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Galvin Sweep of BDs With 'Bad Brokers' Leads to Charges

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[Editor's note: This story has been updated to reflect the final decisions tied to regulatory actions against two broker-dealers and their advisors after the full reviews and related processes were completed.]

Massachusetts regulators on Thursday brought administrative charges against 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 [241] 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 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.

Senior Fraud

The case against 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, the broker-dealer 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 the BD.

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 the BD and the direct supervisor took over the accounts. In 2011, this individual  “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 supervisor had a history of disciplinary actions, including nine client complaints alleging about $1.2 million in damages, according to Galvin.

The BD 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 Broker’

In another case, a widow contacted regulators after hearing a public service announcement about senior fraud.

Jonathan Eric 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.

The woman’s IRA has fallen by roughly $290,000, while over time Altman and the firm he worked for collected a total of $141,300 in commissions and selling concessions.

The broker-dealer involved “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 and changed firms every few years.

In its response to the sweep concerning its hiring practices, the BD that hired the broker said it still hires broker-dealer agents with prior disclosures.

In both cases described above, neither the advisors nor their firms were barred from doing business in Massachusetts or by FINRA.

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