The Securities Lawyer Blog has previously posted on various internal activities that have been missed by supervisors of major broker-dealers within their own firms. Examples of this include registered representatives who have been able, for a time, to engage in improper conduct with the firm's clients and their investments.
This week, FINRA announced a settlement of an alleged supervisory failure in a branch office of a large brokerage firm. Merrill Lynch, Pierce, Fenner & Smtih Inc. will pay $1 million for alleged supervisory failures in its San Antonio, Texas office. In this matter, it is alleged that a registered representative engaged in a Ponzi scheme in which 11 investors provided funds amounting to $1 million over a period of nearly one year.
The branch office Merrill Lynch supervisors were said to have approved the opening of a business account by the registered representative, which is a common occurrence. But FINRA alleged that the firm then failed to supervise the funds in the account which the representative was able to withdraw to carry out a Ponzi scheme without the firm knowing this was occurring. The registered representative was permanently barred from the securities industry by FINRA in December 2009. In addition, the investors who unknowingly were part of what was a Ponzi scheme, have all been reimbursed by Merrill Lynch.
What was left unresolved, was the underlying lack of adequate supervisory systems that enabled the activity to go forward in the first place. The allegations included a failure to adequately monitor employee accounts for improper conduct. Now Merrill Lynch has settled this portion of the matter with FINRA.
The situation is instructive for all broker-dealers. The problem with the Merrill Lynch system apparently was as follows. Accounts opened with an employee social security number were picked-up by the system and automatically monitored by the firm. However, where the system fell short was if an employee opened an account using a social security or other tax identification number, the employee had to manually put the account into the system for supervision.
In addition, according to FINRA, for a period of about four years, the firm failed to monitor "40,000 employee/employee-interested accounts, which were not reported for certain periods of time and therefore not available on the supervisory system." FINRA's Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, cautions that
"[f]irms must ensure their supervisory systems are designed to properly monitor employee accounts for potential misconduct" and that Merrill Lynch's inadequate supervisory system and the firm's excessive reliance on employee self-reporting enabled [the representative] to facilitate his Ponzi scheme to the detriment of investors."
The Wall Street law firm of Gusrae Kaplan Nusbaum PLLC provides legal counsel and representation to broker-dealers in establishing and maintaining proper supervisory systems and all related compliance with FINRA and SEC rules and regulations. Please contact our law firm to talk with us about our broker-dealer advisory services and representation, as well as our expertise and experience before all regulatory agencies and courts in the field of securities law.
