Fred Fry International: Stockbrokers Caught Abusing Client's Money

Here are some excerpts from the NASD January, 2007 Disciplinary Actions Report where stockbrokers were either taking liberties with their client's accounts without permission or borrowing/stealing their client's money.

The total amount of money misused/stolen from investors listed below is $1,178,307.25. (Some entries do not list the amount taken.)

Individuals Barred or Suspended

Mustapha Youssef Aljaroudi (CRD #3274506, Registered Representative, Miami, Florida) submitted an Offer of Settlement in which he was barred from association with any NASD member in any capacity. Without admitting or denying the allegations, Aljaroudi consented to the described sanction and to the entry of findings that he engaged in a pattern of misconduct that included falsification of essential public customer information on a new account opening form and a sale of stock in a customer’s account without the customer’s knowledge, authorization or consent. The findings stated that Aljaroudi converted customer funds, in that he received a customer’s check from a clearing firm, endorsed the check without the customer’s knowledge, authorization or consent, and deposited the check into his personal bank account without repaying the customer or accounting for the funds. (NASD Case #2005001185301)

Kathy Lynn Gallagher (CRD #2189903, Associated Person, Pocatello, Idaho) submitted an Offer of Settlement in which she was barred from association with any NASD member in any capacity. Without admitting or denying the allegations, Gallagher consented to the described sanction and to the entry of findings that she misused $218,558.00 of public customers’ funds intended to be invested on the customers’ behalf, and rather than depositing the funds into the customers’ accounts as instructed, Gallagher caused the funds to be deposited into a bank account she controlled without the customers’ knowledge, authorization or consent. The findings stated that Gallagher forged, or caused to be forged, a registered representative and public customers’ signatures on Investment Distribution Forms, causing funds to be wired from the customers’ accounts to accounts under her control without the customers’ knowledge or authorization to conceal her misuse of funds. The findings also stated that Gallagher falsified books and records, and forged documents and customers’ signatures in order to conceal her misuse. (NASD Case #2005000863701)

Elliott Matthew Glover (CRD #4476082, Registered Representative, New Castle, Delaware) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any NASD member in any capacity. Without admitting or denying the findings, Glover consented to the described sanction and to the entry of findings that he converted $119,000 of public customers’ funds by diverting proceeds from loans that customers had received from a bank. (NASD Case #2006004847801)

Jo Anne Jean Goulet (CRD #4768440, Associated Person, Ludlow, Massachusetts) submitted a Letter of Acceptance, Waiver and Consent in which she was barred from association with any NASD member in any capacity. Without admitting or denying the findings, Goulet consented to the described sanction and to the entry of findings that she withdrew a total of $116,000 from a public customer’s fixed annuity by systematically withdrawing amounts under $10,000 without the customer’s knowledge, authorization or consent. The findings stated that Goulet deposited the funds into her personal bank account, thereby converting the funds for her own use and benefit. The findings also stated that, as a result of the unauthorized liquidations, the customer incurred $6,500 in surrender fees and suffered adverse tax consequences. (NASD Case #2006004750801)

Kyle Jay Keesling (CRD #1911150, Registered Principal, Simpsonville, South Carolina) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any NASD member in any capacity. Without admitting or denying the findings, Keesling consented to the described sanction and to the entry of findings that he obtained $112,629.88 from public customers for investment purposes and converted these funds to his own use and benefit. The findings stated that, in an attempt to conceal his conversion of funds, Keesling provided some of the customers with falsified statements showing that their funds had been invested when they had not. (NASD Case #2006004831801)

George Ellis Brown McMahon III (CRD #3055065, Registered Representative, Waldorf, Maryland) was barred from association with any NASD member in any capacity. The sanction was based on findings that McMahon instructed a public customer to sign checks totaling $3,600 and make them payable to him for investment purpose. The findings stated that contrary to McMahon’s representation, he did not invest the funds for the customer’s benefit, but cashed the checks and misused the customer’s funds. The findings also stated that McMahon failed to respond to NASD requests for information. (NASD Case #2005003051001)

Christopher Lincoln O’Connell (CRD #2153507, Registered Representative, Topsfield, Massachusetts) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any NASD member in any capacity. Without admitting or denying the findings, O’Connell consented to the described sanction and to the entry of findings that he received a $3,140.16 check from a public customer to purchase a disability insurance policy, deposited the check in his personal bank account and misappropriated the proceeds for his own use and benefit. (NASD Case #2006005048501)

Joseph Peter Orozco (CRD #1019164, Registered Representative, Burbank, California) submitted an Offer of Settlement in which he was barred from association with any NASD member in any capacity. Without admitting or denying the allegations, Orozco consented to the described sanction and to the entry of findings that he received a $471,280.09 check from public customers to be invested, but instead, he retained possession of the check and falsely represented to the customers that it had been deposited and the securities had been purchased. The findings stated that Orozco submitted written reports to his member firm that stated that he had not received any customer correspondence, even though he had received letters from his customers inquiring about the status of their accounts. The findings also stated that Orozco made false statements to public customers regarding the check and the securities. The findings also included that Orozco failed to complete an NASD on-the-record interview and provide requested testimony. (NASD Case #C0220040045/E0220030808)

Brian L. Pauley (CRD #4253361, Registered Representative, Olmsted Falls, Ohio) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any NASD member in any capacity. Without admitting or denying the findings, Pauley consented to the described sanction and to the entry of findings that he withdrew $95,000 from a deceased public customer’s checking and savings accounts, transferred the funds to newly created bank accounts and moved $65,000 from the new accounts to an investment account in his name, thereby improperly using the customer’s funds. (NASD Case #2006004940901)

Michael Brent Peterson (CRD #4611211, Registered Representative, Oxford, Wisconsin) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any NASD member in any capacity. Without admitting or denying the findings, Peterson consented to the described sanction and to the entry of findings that he misappropriated a public customer’s funds by signing her name on documentation directing distribution of her fixed annuities without her knowledge and consent. The findings stated that Peterson deposited the customer’s distribution checks into her checking account at the bank where he was employed, and wrongfully used his authority as an officer of the bank to withdraw funds from her account and deposit them into his personal bank account at another bank, thereby converting the funds to his own use. The findings also stated that Peterson failed to respond to NASD requests for information. (NASD Case #2005003168601)

Scott Thomas Powers (CRD #2255877, Registered Representative, Danvers, Massachusetts) was barred from association with any NASD member in any capacity. The sanction was based on findings that Powers accepted $25,000 from a public customer for investment purposes and deposited the funds into a bank account, but failed to use the funds for the customer’s benefit. The findings also stated that Powers failed to respond to NASD requests for information. (NASD Case #2005002808001)

Peter Rhee (CRD #2964890, Registered Representative, Garfield, New Jersey) was barred from association with any NASD member in any capacity. The sanction was based on findings that Rhee effected transactions in public customers’ account without the customers’ authorization or consent. The findings also stated that Rhee failed to respond to NASD requests for information and documentation and failed to appear for an NASD on-the-record interview. (NASD Case #E9B2004049101)

Complaints Filed (NASD issued the following complaints. Issuance of a disciplinary complaint represents NASD’s 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. Because these complaints are unadjudicated, you may wish to contact the respondents before drawing any conclusions regarding the allegations in the complaint.)

Jose Hernandez (CRD #1976668, Registered Representative, Cary, Illinois) was named as a respondent in an NASD complaint alleging that he converted or misused $4,100 from a public customer that was intended for the purchase of securities, and used the funds for personal expenses and not for the customer’s benefit. The complaint alleges that Hernandez created false account statements that purportedly showed that the customer owned securities to conceal from the customer that the money was not used to purchase securities. The complaint also alleges that Hernandez failed to respond to NASD requests for information. (NASD Case #2005001945401)

Christopher David Solomon (CRD #4470012, Registered Representative, Treasure Island, Florida) was named as a respondent in an NASD complaint alleging that he engaged in an outside business activity and failed to provide written notice to his member firm. The complaint alleges that Solomon received $8,000 from a public customer for investment purposes, deposited the funds into a bank account he controlled but failed to transmit the funds from the bank account for the intended investment, thereby converting the customer’s funds. The complaint also alleges that Solomon provided the customer with a false account statement in order to convince him that the investment had been made when, in fact, there was no such investment. In addition, the complaint alleges that Solomon failed to respond to NASD requests for information. (NASD Case #2006005220901)

Richard Adam Thayer (CRD #4123272, Registered Representative, St. Clair Shores, Michigan) was named as a respondent in an NASD complaint alleging that he withdrew $2,000 from a public customer’s bank account without the customer’s knowledge or consent, and used the funds for his personal use or for some purpose other than the customer’s benefit. The complaint alleges that Thayer converted funds from other customers, without their knowledge or consent, to cover up his use of the first customer’s funds. The complaint further alleges that Thayer failed to respond to NASD requests for information. (NASD Case #2006005175401)

Now it is not just brokers who are helping themselves to your cash. The brokerage houses, while not 'stealing' your money, apparently are borrowing it without properly compensating their customers:

The phrase "cash sweep" may sound like a cleaning crew gathering loose change. But on Wall Street, the top brokerage firms are increasingly turning cash sweeps into gold.

The blue-chip securities firms are reaping bigger profits from a few simple changes to how investors' idle cash balances are treated. And most investors either don't notice or don't care that Wall Street's gains are coming at their expense as brokers turn around and reinvest the money for their own benefit at a higher rate.

• The Situation: Wall Street brokers are making more money from the cash sitting in customer accounts.

• The Context: Most customers barely notice they are receiving a low interest rate while the brokerage is making a profit reinvesting their money.

• Bottom Line: In the past year the trend has accelerated despite red flags from market regulators.

WSJ's Randall Smith discusses "cash sweeping," a growing trend despite red flags from market regulators.

Merrill Lynch & Co., which pioneered such tactics starting in 2000, is expected to report next week that its profits derived mainly from reinvesting customers' cash will top $2 billion for 2006, up from $1.3 billion two years ago.

Last year Morgan Stanley ramped up the same strategy of "sweeping" client cash to insured bank deposits, which pay rates as low as 1.25% on the smallest accounts. And the Smith Barney unit of Citigroup Inc. in September also began paying rates as low as 1.51% for cash in smaller accounts.

Smith Barney had considered such moves earlier, but hesitated because its former chief executive, Sallie Krawcheck, who led the firm between 2002 and 2004, raised questions about whether such "tiering" tactics could hurt customers, according to people at Citigroup. This year the firm decided it couldn't afford to pass up the profits and risk being left at a competitive disadvantage, other people said.

In a statement, Smith Barney said it shifted "to a relationship-based offering" that included "clear and abundant client disclosure." The firm said it offers rates "among the most competitive in the industry," and clients have "ample" alternatives.

Regulators at the New York Stock Exchange warned firms and investors in 2005 that such programs risked being instituted "without fully appropriate levels of disclosure or customer consent."

Bank deposits are more profitable for Wall Street because they can be reinvested at profits of roughly three to four times the fees on money funds.

But the bank deposits where the money is swept all pay less than 2% annually for the smallest accounts, far below current money fund rates of 4.72%, where Wall Street firms could put clients' idle cash. - WSJ.com