The Massachusetts Securities Division has filed a complaint against Charles Schwab & Co. for allowing an unregistered advisor to receive investment fees from accounts at the firm.
The state said Schwab engaged in unethical and deceptive practices by allowing James Patrick O’Connell, a former investment advisor using the company’s services, to give investment advice while not registered in Massachusetts and to make investment recommendations unsuited to his clients. O’Connell, the state said, overconcentrated client accounts in one sector and told clients to sell real estate and invest proceeds with him. The division also said O’Connell made false statements to the division in the course of the investigation about not continuing to receive fees for advice.
The division said it began its inquiry because of a complaint that O’Connell was possibly exploiting elderly clients.
“The division’s subsequent investigation revealed numerous regulatory violations by Charles Schwab & Co., including a complete blind spot in Schwab’s compliance practices regarding payments to unregistered individuals for purported advisory services,” the complaint said. O’Connell was registered as an investment advisor from 2007 to 2010 and again from 2013 to 2014, according to the complaint.
Schwab served as a custodian for O’Connell’s client accounts during those periods but also “continued to allow O’Connell to receive payment of his investment advisory fees even while operating in an unregistered capacity and after Schwab removed him from its platform,” the complaint said. Schwab acknowledged in internal emails the risk of letting O’Connell continue to take fees, the securities division said, but nonetheless failed to monitor his accounts.
“Even after 2014, when O’Connell’s registration as an investment advisor representative expired for the second time, Schwab continued to facilitate payments by former clients to O’Connell,” the complaint said. From 2015, he continued to collect investment advisory fees by check and received at least $46,000, with funds from two Schwab brokerage accounts, the securities division said.
O’Connell was the sole rep at JP O’Connell Financial LLP, whose principal place of business was Massachusetts, the securities division said. The state said O’Connell failed to renew his registrations after December 2010 and again after December 2014. The division staff said they spoke with him in 2015, at which point he said he had retired. But from June 2017 to April 2021, he deposited checks totaling $125,000 from seven clients, most of the checks indicating they were for monthly fees. In some client communications, the division said, he indicated it was too expensive to stay registered for just a small handful of clients.
He continued to give advice while he was unregistered, the complaint says, and his average client’s age was 77. One client, it says, had just sold their house in 2000 to purchase a condominium, but O’Connell recommended using the proceeds of the sale to invest with him and take a 30-year variable interest rate mortgage out on the condo. O’Connell also recommended stocks that would overconcentrate his clients in the communication infrastructure sector, the securities division said, in names including Corning Inc., Ribbon Communications, Advanced Micro Devices and Qorvo.
According to emails, seven people, including two Massachusetts residents, had 100% of their noncash or cash equivalent holdings at Schwab in these four stocks, and an eighth had 95%. Though the holdings remained the same from January 2014 to April 2020, the division said, O’Connell collected a 1% monthly advisory fee. He said he was no longer taking fees for advice, but the division said the email trail told a different story.
The division is asking O’Connell and Schwab to cease and desist from further conduct and wants to reimburse Massachusetts clients for all fees paid in connection with the activity. The division also wants Schwab to use an independent compliance consultant to look over written and established policies related to payments made from Schwab customer accounts.
O’Connell did not return a call seeking comment.