LPL Financial has been fined $150,000  by Finra over allegations that it failed to stop a registered representative from using client funds as part of a Ponzi scheme.

The broker-dealer agreed to the penalty as part of a settlement with Finra.

Finra said that the unidentified rep at the center of the case caused five LPL customers to transfer more than $650,000 from their LPL accounts or annuity contracts to an entity or accounts held at a third-party custodian that belonged to the rep. The funds were then converted by a third party.

The violations occurred from September 2018 through August 2019.

Finra said it initiated the investigation after LPL filed an amended Form U5 or termination notice in August 2019 disclosing that the advisor allegedly had been associated with a Ponzi scheme in which he “moved [a customer’s individual retirement account] to a different administrator and used forged documentation to invest [the customer’s] money” in the scheme.

Finra said LPL ignored several warning signs that the representative was involved in outside business activity. First, the regulator said LPL was aware that the advisor conducted minimal business through LPL. In September 2018, the advisor had earned less than $900 in annual compensation and “had stopped working for the firm,” prompting his branch officer the next month to inform LPL that he would no longer supervise the advisor due to the low production, Finra said.

Finra said LPL informed the advisor that it would terminate his registration unless he joined a new branch office or submitted a written request to remain under home office supervision by November 2018. The advisor did neither, Finra said.

Also in October 2018, Finra said, LPL ignored the advisor’s disclosure in an annual compliance firm questionnaire that he used a social media networking website for business purposes without  LPL’s approval. The regulator said had LPL paid attention to the notice, it would have “learned that the representative identified himself on his account profile as ‘vice president, investor relations for the entity and that he failed to disclose to LPL his affiliation with an investment-related outside business activity.”

LPL also missed red flags contained in emails sent to and from the advisor’s LPL email address. Finra said from February 2019 through July 2019, LPL failed to identify that the advisor received about 40 emails to his LPL account from the social media networking website. The emails reflected that the advisor “had updated his profile to include references to work he performed on behalf of the Entity,” Finra noted.

Further, Finra said multiple emails sent beginning in February 2019 from the advisor’s LPL email account to an email address associated with the entity were missed by LPL, including one email to which the advisor attached paperwork concerning an LPL customer. “Likewise, LPL failed to identify that in February 2019, the representative received an email from an outside annuity company indicating that representative had changed his contact email address from his LPL email address to an email address associated with the entity,” Finra said.

Finra said because LPL did not take reasonable steps to investigate the advisor’s activity, he was able to have customers transfer funds to his entity. In February 2019, Finra said the advisor requested that “three LPL customers surrender variable and fixed annuities and sent the proceeds via check to the entity.” He additionally requested that LPL send the total value of one customer’s accounts held at LPL via check to the entity.

All told, a total of $650,000 of customer funds was transferred to the entity or to accounts held at a third-party custodian for which belonged to the advisor. Finra said two customers independently recovered their funds while LPL provided restitution to the other three.

“By failing to reasonably supervise the Representative, LPL violated Finra Rules 3110 and 2010.”

LPL did not respond to a request for comment.

The advisor, who resigned from LPL in August 2019, was barred by Finra in March 2021, Finra said.