Last month, brokerage firm Stifel, Nicolaus & Co. Inc. settled a disciplinary action brought against it by the Financial Industry Regulatory Authority (FINRA) after one of the firm's brokers ran a Ponzi scheme that defrauded customers.
The terms of the settlement included a $350,000 fine and a censure. Stifel Nicolaus also agreed to pay restitution to customers affected by the fraudulent scheme in an amount not to exceed $250,000 plus interest at the rate set forth in the Internal Revenue Code.
Stifel Nicolaus submitted its Letter of Acceptance, Waiver and Consent (AWC) to FINRA to settle the matter on March 23. The firm consented to the entry of findings without admitting or denying the allegations and FINRA accepted the AWC on March 26.
The oversight in question occurred from 2005 to early 2007, when Stifel Nicolaus failed to supervise Kenneth Neely, a former broker working at the firm's branch office in St. Peters, Mo.
Neely engaged in a Ponzi scheme through which he induced Stifel Nicolaus customers and others to participate in the non-existent St. Louis Investment Club and an equally fictitious real estate investment trust, the St. Charles REIT.
In 2009, FINRA permanently barred Neely from associating with any FINRA member firm in any capacity, according to FINRA public disclosure records.
While Neely was perpetrating his fraudulent scheme, Stifel Nicolaus failed to adequately respond to numerous signs that Neely's was engaging in improper conduct, the AWC said.
Despite Neely's efforts to hide his activities, the firm should have followed up more thoroughly on evidence it received, including suspicious letters from customers and a sizeable cashier's check, the AWC said. This evidence should have alerted Stifel Nicolaus to Neely's misconduct.
By failing to reasonably supervise Neely and by failing to adequately investigate the warning signs, Stifel Nicolaus violated Rule 3010 and Rule 2110 of the National Association of Securities Dealers, a FINRA predecessor.
A subsidiary of Stifel Financial Corp., Stifel Nicolaus is a full-service regional brokerage and investment advisory firm based in St. Louis, Mo., that has been registered with FINRA since October 1936. The firm has more than 3,000 registered representatives who work out of 300 branch offices, the AWC said.
One among several signs of misconduct regarding Neely at the time was the fact that he had five pending customer complaints against him related to an annuities business he ran through a previous employer, the AWC said.
In addition, the firm knew that Neely was in extreme financial difficulty. He had even been subjected to a court order to garnish his wages to satisfy personal debts, the AWC said.
Despite this high-risk profile, Stifel Nicolaus failed to respond appropriately to Neely's suspicious actions surrounding two of the firm's customers. The customers were identified in the AWC only as RH and RM. They were investors in Neely's Ponzi scheme.
Early in 2005, the firm became aware of two letters that were written by RH concerning an investment club.
That April, Neely's supervisor reviewed a letter from RH to Neely in which RH discussed the investment club and referenced another letter regarding the club from October 2004.
Neely's supervisor asked Neely to bring him the 2004 letter. Both letters revealed that Neely was playing a role in something called the St. Louis Investment Club, the AWC said.
RH discussed his investments in the letters and asked Neely for certificates of ownership to reflect his investments, which RH never received, the AWC said. RH also complained to Neely in both letters that the investment club's dividend payments were past due.
When Neely's supervisor brought up these letters, Neely said they were simply a misunderstanding and denied any financial involvement with the investment club.
Eventually, RH sent a letter to Neely's supervisor that acknowledged the supposed misunderstanding, the AWC said. RH stated that Neely was merely a go-between, and that Neely had no financial involvement. A $6,000 check made out to Neely was actually for investment club dues that Neely was supposed to pass on, the letter said. Neely's supervisor accepted these contentions without further inquiry.
A series of emails on the same topic were also overlooked by the firm. For example, an April 12, 2005 email from RH to Neely took issue with the missing ownership certificates and the missing dividend checks. Nonetheless, RH said in the email that he wanted to buy four more shares in the investment club for a total of $12,000.
Such correspondence should have alerted Stifel Nicolaus that Neely was up to no good, but the firm did nothing, allowing Neely to continue his fraudulent scheme.
Stifel Nicolaus also failed to adequately investigate a $15,000 cashier's check hand-delivered by RM to Neely at the firm in July 2005. The check was made payable to Neely's wife, the AWC said. RM left it with the receptionist who brought the envelope to Neely's supervisor. When the supervisor asked Neely about the check, he said he didn't know what it was for.
Neely's supervisor then told Neely that he would contact R. According to the AWC, Neely's supervisor said Neely then left the office and made a call on his cell phone. Only when Neely returned did they call RM, who said the cashier's check was a private matter involving Neely's wife.
When the supervisor confronted Neely, he said the check was payment for a car RM bought from Neely's wife. Neely's supervisor was suspicious because he knew about Neely's financial difficulties, so he contacted the firm's
compliance department, the AWC said. He was advised to have Neely furnish a written statement about the check and to prepare a letter asking RM to approve the release of check to Neely in writing.
Neely's written explanation stated that his wife had sold RM her Ford Explorer, and that she did not tell Neely about it because it was a surprise for Father's Day, the AWC said.
This explanation did not satisfy Neely's supervisor. He thought a few things did not add up. First, RM used a cashier's check instead of a personal check when a cashier's check was unnecessary. Second, RM delivered the check to Neely even though it was supposed to be a surprise, and third, RM seemed evasive, which was odd if all he did was buy a car.
The notes that Neely's supervisor kept on the incident made reference to RH, the customer who had sent the letters about the investment club. The supervisor thus recognized that there could be a connection, the AWC said.
In June 2005, Neely's supervisor sent a letter to RM to verify Neely's story. The letter states that brokers – registered representatives of a firm -- are prohibited from borrowing money from clients, and therefore Stifel Nicolaus needed to confirm that the $15,000 check was payment for the vehicle RM purchased from Neely's wife. RM signed the letter and returned it to Neely's supervisor, the AWC said.
Later, when Neely's supervisor asked him for the car's bill of sale, Neely said RM had decided not to buy it after all because he thought the transaction was causing Neely trouble at work.
The firm then returned the check to Neely, who said he returned the check to RM, according to the AWC. Neely's supervisor reported this to the firm's compliance team, which told the supervisor to get Neely to sign an attestation stating that he fully understood the rules prohibiting borrowing money from clients, and confirming that he had not borrowed any money from clients during his employment at Stifel Nicolaus.
Neither Neely's supervisor nor the firm's compliance team looked any further into the mysterious $15,000 cashier's check, which allowed Neely to continue his fraudulent scheme, the AWC said.
If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.