In Focus

February 19, 2007

he SEC recently barred a financial adviser, Dennis Martin, from the securities industry after he had misappropriated more than $2.5 million of customer funds.

Considering Martin had done so while employed by a large brokerage firm, Lincso/Private Ledger Corp. (LPL), the question must be asked, "How did that happen"? According to the Findings of Fact reached by the administrative law judge, the fraud was perpetrated this way. First, Martin obtained authorization, under false pretenses, from at least five customers to sell securities (specifically, variable annuities) from their accounts and to reinvest the proceeds. Second, he recommended (and the customers authorized) that the proceeds be invested in money market funds or closed-end funds, but just for a short time, before purchasing new variable annuities with higher principal amounts and higher minimum guaranteed death benefits.

Third, Martin submitted forged documents to the variable annuity companies, surrendering the contracts and directing that those companies direct the proceeds to him. Fourth, Martin forged his customer names on the checks, and deposited them into a bank account that he had opened. Finally, Martin provided at least four of his customers with false statements and confirmations reflecting fictitious investments in a closed-end fund.

Quite simply, this fraud happened because LPL's supervision system did not catch it. To be fair, that's not the first supervisory failure, and it won't be the last. Customers of financial services firms unfortunately must recognize that someone will not always be watching the store!

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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.