Written by The White Law Group• October 18, 2023• 2:43 pm• Securities Fraud Articles

Broker Embezzlement

Be Aware of Broker Embezzlement

Broker embezzlement is a significant problem that presents itself within the financial industry. These fraudulent behaviors have potentially devastating consequences for investors and financial institutions alike. Understanding the dynamics of broker embezzlement, and the steps of how individuals can protect themselves while mitigating risks is imperative to ensuring investor confidence.

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What is Broker Embezzlement?

Broker embezzlement is defined as misappropriation of funds or assets entrusted to a financial broker for investment purposes. This form of misconduct occurs when brokers, who are entrusted with managing clients’ portfolios and making investment decisions on their behalf, engage in fraudulent activities to divert funds for personal gain. This white-collar crime is a breach of the fiduciary responsibilities and can include diverting funds to accounts that appear to be authorized to receive payments or transfers.

Embezzling funds can be as minor as a store clerk snagging a few dollars from a cash register. However, on a broader scale, embezzlement also occurs when the executives, or brokers of large companies falsely expense millions of dollars, transferring the funds into personal accounts. Depending on the scale of the crime, embezzlement has the potential to end in severe fines, or even jail time.

There are many different types of embezzlement that could be combined with other forms of fraud, such as Ponzi schemes. The most famous ponzi scheme crook in history was Bernie Madoff, and his orchestration of siphoning almost $65 million from investors. Madoff was sentenced to 150 years in federal prison. In such cases, the embezzler scams investors to entrust them with their assets to invest on their behalf, but instead utilize the funds for personal gain and enrichment. Maintaining the fraud often includes seeking out new investors to bring in more money to appease prior investors.

Broker Embezzlement Statistics

According to the Financial Industry Regulatory Authority (FINRA), in 2022 there were 11,180 complaints filed from investors. Along with complaints filed, there was a total of $54.5 million in fines distributed, and $26.2 million distributed in restitution. Firms and individuals that commit fraudulent crimes can get “Barred” by FINRA meaning that they’re permanently prohibited from association with any member in any capacity. According to the FINRA statistics in 2022, there were 227 individuals who were barred from the financial industry, 328 individuals received a suspension, and a total of 7 firms were expelled as well.

Broker Embezzlement in the News

In June of 2023, financial advisor Patrick Thayer of Lebanon, Ohio, reportedly pled guilty to fraud charges in connection to the theft of over $1.31 million from a woman’s investment proceeds, according to the Warren County, Ohio Prosecutor’s Office. According to reports, Thayer, 47 pled guilty to charges of securities fraud, aggravated theft and identity fraud. Thayer operated a tax preparation service and allegedly opened an account in a client’s name where he obtained full account control. These actions occurred without the client’s permission. Thayer transferred funds from this client account and utilized these funds to pay personal expenses, including his mortgage. According to the SEC report, Thayer’s fraud scheme went on for nearly a decade, in total misappropriating over $1.3 million.

On December 8th of 2022, Gautam Arora was reportedly arrested for fraud. After a thorough investigation by the state’s Department of Insurance, it was discovered that he allegedly sold $100,000 of fraudulent investments to four victims. Arora was scheming a multilevel marketing agency (MLM), and persuading individuals to buy into fictitious investments. The Department of Insurance alleged that Arora had overdrawn bank accounts, had high credit card debt, and stated that the victims were led to believe that their investments were “legitimate.” Further, according to his FINRA BrokerCheck report, Arora was reportedly registered with Transamerica Financial Advisors in Orange, CA from 2013 until 2019, when he was allegedly fired for “selling away” from the firm. Arora’s bail was set at $100,500, and was booked into the Orange County Jail.

Further, a financial advisor from New Jersey, allegedly stole $529,870 from his clients. Former financial advisor, Mario Rivero Jr., is facing charges after he allegedly defrauded advisory clients. According to the allegations, Rivero’s clients entrusted him to invest their money, but instead he purportedly kept the money for himself. Rivero was reportedly arrested, and is facing charges consisting of two counts of wire fraud, one count of investment advisor fraud. He could face up to 20 years in prison and a $250,000 fine, or twice the gross gain or loss from the alleged offense.

Broker Faces Twenty Year Prison Sentence

According to a press announcement on September 8, 2022, financial advisor James Kenneth Couture, 42, of Sutton, Mass reportedly pleaded guilty to four counts of wire fraud, four counts of aggravated identity theft, one count of investment adviser fraud and one count of witness tampering. In June 2016, Couture purportedly liquidated one client’s variable annuities to fund withdrawals by another client. Reportedly, Couture was initially charged with the fraudulent scheme in June 2021, after he allegedly had involvement in witness tampering by creating fake documents. Couture was then charged with witness tampering on Jan. 14, 2022. The advisor faces up to 20 years in prison, three years of supervised release and fines of more than $250,000 for the various charges.

According to a litigation release, the Securities and Exchange Commission has filed charges against the estate of Stephen Romney Swensen, a former registered investment advisor. Swensen allegedly operated a fraudulent investment offering from 2011 until 2022 that raised over $29 million from more than 50 investors. His scheme consisted of persuading victims to invest in Crew Capital Group, LLC, however Swensen did not invest in any securities, according to the agency. Swensen reportedly stole all investor funds to make Ponzi payments to other investors and to finance his luxury lifestyle including real estate, vehicles and multiple private aircrafts. The SEC seeks a permanent injunction against Crew Capital, and disgorgement with prejudgment interest from Swensen’s estate and Crew Capital.

Consequences of Broker Embezzlement

When individuals engage in fraudulent activities such as embezzling funds, they put themselves at an increased risk for severe penalties. As a felony crime, embezzlement is subject to harsh punishment including jail time. People go to jail for misappropriation of funds every day. Under federal law, a person convicted for embezzlement can receive up to 20 years in federal prison and $50,000 in fines.

Investors: Investors who fall victim to broker fraud suffer financial losses that may not be recoverable. This can result in a loss of trust in the financial industry and reluctance to invest in the future. All investors have the right to protection against fraud. Investors should keep a vigilant eye and report suspicious behaviors to appropriate authorities.

Financial Institutions: Institutions that employ the rogue broker may face reputational damage, regulatory scrutiny, and potential legal liability. They may also be required to compensate affected investors. Regulatory bodies such as the Securities and Exchange Commission (SEC) may impose fines and sanctions on financial institutions involved in embezzlement cases. This can lead to increased regulatory scrutiny across the industry. See: FINRA BrokerCheck to Flag “Restricted Firms”

Criminal Charges: Brokers involved in embezzlement can face criminal charges, including theft, fraud, and conspiracy, depending on the nature and scale of their actions. Not only can a person charged with embezzlement have civil and criminal consequences, but embezzlement stays on your record indefinitely. Unless expunged, embezzlement stays on a broker’s record and will show up on a background check until and unless expunged. Even after ten years, embezzlement can show up on a background check (depending on the type of background check).

Be Aware of Cyber Fraud

Something to be aware of when researching investment opportunities are impersonation scams. Although not a novel occurrence, these fraud schemes continually evolve with fresh variations emerging regularly. In a report published in February 2021, FINRA noted a rise in cyber-related incidents, notably involving scammers fabricating websites that falsely represent real industry professionals, who are entirely unrelated to these counterfeit sites, by using their names and professional information. More recently, the FBI and the Securities and Exchange Commission have cautioned investors regarding this issue.

Individuals engaging in fraudulent broker imposter websites leverage the identity and publicly accessible particulars of a registered investment professional, using this data to establish deceptive websites. Subsequently, these wrongdoers make phone calls and direct potential clients to these counterfeit sites. Their primary objective appears to be emulating a legitimate website in order to illicitly obtain personal information or login credentials from existing or prospective clients.

Investors are advised to be vigilant for common indicators of deception, such as grammatical errors, misspellings, awkward phrasings, or the misuse of investor terminology. Furthermore, investors should exercise caution when encountering websites that employ the registered representative’s name as the domain name (e.g., firstnamemiddlenamelastname.com).

How Can Investors Protect Themselves?

To mitigate the risk of broker embezzlement, financial institutions and investors can implement several preventive measures to avoid these financial devastations. Remember that while these precautions can reduce your risk, no strategy can provide absolute protection against broker embezzlement or financial fraud. Being vigilant, informed, and proactive in managing your investments is key to safeguarding your assets in the financial market.

Enhanced Due Diligence: Conducting thorough background checks and exercising due diligence when hiring brokers or financial advisors gives companies or investors a better understanding of the candidates character and their views on ethical practices. Verifying credentials and employment history is a smart decision as well. Searching their history on sources such as FINRA BrokerCheck is also a useful tool as it provides a more in depth analysis of a broker’s history. This information can help to determine whether they’re the right choice for your firm as an employee or as a financial advisor.

Choose Reputable Brokerage Firms: Research and select well-established, reputable brokerage firms with a track record of integrity and regulatory compliance. Look for firms that are members of relevant regulatory bodies, such as the Securities and Exchange Commission (SEC), or the Financial Industry Regulatory Authority (FINRA).

Review Disclosures and Agreements: Carefully review all account agreements, disclosure documents, and contracts before signing. Pay attention to fee structures, withdrawal policies, and any clauses related to the broker’s authority over your assets. It’s also important to monitor your accounts regularly to ensure that your funds are proceeding in a positive manner, and not being manipulated by your broker.

Set Clear Investment Objectives: Clearly communicate your investment objectives and risk tolerance to your broker. Ensure they understand your financial goals, and don’t hesitate to ask questions if something seems unclear or inconsistent with your objectives.

Diversify Your Portfolio: Diversifying your investments across different asset classes and industries is a preventative measure as well. Diversification can help reduce the impact of potential losses caused by the misconduct of a single broker or investment. Through this process, investors are also able to achieve the proper balance between growth and risk for their financial situation.

FINRA Arbitration

FINRA Arbitration stands as a formal alternative to traditional litigation, wherein two or more parties opt for a neutral arbitrator to settle their disputes. It bears a resemblance to a court proceeding but often proves swifter, more cost-effective, and less intricate than conventional litigation. This process operates under its unique set of rules, encompassing guidelines regarding timeframes, the disclosure of evidence, and the identification of witnesses.

It was found in a study that consumers were more likely to win in arbitration (almost 42 percent) than in court (about 29 percent). Additional benefits of arbitration is how on average, consumers won more money through arbitration (almost $80,000) than in court (about $71,000) Further, arbitrations on average were resolved faster (321 days) than litigation (439 days).

Do I need a Securities Fraud Attorney?

If you’ve experienced financial losses in your investments or if you’re a broker seeking legal representation, we encourage you to contact the FINRA arbitration lawyers at The White Law Group. Our firm’s representatives will conduct an initial intake call with you to assess the viability of your claim. Following this assessment, our attorneys will carefully evaluate your case and, if appropriate, proceed accordingly.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to the representation of investors in FINRA arbitration claims against brokerage firms throughout the United States.