Your firm is on the hook when your brokers go rogue

It’s hot outside and inside for brokers gone bad and the firms that run them. The most recent regulatory haul is the Security and Exchange Commission’s (SEC) $4.5 million snagged from the checkbooks at Ameriprise for a long history of failing to supervise brokers ripping off their clients.

What? You read that right. According to Reporter Bruce Kelly writing in a recent issue of InvestmentNews, Ameriprise’s exposure is just the latest wrinkle as the financial services industry continues to be plagued by an endless supply of bad apples acting badly. It’s almost like whack-a-mole. Sanction, fine, jail, bar one and two pop up to fill the space.

Why can’t the industry keep investors safe?

Good question. At the heart of the most recent failing were brokers forging client signatures and creating phony wire transfers. Ameriprise Financial Services, the latest deer in the headlights, agreed to pay the SEC $4.5 million to settle charges that it failed to safeguard retail investor assets from theft by its representatives.

Five former Ameriprise brokers were named in the SEC’s order. Four of the brokers’ misdeeds were caught in 2013 and they were fired. One broker’s theft of client monies was not discovered until 2016 after which he was fired. Three of the five went to prison.

Why is no one surprised by the relentless stream of crime and punishment?

At issue is that these kinds of crimes and misdemeanors have been going on forever. According to members of the industry, brokers committing forgeries or acting under the guise of an outside business to rip off clients are offenses as old as the hills. Frustratingly, however, is that firms know this happens but they somehow suffer a failure in their assumed-to-be- robust systems of checks and oversight.

According to the SEC’s order, one team of bad actors – a mother and daughter Ameriprise team in Minnesota “forged client signatures on dozens of Ameriprise forms, including those to change the address of a client, to disburse funds via check, and to transfer funds by wire.” The two stole $1 million in client money.

On at least two occasions, the two women separately or together changed the addresses of two clients to the broker’s office address and the broker’s home address. Ameriprise was aware that both addresses belonged to and were controlled by the brokers, according to Kelly’s report. But the firm’s compliance and supervisory policies failed to detect the unauthorized address changes.

Outside business activities are another ruse

Another Ameriprise broker from Virginia stole $200,000 from a client, using an outside business known to the firm as a destination for the client’s money wired from the account. According to the SEC, “Even though it should have been apparent that [the adviser] was attempting to wire money from a client account to an external party under his control, Ameriprise approved the transfer.”

The fraud of another broker in Ohio who stole $373,000 from Ameriprise accounts was discovered in 2013 “when an office employee found evidence in a trash can that [the broker] had been attempting to copy the signature of a family member from whom he was attempting to steal funds.”

What good is a non-functioning compliance solution?

The thefts mentioned in this blog happened several years ago. Yet, given the new SEC order and fines, they continue to embarrass Ameriprise today. As the SEC’s order noted, the company had automated surveillance tools in place to prevent and detect such frauds committed by brokers. But, because of a technical error that went undetected until December 2013, the system did not function properly.

Of course, Ameriprise is not alone in facing issues with its brokers and advisers. Earlier this summer Morgan Stanley paid a $3.6 million penalty to the SEC for its failure to protect four advisory clients from the actions of one of its representatives, who misused or misappropriated approximately $7 million from the clients’ accounts.

Still, how does a firm let such essential systems fail, as was the case here with Ameriprise?  Maybe there should be third-party oversight?

“The actions of these five individuals – which happened years ago – were in clear violation of our policies and resulted in their immediate separation from the firm,” said Ameriprise spokesman John Brine. “We fully reimbursed clients who were impacted after the activity was discovered. We continually review and enhance our compliance program to better detect this type of prohibited activity.”

But what kind of compliance failure will dog Ameriprise tomorrow?

Good question. More fines? More penalties? Increased regulatory scrutiny? Why is compliance falling down on the job when the cost to do the right thing can be so inexpensive? Is it worth it the exposure, fines, and worse? That’s a question only you can answer. But that’s also where Patrina can help. We’ve built a business on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.