When an investment advisor's personal financial habits dig him into a hole, his firm may find itself sharing the hole with him.
In December 2000, Centaurus Financial hired Bart B. Bertholic as an independent registered representative and investment advisor. Centaurus knew about his 1991 personal bankruptcy and two unsatisfied IRS judgment liens. Some would say, No big deal … that's history. On the other hand, there's still that question mark about a rep who can't handle his own finances. Although I'm not taking sides here, Centaurus would have been well-advised to keep Bertholic on a short leash.
Between 2002 and 2005, Bertholic got himself into quite a mess. His credit card debt rose so high that he retained a credit service for about six months. What would perhaps have been of greater concern to Centaurus was Bertholic's practice of soliciting loans from Centaurus customers for investing in the advisor's own real estate ventures outside of his work with his employer. Two customers, Ivan and Hazel Sleight, redeemed an annuity in order to lend money to Bertholic. Finally, in October 2005, Bertholic commenced a widespread public advertising campaign soliciting investments in his realty ventures.
By The Way …
A bit after the fact, in August 2005, Bertholic gets around to reporting to Centaurus that he was engaged in the outside business activity of purchasing real estate, which he described as “buying real estate for my own account — 10-20 hours per month.” Unfortunately, it doesn't appear that Bertholic went into all the pesky details about borrowing from clients or his outside sales of securities related to his venture.
In 2005, Centaurus conducted four — count 'em, four — on-site inspections of Bertholic, but didn't uncover any regulatory issues. However, in January 2006, the state of Washington investigated Bertholic's real estate activities, and don't you just know that the following month, Centaurus terminated Bertholic. Ever resilient, he joined a new firm, and the Sleights, apparently unaware of his looming regulatory problems, went with him.
The Sleights' relationship with Bertholic ended in litigation. In a FINRA complaint filed in February 2010, the Sleights sought damages of at least $435,000 from Centaurus because of that firm's alleged failure to supervise Bertholic. Centaurus denied the allegations. (In the Matter of the Arbitration Between Ivan Sleight and Hazel M. Sleight, Claimants, v. Centaurus Financial, Inc., Respondent; FINRA Arbitration 10-00536, January 7, 2011.)
The FINRA arbitration panel found no proof that Centaurus notified the Sleights of its reasons for terminating Bertholic. Sure, Bertholic told the Sleights that he was leaving Centaurus, but it appears that, somehow, he just managed to omit the critical details regarding why. As such, the FINRA panel found the absence of any meaningful warning by Centaurus to the Sleights as contributing to the customers' decision to maintain an ongoing relationship with Bertholic, and thereby sustain further economic damage.
Asleep at the Switch
The FINRA panel seemed mystified by Centaurus' failure to detect Bertholic's outside activities and by the firm's relatively lax supervision of an individual with a history of personal financial difficulties. Consider the panel's admonition:
Totally lacking was any reasonable follow-up by Centaurus to ascertain the detail as to what these “real estate” activities involved, particularly when it was going to consume “10-20 hours per month.” Even the slightest inquiry at the time would have uncovered the “selling away” activities and might have nipped them in the bud.
The FINRA panel found Centaurus liable and ordered it to pay the Sleights $164,000 in compensatory damages, and $50,000 in attorneys' fees (including costs and expenses of their expert witness in the amount of $10,000). If it is not paid within 30 days, interest at the rate of 5.375 percent per year on both the awarded compensatory damages and attorneys' fees will accrue.
And then there's this kicker. Bertholic filed for personal bankruptcy in 2009, which seemed to leave both the Sleights and Centaurus without further possibility of recovery or indemnification from him.