In a recent disciplinary action against Cadaret, Grant & Co., Inc., FINRA discusses various red flags that should have been investigated by the firm to discover and prevent the sale of a ponzi scheme investment to its customers.
The Letter of Acceptance, Waiver and Consent (found here) states that the firm "failed to reasonably supervise the activities of a registered representative even after becoming aware of red flags of sales practice violations." According to the AWC, a securities salesperson at Cadaret, Grant created and controlled three ponzi scheme entities, promising annual returns as high as 8% despite the fact that the entities were shell companies with no revenues or business operations. The broker never disclosed he was selling the investments to his customers at the firm, however, the AWC found the firm liable for failing to supervise his activities.
The AWC discusses various red flags that should have been discovered and investigated by the firm when complying with its duty to supervise under FINRA Rule 3110, including the following:
- The firm obtained copies of large checks deposited into a customer account from the ponzi entities but did not further investigate or alert the broker's supervisor.
- The broker had a large number of liens and judgments against him, and although the firm obtained a public records report showing the broker's association with one of the ponzi entities, it did not investigate it.
- The firm received a letter from an attorney of a customer victim regarding direct investments with the broker, it did not question the broker or the attorney about the matter.
- The broker refused to provide the firm emails for supervisory review.
Seventeen months passed from the receipt of the complaint letter until the termination of the broker, during which time the broker continued to operate the scheme causing further harm.
In the AWC, the firm consented to a censure and a fine of $200,000. FINRA did not impose restitution because the firm settled arbitration claims brought by the harmed customers. However, a review of Brokercheck shows that most of the settlements with customers were for amounts well below the damages claimed.
FINRA securities firms have duties to supervise their financial advisors, and implement reasonable supervisory systems to detect and prevent fraudulent activity such as ponzi schemes. Such firms can be held liable in FINRA arbitrations for the fraudulent acts of their agents, and for their failures to supervise. If you are the victim of a ponzi scheme or other wrongful activity relating to investments, and you would like to discuss your potential claims for free with an attorney, please contact W. Scott Greco at Greco & Greco, P.C.
W. Scott Greco has decades of experience recovering stolen funds on behalf of investors.