In Focus

September 4, 2006

rokerage firms that fail to supervise already should be on notice that securities regulators and attorneys representing investors will look to them for recompense."

That was the message delivered by NASD regulators a short time ago in connection with LaSalle Street Securities' failure to prevent and detect several Ponzi schemes that LaSalle Street's broker, Frank Devine, had perpetrated on customers of the firm.

That's also the message delivered recently by Massachusetts Secretary of State William Galvin, who charged three different sets of brokers and brokerage firms with fraud and failure to supervise. The first complaint alleges that Ameriprise Financial Services (formerly American Express) and its broker Shane Selewach sold fraudulent interests in a commodities hedge fund. The second complaint alleges that New England Securities (a unit of MetLife) and its broker Paul Surface wrongfully invested their clients' money in an Internet company that eventually failed. The third complaint alleges that Gateway Financial Agency Corp. and its broker Patricia Ann Palmer sold nonexistent certificates of deposit to investors.

Galvin's complaint against Ameriprise Financial Services, available online, is especially noteworthy given the high degree of both the fraud and the supervision failures. While Ameriprise did fire Selewach, its supervision was too little, too late. As Secretary Galvin describes it, "Ameriprise missed many opportunities to detect and halt Selewach's illegal acts by missing many red flags", including even failing "to have any meaningful contact with Selewach clients even after the firm learned of his scam"! Galvin makes the remarkable allegation that "almost all of Selewach's illegal activities occurred after Ameriprise placed him on heightened supervision"! Galvin concludes that Ameriprise's failure to supervise "allowed" Selewach to "victimize his clients through unsuitable investments and outright theft of their assets."

Accordingly, investors cannot assume that their brokerage firms are monitoring their brokers' activities and investments -- at least not until actions of regulators and investor attorneys' actions send a message that failure to supervise will not be tolerated.

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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.