Print

Email story

Comment

Email editor

Brokerage gets chilling message

An SEC division looking into fraud by a former broker calls for harsh penalties and says oversight at Raymond James was lax.

By HELEN HUNTLEY
Published March 31, 2005

The Securities and Exchange Commission's enforcement division says compliance with securities regulations is so lax at Raymond James Financial Services that it wants a judge to bar the company from hiring brokers and opening offices until improvements are made.

The harsh recommendation is part of a brief filed this week in a case that grew out of the theft of $16.4-million by a broker in Raymond James' Cranston, R.I., branch office.

Raymond James is accused of fraud and failure to supervise the former broker, Dennis Herula, who is in federal prison.

"Lack of oversight allowed Herula to continue defrauding investors and stealing their money," the SEC said. It said Raymond James' attitude toward compliance "is too lax and not sufficiently proactive to offer any assurances that the investing public will be protected against future fraud" by company brokers.

An administrative law judge conducted hearings in the case in Tampa in February and is expected to rule this summer. Raymond James officials said the company will not make a statement about the case before it files its response, which is due April 18.

The case has been a huge headache for Raymond James, which has paid $2.5-million to settle with one of the victims. It is highly unusual for a brokerage to be charged with fraud in a case involving a rogue broker. Usually those cases are settled without requiring a company to admit it did anything wrong.

The SEC brief says the judge should require Raymond James to hire an independent consultant to review its compliance procedures and should bar the company from hiring brokers or opening offices until the consultant's recommendations are implemented.

The brief claims the Herula case was not an isolated incident, noting that the company has been found liable in a dozen arbitration cases related to broker misconduct in the past three years.

Raymond James Financial Services is the largest of three brokerages owned by Raymond James Financial Inc. of St. Petersburg. Together they employ about 5,000 brokers. Raymond James Financial Services presents supervisory challenges because its brokers are independent contractors who mostly work in small offices.

The SEC enforcement division criticized Raymond James for relying too heavily on the Cranston office's branch manager, who benefited financially from Herula's dealings. Herula was allowed to work from a home office, which Raymond James never checked.

An audit of the Cranston branch failed to include the operating account and missed suspicious fund transfers. Even when other reports caught unusual transfers, they weren't investigated, the SEC said.

The SEC brief also calls for particularly harsh financial penalties. It says Raymond James should be held liable for all the money Herula stole, plus $1.8-million it received in interest and fees on transactions related to Herula's fraud plus as much as $16-million in penalties.

In addition, the brief says former Raymond James Financial Services president Stephen Putnam should be barred from the securities industry for an unspecified time.

Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.

[Last modified March 31, 2005, 01:27:20]