Massachusetts regulators on Thursday brought administrative charges against two broker-dealers based in New York and two advisors for “deceptive and unethical conduct in the handling of the accounts of older investors.”
Secretary of the Commonwealth William F. Galvin, said in a statement, “In June of 2016, my Securities Division did a sweep of  state-registered broker-dealers with an above-average percentage of agents hired with disciplinary history. While the results of the sweep are still being studied by my office, these two firms [Spartan Capital Securities and Revere Securities] were included in that sweep.”
The BD sweep followed steps taken by Sen. Elizabeth Warren, D-Mass., and other politicians earlier this year to prod the Financial Industry Regulatory Authority to rein in broker misconduct.
Warren cited a February National Bureau of Economic Research working paper analyzing data from BrokerCheck, which found that about 12% of advisors have been accused of bad behavior and 7.7% have settled a claim or have been fined between 2005 and 2015. The study also found that only about half of advisors who committed misconduct lost their jobs, with 44% of those obtaining a job at another advisory firm within a year.
“In each case, the agents had numerous misconduct reports on their records. These agents went on to abuse the accounts of senior investors,” Galvin explained.
“Both broker-dealers knew or should have known that these agents raised risks to their clients, and if they were going to take them on they had the ethical duty and obligation to place them on special heightened supervision,” he added.
The case against Spartan and its advisor Dean J. Kajouras of New Jersey involved a second registered rep, who was not named in the charges and now is deceased. In 2009, the unnamed agent cold-called a retired Massachusetts resident who had a history of conservative investing.
Despite this investor profile, Spartan opened an account of $222,000 for the investor with the stated objective being “speculation” and a risk tolerance of “very aggressive.” Later that year, the investor moved some $162,000 to Spartan. Over a seven-month period, the agent “churned both accounts” and received close to $116,000 in commissions and over $9,000 in fees and other charges, Galvin’s office says.
The agent left Spartain in 2009, and the direct supervisor – Kajouras, the BD’s CEO – took over the accounts.
In 2011, he “unsuitably over-concentrated” the investor’s accounts by putting some 70% of their market value – into an energy exploration company in Oklahoma that went bankrupt, according to the charges.
Both the unnamed agent and Kajouras had a history of disciplinary actions. Kajouras had at least nine client complaints alleging about $1.2 million in damages.
Spartan, which also has a history of regulatory actions, told regulators during the recent sweep that it had hired 60 broker-dealer agents with prior disciplinary records between January 2014 and June 2016 – though just six were placed on heightened supervision during this time, Galvin’s office points out.
Other ‘Bad BD’
In the case against Revere and Jonathan Eric Altman, a widow contacted regulators after hearing a public service announcement about senior fraud.
Altman set up a beneficiary IRA for the female client and conducted excessive trading, made unauthorized transactions and gave unsuitable recommendations. The regulators estimate that the account would have had to earn at least 20% from July 2013 to June 2014 to cover the $77,000 in commissions and $18,200 in selling concessions, which were split between Revere and Altman, to have broken even.
The woman’s IRA has fallen by roughly $290,000, while over time Altman and Revere collected a total of $141,300 in commissions and selling concessions.
“Revere has a history of hiring broker-dealer agents with a record of prior disclosures, including customer complaints,” the complaint states. “Altman has a history of customer complaints related to excessive trading, unauthorized transactions, and unsuitable transactions.”
Despite those complaints, the regulator says, Altman kept working in the brokerage industry. He changed firms every few years before coming to Revere.
In its response the sweep concerning its hiring practices, the BD indicated that it still hires broker-dealer agents with prior disclosures.
The state regulator’s complaint aims to bar Altman from the securities business in Massachusetts and asks for restitution, disgorgement of all profits from the alleged wrongdoing and an administrative fine.
It also seeks a cease and desist order, a censure, an independent compliance review of policies and procedures, restitution, disgorgement and a fine against Revere.
In the Spartan case, the regulators seek to bar both Spartan and Kajouras from the securities business in Massachusetts and to collect a fine, censure and obtain compensation for investors due to the reported misconduct.