Allegations against broker/dealers these days have become somewhat commonplace. Still, it’s unusual for the SEC to file charges of civil fraud against a firm for the actions of one of the firm’s registered reps, which is what the SEC did when charging Raymond James Financial with fraud this past Friday.
The SEC brought fraud charges against the Tampa-based firm on Oct. 8, saying the firm—specifically former president and Chief Operating Officer J. Stephen Putnam and former branch manager David Ullom—had looked the other way when former broker Dennis Herula scammed investors of approximately $44.5 million between 1999 and 2000.
One lawyer, who declined to be identified, said he was surprised at the extent of this charge, pointing out that Lehman Brothers and SG Cowen hadn’t been charged with fraud in connection with the shenanigans of former branch manager Frank Gruttadauria, who stole $40 million from clients. Gruttadauria’s fraud wasn’t detected until he, having disappeared, left a note confessing it.
“To me, that was the worst customer screwing in years, and SG and Lehman weren’t hit with 10b and 10b-5,” the attorney said, referring to the Exchange Act’s rules that deal with preventing fraud. “That’s a big deal.”
Raymond James denies the SEC’s allegations. An RJFS official was not available for comment, but in a statement, the firm said it “respectfully disagrees with the claims made by the SEC staff in this proceeding and intends to present the matter for a full and thorough hearing.” That same statement includes a quotation from current RJFS Chairman and Chief Executive Officer Dick Averitt, who said: “As to the charge of fraud against RJFS, we believe it is wholly unjustified.”
Averitt’s statement suggests that the firm spent months cooperating with the SEC, but that “there was never any suggestion by them of a claim of fraud until after we advised them of our unwillingness to settle the initial allegations of inadequate supervision.”
Herula, the accused former RJFS rep, was, apparently, a real piece of work: The SEC accuses him of promising clients big profits with “no risk,” ultimately transferring $16.5 million of funds raised into his wife’s RJFS account. Herula and others, including his wife, Mary Lee Capalbo, and Charles Sullivan, a former New England Patriots official, were soliciting investors for a venture known as Brite Business, which no longer exists. Herula managed to raise $44.5 million, fraudulently, the SEC says, and deposited the sum in a Brite Business brokerage account at Raymond James. The SEC charged them with civil fraud in 2002. After a restriction was placed on the account by former RJFS head Putnam, Herula set up an account for his wife and transferred funds into that account, according to the SEC order.
The SEC charges that while the branch manager and firm had knowledge in mid-2000 of Herula’s dealings, they didn’t fire him until December 2000. “In your typical case, you have someone who’s stealing money without anybody knowing about it,” says a source with the SEC. “Here, he’s dealing with Raymond James and Putnam, along with the branch manager. They had concerns about the suspicious nature of activities. They saw Herula sending correspondence on behalf of the firm and didn’t take steps to stop scheme.”
New York-based attorney Jacob Zamansky, who frequently represents investor claims, agreed that a charge of fraud was indeed unusual, but said the SEC’s efforts are to be applauded. “The only way to deter fraud is by having good supervisors who are concerned about their own records and being charged with supervision,” he said.
The SEC’s action is interesting too because it is filing the suit in civil court, which could leave RJFS open for class-action lawsuits. A torrent of those could put the firm in a precarious financial situation. Some say the SEC is putting the screws to Raymond James because they wouldn’t settle the case from the get-go like other firms have, such as T.D. Waterhouse did last month. “They could have a bigger mess on their hands now than if they had just said, ‘Yeah, we’re sorry, we [screwed] up,’” says one securities lawyer. “This opens them up to some big trouble down the line.”
Ullom’s attorney, Willis Riccio of Adler Pollack and Sheehan, based in Providence, R.I., said his client will ultimately be proven to have notified his supervisors of Herula’s problems. He said, however, that charging RJFS with fraud was pushing it. “That’s a real stretch,” he said. “Taking failure to supervise and translating into fraud, well, that’s like calling them aiders and abettors—if the world comes to that, you might as well close up your doors.”