On March 5, 2010, the United States Securities and Exchange Commission charged a San Diego-based broker-dealer with failing to reasonably supervise one of its registered representatives who engaged in unauthorized fraudulent trading in the accounts of two Florida municipalities.
Brokerage firm First Allied Securities, Inc. has agreed to settle the SEC's findings by paying $1.95 million. The SEC charged the firm's former broker, Harold H. Jaschke, with fraud last year. "Supervising registered representatives is a job that must be taken seriously by broker-dealers," said a Director of the SEC's Los Angeles Office. "By failing to establish reasonable systems to prevent the broker's misconduct, First Allied did not fulfill its obligation to reasonably supervise its registered representatives."
The SEC found that between May 2006 and March 2008 the First Allied broker executed numerous unauthorized transactions, made unsuitable securities recommendations, and churned the accounts of the City of Kissimmee, Fla., and the Tohopekaliga Water Authority. The SEC found that First Allied failed reasonably to supervise the broker because the brokerage firm did not establish reasonable systems to direct follow-up action in response to red flags regarding churning and suitability.
According to the SEC's order, First Allied waited nine months before contacting the municipalities through "annual review" letters that, in actuality, did not relate to annual reviews. The SEC has asserted that the letters failed to alert the municipalities about the suspicious trading activity occurring in their accounts. Additionally, the SEC order finds that First Allied had no system in place to monitor compliance with its rule prohibiting brokers from using personal e-mail accounts to conduct business. This enabled the broker, Jaschke, to use his personal e-mail account to send and receive e-mails that were neither reviewed nor retained by the firm. The SEC also found that First Allied failed to retain certain e-mails sent to and from its employees, as required under law.
In addition to requiring payment of $1.95 million in disgorgement, prejudgment interest and monetary penalties, the SEC censured First Allied and required the firm to cease and desist from committing or causing any future violations of certain books and records provisions. First Allied also agreed to hire an independent consultant to review its policies and procedures as well as its system for implementing its policies and procedures. First Allied consented to the SEC's order without admitting or denying the SEC's findings.
