000 from more than $15 million, the lawsuit states.

Judith and Robert Jamieson filed the civil lawsuit in the Southern District of New York on Feb. 26, alleging fraud, negligence and unjust enrichment by May, his daughter and employee Vania Bell, and the Ladenburg Thalmann independent broker-dealer. May has already pleaded guilty to criminal fraud.

May, 77, also agreed to pay $11.5 million and forfeit items like Rolex watches, gold and diamond jewelry and several fur coats, a preliminary forfeiture document shows. In addition, other former clients of May’s have received a combined $4.4 million in two settlements, according to FINRA BrokerCheck.

All told, requested compensatory damages in the civil lawsuit filing come to $18 million. To put that in perspective, that’s more than double the amount Securities America and two other Ladenburg IBDs agreed to pay to settle three other major SEC cases.

Like most publicly traded BDs, Ladenburg cites misconduct by financial advisors as a business risk. Rather than settling the civil lawsuit, however, Securities America filed a motion on March 21 seeking to compel arbitration.

While the motion appears likely to succeed given the industry’s compulsory arbitration rules, the lawsuit nevertheless alleges disturbing supervisory shortcomings at Ladenburg’s largest IBD.

Securities America failed to detect or follow up on suspicious conduct by May dating as far back as 2003 and continuing for 15 more years, according to the lawsuit. The negligence enabled May to transfer money from brokerage accounts to so-called custodian accounts used for the theft, the lawsuit alleges.

“It is only through a substantial award of punitive damages that Securities America — a documented failure-to-supervise recidivist — will be sufficiently motivated to redesign its compliance systems, invest the resources necessary to supervise its registered investment advisor representatives in an effective way and protect its customers against a recurrence of the type of fraud perpetrated by May and Bell,” the lawsuit states.

Fierce opposition greets states’ fiduciary proposals
Advisors and trade groups resist a patchwork of regulations, saying it would limit consumer choice and increase firms’ expenses.

Kevin Conway, the lawyer representing May in the criminal case filed in the Southern District, did not respond to requests for comment. He did, however tell a local newspaper in May’s native Rockland County that civil litigation is “not unexpected” and cited his client’s willingness to pay restitution.

Representatives for Securities America declined to comment, citing “public company best practices” to let its filings speak for themselves, as well as other firm policies against discussing legal or regulatory matters and individuals who aren’t affiliated with the firm.

Two arbitrations claims filed by May’s former clients ended in settlements in November and December, respectively, according to a disclosure in Ladenburg’s 2018 annual report last month, which further stated that Securities America was “reviewing the circumstances” of the lawsuit “as it seeks to resolve the matter.”

In a section on risk factors, the annual report stated that Ladenburg “cannot always deter misconduct by our employees and independent financial advisors,” and its prevention efforts “may not be effective in all cases.” Additional challenges could result from “our failure to properly investigate new and existing financial advisors” and the “small, decentralized offices” of independent advisors, it adds.

Six days after submitting its annual report to the SEC, the firm filed the motion to compel arbitration in the case. As exhibits, Securities America included copies of the Jamiesons’ initial signed client agreements, which included a provision that “all controversies” must be decided in arbitration.

“Plaintiffs’ claims against Securities America are subject to valid and enforceable arbitration agreements,” the motion continued. “Accordingly, this court should compel plaintiffs to submit their dispute with Securities America to FINRA arbitration and stay this proceeding pending arbitration.”

Attorneys on both sides of the civil case didn’t respond to requests for further comment on their filings. Upon their April 2 request to delay their response to the arbitration motion, the Jamiesons’ lawyers received an extension on filing it until April 11, court records show.

In the lawsuit, the plaintiffs argue that a November 2010 agreement between the family, Securities America, May and his RIA superseded earlier agreements and did not waive the family’s right of action or the firm’s liability.

Robert Jamieson, a retired longtime music industry executive, and his wife, Judith, hired May as their advisor in 1999, according to the lawsuit. May had been a member of the country club where Robert Jamieson’s father was a golf pro, and May attended the weddings and graduations of the couple’s three children.

May stole from the family by directing them to invest in municipal bonds, the lawsuit alleges. He instructed them to wire money from 20 brokerage accounts into an account held in the name of the independent RIA — Executive Compensation Planners — and controlled by May, the lawsuit says.

May routinely claimed that the bonds were maturing so the Jamiesons would bring more money into his so-called custodial account, according to the lawsuit. In addition, it says, May pushed outside investments like a real estate venture and a startup “music cruise” business.

In 2003, when Securities America’s compliance department inquired about three withdrawals totaling $350,000 from a family brokerage account, May claimed the withdrawals stemmed from “personal reasons” and assured the firm that the money had not gone to another BD, the filing states.

The firm made no further inquiries, according to the lawsuit. In addition, the suit alleges, Securities America failed to review other suspicious transactions and misstated the Jamiesons’ account levels. Branch inspections and email supervision also missed the long-running scheme, the civil filing says.

If the firm “had communicated only accurate information” or “had performed its supervisory activities in a minimally competent manner,” it could have prevented the fraud in 2003, according to the lawsuit, and the family and numerous other clients “would still have their life savings.”

Securities America’s motion for arbitration remains pending in the Southern District, where May had pleaded guilty in December to investment adviser fraud and conspiracy to commit wire fraud. The SEC barred him from the industry in February as well, after alleging May and Bell carried out a Ponzi scheme.

May agreed to the money judgment of $11.5 million as part of his guilty plea, but District Judge Vincent Briccetti will deliver the final forfeiture order at his sentencing. With the felony rap carrying a maximum sentence of a decade or longer, Briccetti scheduled the sentencing for April 26.

The case follows the SEC’s major one against Securities America’s corporate RIA, which agreed to pay $5.8 million last year after the regulator accused it of failing to disclose 12b-1 fees. The corporate RIAs of two other Ladenburg IBDs settled similar cases for a combined $2.1 million last month.

For reprint and licensing requests for this article, click here.
Compliance Enforcement actions Lawsuits Arbitration Independent BDs Securities America Ladenburg Thalmann Financial Services SEC U.S. Attorneys Office
MORE FROM FINANCIAL PLANNING