LPL Financial has agreed to pay $6.5 million to settle Finra charges that the firm failed to establish and maintain a supervisory system compliant with rules concerning recordkeeping, fingerprinting and screening of non-registered people associated with the firm and consolidated reports.
Finra said it also barred James Thomas Booth, a registered representative who, because of LPL’s lack of supervision, was able to send reports containing fictitious assets to several LPL customers as part of a Ponzi scheme away from LPL.
Booth, 75, of Norwalk, Conn., was barred by Finra for converting at least $1 million of LPL customers’ funds, the self-regulatory organization said. He pleaded guilty in October to one count of securities fraud and was sentenced by Audrey Strauss, the Acting United States Attorney for the Southern District of New York, to three years in prison and was ordered to pay $4.97 million in forfeiture for running a Ponzi scheme.
In a statement in response to the Finra announcement, LPL said, “We take our compliance obligations seriously, and have been proactive in identifying, reporting and remediating these issues. We’ve made significant investments to strengthen our capabilities related to this important work.”
Finra said from January 2014 to September 2019, LPL did not have a supervisory system with written procedures reasonably designed to achieve compliance with certain of its record retention obligations. As a result, among other things, the firm was in violation of failing to retain electronic records in the required format, preserve certain electronic records, and notify FINRA prior to employing electronic storage media, Finra said.
LPL’s failure to establish a supervisory system affected at least 87 million records and led to the permanent deletion of more than 1.5 million customer communications maintained by a third-party data vendor, Finra said. Further, LPL failed to send required account notices, which included mutual fund switch letters, 36-month letters and wire transfer confirmations that were required to be preserved for at least three years, to more than one million customers.
Also, Finra said LPL’s failure to fingerprint and screen more than 7,000 non-registered associated persons from January 2014 to the present for statutory disqualification based on criminal convictions, arose from the firm’s failure to maintain a reasonable supervisory system and procedures to identify and properly screen all individuals who became associated with the firm in a non-registered capacity. Such violation led to Booth, who was subject to statutory disqualification, to remain associated with the firm from January 2017 to September 2019, Finra noted.
Additionally, Finra said LPL was not aware of, and therefore failed to reasonably supervise, certain tools that its approved third-party vendors provided to the firm’s registered representatives to create and disseminate consolidated reports. The firm also failed to review assets that were manually entered by representatives on consolidated reports when the representatives categorized them as “non-securities related,” even when the manually entered assets were evidently securities-related. Finra said Booth was able to exploit these supervisory deficiencies in perpetrating a Ponzi scheme through which he converted at least $1 million of LPL customers’ money.
According to the court record, from 2013 through 2019, Booth solicited money from clients of Booth Financial and falsely promised to invest their money in securities offered outside of their ordinary advisory and brokerage accounts. It said he directed certain of his clients to write checks or wire money to an entity named “Insurance Trends Inc.” The court said instead of investing his clients’ funds, Booth subsequently misappropriated his clients’ funds to pay his personal and business expenses. In total, he raised more than $4.9 million from approximately 40 investors.
LPL was one of several firms to settle hefty sums with Finra for failing to establish, maintain and enforce a supervisory system. Among them were Deutsche Bank Securities Inc., who was fined $2.5 million; SG Americas Securities agreed to a $1 million fine; and Worden Capital Management agreed to a $350,000 fine and a restitution of $1.25 million. The firms also were censured by Finra.
In addition to the fine, LPL also was censured by Finra and the firm agreed to conduct a comprehensive review of its recordkeeping compliance and take corrective action in all areas identified in violation of Finra’s rules.