LPL Financial has agreed to a $3 million fine by the Financial Industry Regulatory Authority for failing to adequately supervise two reps accused of funneling $2.4 million from 13 customers into outside accounts.
The two unnamed representatives did not know each other, according to Finra, and the “conversions” took place from May 2018 to August 2020, according to a letter of acceptance, waiver and consent published yesterday on Finra’s website.
In a related investigation, Finra also found that LPL failed to create a reasonable system for detecting signature forgery or falsification between January 2018 and January 2022, and that at least 50 LPL reps electronically signed some other person’s name on more than 1,000 LPL documents.
The investigation originally began when LPL notified the agency that it had terminated a registered rep for misappropriating a customer’s money. Finra’s investigation into the transfers prompted further inquiry, and the regulator discovered that the rep had moved client money to his account in part by using an electronic forgery on a wire transfer request.
Once Finra noted the forgery, LPL continued with its investigation and discovered that many reps had also forged a signature on one document or another. It reported the systemic failing to Finra.
Besides the $3 million fine, LPL has also agreed in the letter to a censure and to make restitution to two clients in the amount of $100,000 plus interest. It will also try to locate other customers who might have been affected, the letter said, as well as to implement an acceptable supervisory system.
“LPL takes its compliance obligations seriously and has made investments to address the underlying issues related to this matter," an LPL spokesperson said. "The firm fully cooperated with regulators to resolve and remediate this matter."
From May 2018 to May 2019, Finra said one of the reps accused of misappropriating money took funds from nine customers, five of whom were senior citizens. He persuaded them to issue checks from their brokerage accounts payable to an entity that the rep did not disclose was his own account. The checks totaled $550,000, and the rep used the money to pay his own personal and business expenses, the letter said, adding he was barred in July 2019.
While Finra did not name the rep, according to BrokerCheck, the agency barred LPL representative James T. Booth in July 2019 for diverting more than $1 million of customer funds to his own accounts. At the time, Booth was 75 and a resident of Norwalk, Conn. He pleaded guilty in October 2020 to a count of securities fraud in federal court, was sentenced to three years in prison and made to pay $4.97 million in forfeiture. Separately, LPL agreed to pay $6.5 million for failing to adequately comply with rule of recordkeeping, fingerprinting and screening non-registered people associated with the firm.
In August 2020, a different rep took money from four customers, three of whom were seniors, totaling $675,000. That same month, he forged the electronic signature of a fifth customer on a wire transfer, diverting $1.2 million from her account to a law firm in connection with the rep’s purchase of some real estate, the letter said, adding he was barred in October 2021.
According to BrokerCheck, Finra barred LPL representative Eric Shea Hollifield in October 2021 for refusing to cooperate in an investigation into an alleged theft of money from an elderly customer. In July 2022, the Securities and Exchange Commission sued Hollifield, who was 49 and a resident of Winder, Ga., for misappropriating more than $1.7 million from at least three clients and using the proceeds to buy a house.
According to Finra’s letter yesterday, most of the affected customers have already been identified and made whole.
In both cases, the systems that were supposed to flag potential issues were inadequate, Finra said.
“Among other things, the firm used an automated tool to identify checks issued from customer accounts that were payable to registered representatives or entities associated with representatives,” the letter said. “However, until August 2019, the tool was programmed to only review the second line of the check recipient’s address. Checks would not be flagged if the address associated with a representative came below the second line, which was the case when checks were mailed to a representative’s business address and the payee and the representative’s business name occupied the first two lines.”
For that reason, the checks that were sent to the first rep’s business address contained the address on the fourth line and, as a result, were not identified by the firm’s automated tool.
In addition, there was no system at all to flag episodes when unrelated customers were suddenly sending checks or wires to a common payee, Finra said.