Securities Lawyers Blog
As previously reported by Gana Weinstein LLP, the Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) barred broker Eric Johnson (Johnson) concerning allegations that he misappropriated more than $1,000,000 from at least six firm customers’ brokerage accounts. FINRA had also alleged that Johnson falsified the signatures of two firm employees and notarized seals on firm documents.
In a second disciplinary proceeding FINRA sanctioned RedRidge Securities, Inc. (RedRidge) and principal Brent D. Hurt (Hurt) alleging that the firm and Hurt failed to establish and enforce a supervisory system reasonably designed to detect unauthorized wire transfers.
In March 1999, Johnson became registered with RedRidge and operates out of his DBA business called HD Brent & Company (HD Brent). RedRidge terminated Johnson’s registration on September 24, 2014.
FINRA rules require that firms establish and enforce supervisory control procedures that are reasonably designed to review and monitor all transmittals of customer funds to any third party. The control procedures for third-party wire transfers must include a means or method of customer confirmation, notification, or follow-up that can be documented.
In this case FINRA found that Hurt was Johnson’s supervisor and Redridge’s CEO and CCO responsible for ensuring that the firm established, maintained, and enforced a supervisory systems. FINRA found that the firm’s supervisory system was unreasonable because it required approval by only one principal, either Hurt or Johnson for third-party wire transfers. Thus, FINRA alleged that Hurt and Johnson were both authorized to approve third party wire transfers originated by their own customers and processed by themselves. FINRA found this system was not reasonably designed to prevent fraudulent or otherwise unauthorized third-party wire transfers from customer accounts.
FINRA also alleged that the firm’s supervisory controls required the compliance officer to review third party transmittals of customer funds within 24 hours of the transmittal and to use an exception report and to initial and maintain the exception report for a period of 18 months. FINRA also found that these procedures were not reasonably because there was no control to ensure that the person responsible for reviewing and monitoring all third-party wires did not himself effect the unauthorized transfers. In this case, FINRA found that the absence of a required review of all third-party fund transmittals by both principals of the firm rendered the firm’s supervisory controls unreasonable.
Moreover, FINRA found that even these inadequate controls were not actually implemented. FINRA found that Hurt failed to systematically review all third-party fund transmittals, and the reviews that Hurt did conduct were not reasonable because he failed to review the letters of authorization associated with such wire transfers or any documents or reports that would have identified the counter party for the transfers.
Investors who have suffered losses or misappropriation of funds may be able recover their losses through arbitration. The attorneys at Gana Weinstein LLP are experienced in representing investors in cases where brokerage firms fail to supervise their representatives. Our consultations are free of charge and the firm is only compensated if you recover.