On July 25, 2023, the Financial Industry Regulatory Authority (FINRA) issued a Letter of Acceptance, Waiver, and Consent (AWC) against LPL Financial LLC, a prominent independent securities broker headquartered in Fort Mill, South Carolina. This disciplinary action followed a series of egregious violations that involved the conversion/theft of approximately $2.4 million of customer funds by two of the firm’s brokers.
The AWC against LPL Financial LLC was the result of a failure to reasonably supervise the transmittal of customer funds, which enabled two firm registered representatives to convert substantial sums of money for their personal use. The findings by FINRA in the AWC are outlined below:
- Improper Transfers of Customer Funds: One representative persuaded nine customers, five of whom were seniors, to issue checks from their brokerage accounts payable to an undisclosed entity controlled by the representative. Instead of investing these funds, the representative used them for personal and business expenses, totaling approximately $550,000.
- Wire Transfers for Personal Use: Another representative convinced four customers, three of whom were seniors, to wire money from their firm accounts to an outside business he controlled, purportedly for investment purposes. However, he misappropriated around $675,000 of their funds for personal use. Furthermore, this representative electronically forged a senior customer’s signature on a wire transfer form to transfer approximately $1.2 million for his personal real estate purchase.
- Lack of Reasonable Supervisory Systems: LPL Financial LLC failed to establish a reasonable supervisory system to review transmittals of customer funds to third parties by wire or check. Their automated tool for reviewing checks only examined the second line of the recipient’s address, missing discrepancies in the address on the fourth line. Additionally, the firm did not monitor transmittals from unrelated customer accounts to the same third party.
- Failure to Respond to Red Flags: The firm did not adequately respond to red flags indicating potential conversion/theft, such as all third-party checks being mailed to the undisclosed entity and flagged wire transfers. They also failed to detect instances of signature forgery or falsification and did not verify questionable transfers adequately.
- Unauthorized Electronic Signatures: At least 50 firm representatives electronically signed customers’ names on over 1,000 firm documents without proper verification.
As a result of these violations, FINRA imposed significant sanctions on LPL Financial LLC:
- Censure: The firm was officially censured by FINRA.
- Financial Penalty: LPL Financial LLC was fined a substantial amount of $3,000,000.00.
- Restitution: The firm was ordered to pay $100,000 plus interest in restitution to affected customers who suffered financial losses due to the actions of the two representatives.
- Remediation and Supervision: LPL Financial LLC must undertake a review to identify and rectify any additional improper transfers of customer funds, establish a supervisory system designed to monitor customer fund transmittals and electronic signatures to ensure compliance with securities laws and FINRA rules.
This disciplinary action against LPL Financial LLC underscores the importance of robust supervisory systems, diligent monitoring, and quick response to red flags.
Here are some key takeaways for FINRA securities firms:
- Enhance Supervision: FINRA Broker-Dealers must implement robust supervisory systems that can detect and prevent unauthorized transfers of customer funds.
- Vigilance with Red Flags: Red flags indicating potential misconduct should never be ignored. Firms must respond promptly and thoroughly investigate any suspicious activity.
- Authentication and Verification: Verification procedures for electronic signatures and fund transfers must be stringent to prevent forgery and misappropriation.
- Regular Audits and Reviews: Regularly audit and review transactions and documents to ensure compliance and prevent unauthorized actions.
Greco & Greco’s securities fraud lawyers have extensive experience pursuing legal recovery of monies stolen by customers’ financial advisors. Although criminal advisors may not be able to repay the monies they have stolen, their securities firms bear responsibility for the fraud and theft under multiple legal theories. This includes liability by the firm’s for the actions of their agents related to investments, as well as direct liability by the firms for supervisory failures and failures to follow up on red flags as discussed herein. If you have been defrauded by your financial advisor or firm, please contact Scott Greco for a free attorney consultation.