The Financial Industry Regulatory Authority has barred former Georgia-based LPL broker Eric Hollifield, after the registered representative failed to cooperate or provide information to the regulator as it investigated a client allegation that Hollifield stole more than $1 million.

Finra said it launched an investigation into Hollifield, who was a registered rep of LPL Financial and subsequently Hamilton Investment Counsel, in connection with an arbitration claim filed by an elderly client who alleges Hollifield misappropriated $1,240,000.

LPL terminated Hollifield on September 10 for “failing to disclose an outside business activity.”  On September 1, 2021, Hamilton Investment Counsel followed LPL’s lead and terminated Hollifield for the same reason.

Since Hollifield failed to respond to Finra’s request for information, which is required by Finra Rule 8210, Hollifield was hit with a lifetime bar from the securities industry.  

“Brokers agree to these lifetime bans, instead of cooperating with an investigation, for any number of reasons,” said  Joe Wojciechowski, a veteran investor advocate attorney with Stoltmann Law Offices, in an interview with Financial Advisor.  

“Given Finra’s ongoing investigation into the allegations made in the pending customer complaint and the terminations from LPL and Hamilton, a reasonable conclusion to draw is Hollifield chose to accept a lifetime ban from Finra as opposed to disclosing or admitting information to Finra that could be used against him by criminal authorities,” Wojciechowski said.  

He noted that facts in the customer complaint and the information contained in the Finra filing are mere allegations and nothing has been proved.

Hollifield could not be reached for comment.

LPL did not immediately respond to a request for comment.

Wojciechowski said that BrokerCheck, an online tool investors can use to check the disciplinary history of reps and their firms, becomes less meaningful for investors if firms use opaque or inside baseball terms like “failing to disclose an outside business activity” to describe the reason reps are terminated.

“Most investors won’t know what the term means, and firms don’t put any other details in [U5 termination forms], although in my experience reps often use an outside business to run a Ponzi scheme or commit fraud,” said Wojciechowski, who has represented investors for 16 years.

Meantime, more firms are being vague in U5 terminations because “they don’t want to get sued by reps for defamation,” said Wojciechowski. “There is a cottage industry that has sprung up to sue broker-dealers for what they put in U5s. And firms also don’t want to put something on there to alert guys like me or other clients. But lay people don’t know what that term means.”

While defense attorneys for broker-dealers that are brought to arbitration for such claims will often ask how they were supposed to know what a rep was doing in his or her outside business, three Finra rules require firms to supervise their reps to discern such activity.

For instance, Finra Rule 3110 requires a firm to establish and maintain a system to supervise the activities of its associated persons that is reasonably designed to achieve compliance with the applicable securities laws, regulations and Finra rules.

Generally, in many “outside business activity” cases, “there is sufficient evidence that the firm should know what outside activities a rep is engaged in. I always ask, when was the last time you had a compliance rep show up at this guy’s office? There are always red flags. A rep doesn’t just wake up in the morning and create a fraud scheme,” Wojciechowski said.

Firms also have internal compliance and supervisory policies and procedures that are geared toward detecting undisclosed outside business activities “because it is commonly through these outside businesses that financial advisors execute their worst schemes on their clients,” he added.