Regulators concerned about 'Selling away'

In an October 2nd, 2011, InvestmentNews.com article, Bruce Kelly writes that stockbrokers who sell products that promise high returns without the approval of their broker-dealers once again have become a leading concern for state securities regulators.

This practice is known as “selling away,” and is one of the most common difficulties that independent and franchisee broker-dealers face in their oversight of registered representatives.

Independent broker-dealers, including Edward Jones, Raymond James Financial Services, Inc., and Woodbury Financial Services, Inc., have had former brokers investigated this year for their roles in alleged selling-away schemes.

Kelly writes that such reps typically operate in one- or two-man offices and have no branch manager looking over their shoulders on a day-to-day basis. Cases typically involve a broker's selling a financial product that the broker-dealer didn't approve or know about, with the investment vehicle blowing up and harming the client's portfolio.

“There's been an increase in selling away,” said Matt Kitzi, Missouri securities commissioner and head of the enforcement section for the North American Securities Administrators Association Inc., which represents state securities regulators.

“When the financial crisis hit, brokers and agents were left with clients who weren't happy with the investment options they were offered. Some brokers, also looking to supplement their income, went outside the traditional market, trying to find other products to push,” Mr. Kitzi said.

Bob Webster, a spokesman for NASAA, said that he had no data from 2009 about selling away, so he couldn't say if the number of cases regulators reported last year indicated an increase or decrease of selling-away incidents.

“Investors may have been a little more ripe for those kinds of unsolicited pitches, but I doubt that many investors approached their broker specifically looking for an off-books investment opportunity,” Mr. Kitzi said. “The mistake for brokers is using products outside the firm's rules and the regulators' requirements.”

According to NASAA's 2011 survey of state securities enforcement officials, selling away ranked eighth last year on a list of the top 10 industry violations not involving fraud, with 54 reported enforcement actions against registered members of the securities industry. 

PROMISSORY NOTES

The InvestmentNews.com article goes on to say that the Securities and Exchange Commission (SEC) in February charged Thomas Keough, a broker based in Massachusetts and formerly affiliated with Raymond James Financial Services Inc., with illegally selling unregistered promissory notes for a subprime auto lender in a scheme that raised $110 million from hundreds of investors. Investors who bought the promissory notes were promised returns of 9% to 15%, according to the SEC, Mr. Keough make more than $500,000 in referral fees between 2004 and 2009, the SEC said.

Additionally,  former Woodbury Financial broker Joshua Gould was sentenced in July to 97 months in prison by a Missouri federal judge for a variety of actions, including selling unregistered securities in private businesses. Mr. Gould touted those investments as “unconventional” and bringing “an increased rate of return,” according to statements by Missouri officials.

Kelly states that the firms don't face charges from the regulators about the selling-away cases, but they do face client lawsuits in securities arbitration stemming from the brokers' alleged actions.

Securities Attorney, Lars Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you or a family member  feel you have become victims of  'selling away' by your broker-dealer, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.