The thing about financial fraud is that it often victimizes more than the man or woman whose pockets have been picked. The con artist often harms multiple parties other than the apparent victim: an employer, a business, those responsible for seemingly failed supervision. The fall-out of fraud may also negatively impact a business' reputation or engender a loss of confidence in a once-respected supervisor. In a recent Complaint involving allegations of fraud by an Investment Advisor Representative, we are at that stage where there are far more questions than answers. The allegations may be explained away in coming months. The adviser may not have done anything wrong. The client may come forward and fill in some blanks and what looks bad may look good. Not likely, to my veteran lawyer's eye but, hey, life and Wall Street are full of surprises.
Case In Point
Pursuant to a civil Complaint filed by the Securities and Exchange Commission ("SEC") in the United States District Court for the Northern District of Illinois ("NDIL"), the federal regulator is seeking a permanent injunction; disgorgement and other equitable relief; and a civil monetary penalty against William P. Carlson, Jr., 53, who at the time of his termination by his last registered investment adviser employer had serviced about 70 clients. SEC, Plaintiff, v. William P. Carlson, Jr., Defendant (Complaint, NDIL, 17-CV-1328 / February 21, 2017). As set forth in the introductory "Nature of the Action":
1. From at least November 2012 through December 2016, Defendant Carlson, while associated with an SEC-registered investment adviser ("Advisory Firm A"), misappropriated more than $900,000 from one of his clients by fabricating client account withdrawal requests and forging his client's signature on authorization forms and checks.
2. In the first few years, Carlson carried out his misappropriation scheme by directing that checks made payable to the client be issued from the client's brokerage account; arranging for overnight delivery of the checks to the client's residence; intercepting the checks upon delivery based on package tracking information; and then forging the client's endorsement of the checks to Carlson. There were at least 16 such unauthorized transactions totaling at least $437,000.
3. In subsequent years, Carlson misappropriated funds from the client's brokerage account by forging the client's signature on authorization forms that allowed Carlson to cause a series of checks to be issued to a third-party-a friend of Carlson's-who deposited the checks into one of his own accounts and then gave the proceeds to Carlson. There were at least 25 such unauthorized transactions totaling at least $474,000.
4. In submitting these fraudulent check requests, Carlson repeatedly caused securities held by the client to be sold and the cash diverted for Carlson's own personal use and benefit.
5. In order to conceal and continue his scheme, Carlson sent false account statements to the client on several occasions.
6. After the five-year span of misappropriation, Carlson had depleted most of the assets entrusted to him by this client.
7. Through the activities alleged in this Complaint, Carlson engaged in fraudulent or deceptive conduct in connection with the purchase or sale of securities, in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
8. Through the activities alleged in this Complaint, Carlson also engaged in fraudulent or deceptive conduct with respect to one or more investment advisory clients, in violation of Sections 206(1) and (2) of the Investment Advisers Act of 1940 ("Advisers Act") [15 U.S.C. §§ 80b-6(1) and 80b-6(2)]. In the alternative, Carlson aided and abetted violations of Sections 206(1) and (2) of the Advisers Act by Advisory Firm A . . .
NOTE: A Complaint merely contains allegations against a Defendant, who is presumed innocent unless and until convicted by a preponderance of the evidence in a court of law.
As is often the penchant of many Wall Street regulatory Complaints, the name of Carlson's employer during the relevant times is shrouded with mystery behind the opaque reference of "Advisory Firm A." Okay, sure, I understand the need to protect the innocent and all that but, c'mon, it's not that difficult to pull up any registered person's online history and find out when they first entered the biz, where they've worked, and all the other disclosure items mandated by federal and state law and by self-regulatory-organizations. Instead of full disclosure, however, far too many regulatory documents come off as a game of hide-and-seek.
Also, did you notice that portion of Paragraph 8 above where it says that "Carlson aided and abetted violations" by Advisory Firm A? Read an re-read the Complaint and see if you can find a reference or a footnote to the alleged violations by Advisory Firm A that were aided and abetted by Carlson -- and then ask yourself why this Complaint doesn't disclose that unnamed firm's name.
The SEC's online Investment Adviser Public Disclosure ("IAPD") database as of February 22, 2017, discloses that Carlson is not currently registered as an Investment Adviser Representative ("IAR"). Under the IAPD database heading "PREVIOUSLY REGISTERED WITH THE FOLLOWING INVESTMENT ADVISER FIRMS," we are with this information:
Ehlert Financial Group, Inc. (August 31, 2015 - February 6, 2017)
Forum Financial Management, LP (June 23, 2010 - February 6, 2017)
MPM Wealth Advisors, Inc. (April 22, 2005 - June 24, 2015)
NFP Securities, Inc.(September 23, 2004 - April 5, 2005)
Fisher Investments, Inc. (June 7, 1998 - September 29, 2004)
Frankly, I can't definitively point my figure to which of the above five firms are Advisory Firm A. I can eliminate Fisher and NFP because the alleged misconduct by Carlson took place from 2012 to 2016, and he was not registered with either of those firm during that time. Similarly, although Carlson was with MPM for some of that period, he was gone by mid-June 2015, so let's eliminate that contender also. Which leaves us to figure out whether Ehlert or Forum is Advisory Firm A. Further, Paragraph 18 of the Complaint asserts that Carlson:
was an investment adviser
representative associated with Advisory Firm A (headquartered in this district) from 2010 until
he was terminated on February 6, 2017, for the conduct described herein.
Since, Carlson didn't arrive at Ehlert until late 2015, I'm guessing that it's not that firm.Simply by process of elimination, we're left with Forum Financial as the possible candidate for Advisory Firm A but that process of elimination may be flawed and the conclusion baseless. Frankly, that uncertainty is not fair to whichever firms are not under suspicion as asserted in the Complaint. Why not simply say the name in the Complaint?
The SEC's online IAPD report further discloses under the heading "Termination" that on February 6, 2017, Carlson was "Discharged" by both:
Ehlert Financial Group for alleged "Breach of Fiduciary Duty"
Forum Financial Management, LP for "Breach of Fiduciary Duty - Mishandling of Client Funds"
Finally, Carlson's online IAPD report discloses under the heading "Regulatory Event" that in 1994, without admitting or denying the allegations, Carlson entered into a Cease-And-Desist and paid a $187.50 administrative fine pursuant to a settlement with the Florida Department of Banking and Finance pertaining to allegations that he sold securities as an unregistered agent.
Separate and distinct from the SEC's IAPD online database, we have the Financial Industry Regulatory Authority's ("FINRA's") online BrokerCheck database as of February 22, 2017, that discloses, among other items, that Carlson was first registered in 1988, and was last employed by a FINRA member firm from September 2004 to April 2005.
The victimized client highlighted above was a 63-year-old for whom Carlson managed an individual and an IRA account, both of which were opened in 2010 and primarily invested in mutual funds. The Complaint offers some intriguing insight into how the alleged fraud was pulled off without detection:
24. At Carlson's direction, Advisory Firm A staff arranged for Broker-Dealer A to send these checks by overnight delivery to the client's residence and to provide Advisory Firm A with tracking numbers for the shipments. Carlson selected delivery dates and times when he understood the client would not be home. Carlson monitored the progress of the shipments, based on the tracking numbers provided by Broker-Dealer A, and then retrieved the packages from the client's residence. Carlson then forged the client's endorsement on these checks and deposited the checks into his own account.
25. In approximately June 2014, Carlson changed his method of making unauthorized withdrawals from the client's account. At or about this time, Carlson began forging the client's signature on "Check and Journal Request" forms that directed Broker-Dealer A to make disbursements of funds held in the client's account to a third party who was a friend of Carlson's.
26. In March 2015, Carlson forged the client's signature on a standing letter of authorization and a notarized signature sample letter permitting Broker-Dealer A to issue checks from the client's account to Carlson's same friend, without the need for further check and journal requests that required additional client signatures.
Bill Singer's Comment
For a period of over four years, Carlson allegedly stole just shy of $1 million from a client by the relatively uninspired but highly effective use of phony withdrawal requests and old-school forgeries, coupled with the intercept of overnight deliveries. In the end, for all Carlson's subterfuge, he seems to have been caught stealing.
As droll a bit of fraud as is set forth in the Complaint, you sort of have to wonder what, if any, in-house compliance was watching over Advisory Firm A's clients.
Did anyone notice that 41 checks had depleted the account by $474,000?
Did anyone telephone the client just to say "hi" and see how things were going and, hey, while I got ya on the phone, I was wondering about all those checks . . .
This case is an alert, a warning, a head's up. Log on to your online bank/brokerage/advisory accounts and verify, even if only once a quarter, that what's being sent to you via snail mail is what's showing up on the screen. Also, for godsakes, read your confirms, your monthly statements, and your annual tax documents. Don't leave them sitting around in unopened envelopes. Don't trust your stockbroker, adviser, or your son-in-law to help you figure out what's on the pages. If you can't understand something as basic as a monthly statement, then maybe you need to reconsider how you're investing.
I'm still trying to figure out how the alleged 63-year-old victim never caught on to four years of allegedly ongoing thievery. A simple and likely explanation is that the victimized client never knew about the checks because of the alleged steps Carlson took to cover-up his fraud. Which turns the uncomfortable spotlight back on the firm's compliance staff and makes you wonder how the extended flurry of asset depletion didn't come up on an exception run or fall under some supervisor's scrutiny.