Raymond James Financial Services (RJFS) was ordered to pay a $6.9 million fine to the SEC for failing to supervise Dennis Herula, a former broker who is currently in prison after pleading guilty to federal charges of fraud.
In addition, David Lee Ullom, the manager of the RJFS branch in Cranston, R.I., where Herula was attached, was ordered to pay a civil fine of $100,000. Further, Ullom was barred from acting in a supervisory capacity for any broker/dealer for life. But after one year, he may apply to work at a b/d in a nonsupervisory capacity.
What is notable about the case is that not only did the SEC go after Herula, the rogue broker who pleaded guilty to stealing $13 million from clients in 1999 and 2000, but also RJFS’ then-president and CEO, J. Stephen Putnam. U.S. Chief Administrative Law Judge Brenda Murray fined Putnam $200,000 and suspended him for 90 days for his part in failing to supervise Herula. The SEC’s request that RJFS pay up to $31 million in fines and disgorgement was rejected by Judge Murray because, “Raymond James did not use these funds or receive any benefit from them.”
The case is significant because, in the pre-Spitzer days, RJFS might well have received a failure to supervise charge and a fine against the firm, plus a suspension for the rogue broker. This time the SEC pursued RJFS with a civil fraud charge, and even sought to bar RJFS from hiring any registered reps or opening any new branches for six months. Again, Judge Murray rejected that punishment.
“I will not apply the maximum amounts allowed” for the violations under SEC rules, Judge Murray wrote in her Sept. 15 decision, “because, except for the events at issue, the record does not show that Raymond James and Mr. Putnam have had a poor record of compliance.” She notes that RJFS had only 12 arbitration awards over the past three years cited by the SEC, which “seems low given that Raymond James had over 500,000 accounts during this period.”
In September 2004, the SEC charged RJFS with civil fraud in connection with the conduct of Herula, who worked off-site as an independent rep in Cranston. While employed there from 1999 to 2000, the rep conned six wealthy investors into pouring $44.5 million into a fraudulent venture. Herula and his wife misappropriated $8.5 million in funds for their personal benefit, while others involved in the scheme took money as well, the SEC alleged. The commission also charged RJFS with failing to properly supervise the broker and lacked an adequate system for supervising all of its 3,500 reps.
The take-away from this case is that regulatory agencies are now moving to hold higher-ups at brokerage firms personally liable when reps working for them are charged with illegal conduct. “Certainly, we’ve seen fine inflation,” says Timothy Burke, a securities lawyer with Boston’s Bingham McCutchen, who has been following the case. “But we’ve also seen the regulators impose novel forms of sanctions.” It’s part of a trend, he says, of regulators being creative, to put additional teeth into sanctions beyond the payment of fines.
One wirehouse BOM, who oversees an office and satellite branch with some three-dozen reps in the Western U.S. region, agrees with the SEC’s strategy of going after the rouge broker’s employers. “It’s not like the branch manager is asleep at the switch,” he says. “You know when there’s suspicious behavior going on,” he adds, adamantly. “The firm and branch manager are, in many ways, acting as the rep’s agent. So, the firm has culpability for its reps’ conduct.”
For more, see No More Slap on the Wrist and Raymond James Fights a Lonely Battle With the SEC.