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Regulation and Compliance > Federal Regulation > FINRA

FINRA Accuses Rep of Fleecing Blind, Elderly Widow

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Regulators said Monday that they have filed a complaint against broker Hank Mark Werner of Northport, New York, for fraud related to churning the account of a 77-year old blind widow and for excessive and unsuitable trading.

The complaint brought by the Financial Industry Regulatory Authority alleges that Werner “engaged in a deceptive and fraudulent scheme by churning the widow’s accounts over a three-year period to maximize his compensation by charging more than $243,000 in commissions, while causing the customer approximately $184,000 in net losses.”

According to FINRA, Werner – who is no longer a registered broker – had been the broker for the woman and her blind husband (who died in 2012) since 1995.

Werner became an advisor nearly 30 years ago, when he started in the business at Shearson Lehman Hutton. Since then, he worked for 11 other broker-dealers, including three that were expelled from the industry by FINRA. He has 11 disclosures on his BrokerCheck records, starting in 1994.

FINRA’s complaint alleges that just a few weeks after the client’s husband died, Werner began “aggressively trading her accounts to generate excessive commissions for himself … Because she was blind and severely debilitated, requiring in-home care, the customer relied completely on Werner to accurately portray her account activity and let her know about account performance.”

From October 2012 to December 2015, Werner placed more than 700 trades in 200 different securities, FINRA said. He charged the widow either a markup or a commission on every purchase and sale; the initial markups or commissions were between 2.50% and 3% of the transaction.

However, when he moved from Liberty Partners Financial Services to Legend Securities in December 2012, he increased his markups and commissions to between 3.75% and 4.25%, representing a jump of over 40%, according to FINRA.

The regulators’ complaint states that “based on the level of trading and commissions charged, there was little to no possibility that the customer would profit from such trading.” It also points out that the trading “was excessive, as evidenced by the high turnover rates and cost-to-equity ratios for her accounts ranging from 64.40% to 97.73%.”

Given the widow’s investment aims and financial situation, “Werner did not have reasonable grounds or a reasonable basis to believe that his recommended trading was suitable,” FINRA said in a statement. “The complaint also alleges that in July 2015, Werner recommended an unsuitable variable annuity exchange, and earned a commission of more than $10,000 on the transaction.”

FINRA explains that this disciplinary complaint “represents the initiation of a formal proceeding … in which findings as to the allegations in the complaint have not been made, and does not represent a decision as to any of the allegations contained in the complaint.” A firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel.

Broker Misconduct

Earlier this year, the University of Minnesota’s Mark Egan and University of Chicago Booth School of Business’ Gregor Matvos and Amit Seru released a study of broker misconduct based on 10 years FINRA records. The authors claim that advisor misconduct “is broader than a few heavily publicized scandals.”

“The incidence of misconduct varies systematically across firms, with the highest incidence at some of the largest financial advisory firms in the United States,” they write. “We find evidence suggesting that some firms specialize in misconduct. Such firms are more tolerant of misconduct, hiring advisors with unscrupulous records. These firms also hire advisors who engage in misconduct to a lesser degree.”

The study says that about 12% of advisors have been accused of bad behavior and 7.7% settled a claim or were fined between 2005 and 2015.

The research also found the per-year level of misconduct across some 1.2 million registered representatives was less than 1% in the 2005-2015 period. It started the decade near 0.5%, rose to nearly 1% in 2008 and 2009 and then fell to roughly 0.5%.

The Securities Industry and Financial Markets Association, a lobbying group that represents big financial firms, disagreed with the results.

“While we appreciate what the authors of the study are seeking to determine, in our cursory review we believe their model overstates the level of relevant misconduct, including allegations related to declines in value due to volatility or infractions completely unrelated to the advisors’ professional responsibilities.” it said in a statement.


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