Raymond James Financial Services Inc. didn't supervise a broker accused of bilking customers, the SEC says.
By HELEN HUNTLEY
Published October 1, 2004
The Securities and Exchange Commission Thursday charged Raymond James Financial Services Inc. with civil fraud for failing to supervise a Rhode Island broker accused of stealing millions of dollars from clients.
The brokerage is a subsidiary of Raymond James Financial Inc. of St. Petersburg.
At the heart of the charges is a venture known as Brite Business that had an account with the brokerage's Cranston, R.I., office. The broker who handled the account, Dennis Herula, helped raise $52-million from investors in 1999 and 2000 by promising outlandish returns, such as 120 percent over three months.
Raymond James did not approve Brite Business as an investment for clients, but Herula used Raymond James stationery to solicit investors and $44.5-million of the money ended up at Raymond James.
Investors ultimately lost $15.5-million, most of which was transferred to a Raymond James account in Herula's wife's name and then to accounts outside the brokerage. The SEC says Herula and his wife stole $8.7-million for their personal benefit.
"Raymond James was aware at the highest levels that Herula was making misrepresentations to potential investors and yet failed to put a stop to Herula's activities," said Stephen Cutler, director of the SEC's enforcement division. "Brokerage firms cannot turn a blind eye to the fraudulent activities of their employees and expect to avoid the consequences."
Raymond James called the fraud charges "wholly unjustified" and said it should not be held accountable for the fraudulent actions of a client - Brite Business - assisted by a dishonest broker. Herula was fired at the end of 2000.
"Believing this to be an unwarranted expansion of a brokerage firm's responsibility, we feel we have no choice but to contest these charges," said Richard Averitt, chairman of Raymond James Financial Services.
The SEC says Raymond James failed to supervise Herula and failed to establish or to implement procedures to detect the fraud. In addition, it says the company failed to preserve e-mail communications related to the case. The charges call for administrative proceedings to determine any remedial action, which could include a fine and an order to repay money.
Raymond James received $1.78-million in margin interest and $32,000 in commissions and fees on a Treasury bill transaction Brite Business arranged to make it appear it had more assets than it did, the SEC says.
The commission also filed charges against the brokerage's former president, J. Stephen Putnam, 61, of Tarpon Springs and against the former manager of its Cranston, R.I., office. Putnam says the commission is wrong to expect personal supervision by a firm's president. Raymond James Financial Services has more than 3,700 financial advisers in 2,100 offices. His lawyer, Jerry Isenberg, said Putnam "fully complied with all of his supervisory responsibilities."
However, the SEC says Putnam knew about the correspondence on Raymond James letterhead and personally approved at least two transfers totaling millions of dollars out of the Brite Business account into Herula's wife's account. Raymond James says the president of Brite Business signed off on the transfers.
The SEC previously filed civil charges against Herula and obtained a court order two years ago requiring him to pay $19-million. Herula's legal team in the case included Mark Geragos, a lawyer now representing Scott Peterson, on trial in California for murdering his pregnant wife, Laci Peterson.
SEC officials say that after leaving Raymond James, Herula became involved in a "Prime Bank" scam that raised $40-million from investors by promising even more outlandish returns, such as 100 percent per week, through trading financial instruments. The victims included members of the Coors family, founders of Adolph Coors Co. Herula is in federal custody in Colorado awaiting trial on criminal fraud charges in that case.
