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NASD Fines Securities America for Failure to Supervise

The NASD has fined Securities America $2.5 million for failing to supervise an advisor who allegedly lured clients into early retirement with exaggerated promises of high returns.

The victims, Exxon Corp. retirees, were offered unreasonable and exaggerated promises of high returns from reinvested funds from their company retirement plans, according to the NASD.

In addition, Securities America, which has over 1,800 independent-contractor reps, must also pay $13.8 million in restitution to 32 former Exxon employees. (Securities America is a unit of Ameriprise Financial.) In addition, the firm agreed to hire a consultant to help conduct a review of its seminar presentations, advertising and systems and procedures related to retirement planning and investment recommendations, the NASD says.

Meanwhile a judge in the Eastern District of Louisiana today denied Securities America’s motion to throw out the recent $22 million arbitration award against it back in May.

James S. Shorris, NASD Executive Vice President and Head of Enforcement, says, “In this case, Securities America’s lack of supervision resulted in Exxon employees being fraudulently induced into retiring early based upon false and misleading projections of future investment returns on their nest eggs. Together, these unsuspecting investors lost millions of dollars of life savings after following advice that benefited no one other than Securities America and its representative.”

The advisor, David L. McFadden, is being charged separately. The NASD claims McFadden held seminars aimed at long time Exxon employees between the ages of 50 and 60 in which he advised liquidation of their company 401(k) and pension plan assets for deposit into Securities America accounts. McFadden recommended and sold variable annuities, Class B or Class C mutual fund shares and exchange-traded funds (ETFs) for his program. McFadden “engaged in discretionary and in some cases unauthorized variable annuity subaccount exchanges and mutual fund switches,” the NASD says.

Philip Palaveev, a senior manager with Moss Adams, a consulting and accounting firm specializing in financial-advisory practices, says the case against Securities America is probably just an isolated incident. “The independent broker dealers have had an outstanding compliance record. They’ve maintained a really clean record, especially compared to larger firms,” he says.

The fine, Palaveev says, will not threaten the firm’s bottom line. Although he says the incident will have most independent b/ds on its toes since their average revenue is about $120 million compared to Securities America’s $350 annual revenue.

Securities America could not be reached at press time.

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