Broker-dealers are one of the first lines of defense against money laundering and fraud. In order to disguise the true origins of their ill-gotten gains, fraudulent brokers might transfer money to shell corporations in order to make the money look like legitimate earnings. Then, the broker has easy access and can withdraw the money without raising eyebrows with the IRS. Inevitably, there will always be a few bad apples in the securities industry — representatives who have no problem stealing client funds to subsidize a lavish lifestyle or a Ponzi scheme.

Broker-dealers should have supervisory systems in place to catch transfers like these, but unfortunately for investors, these internal systems don’t always work the way they should.

Suspicious Activity Reports

When a compliance manager sees money transferred from an account to what could be a shell corporation, they should file a Suspicious Activity Report (SAR). In fact, any suspected insider abuse of a financial institution should trigger an SAR.

If a firm has a suspect in mind, they can report suspicious transactions of at least $5,000, but they can report without a suspect if the suspicious transaction is at least $25,000. They might also want to file a suspicious activity report if they notice a broker consistently makes transfers of just under $10,000 — the transaction amount that broker-dealers always report to the Treasury, even if it’s not suspicious. Crooked brokers know to keep their transfers under $10,000 to avoid regulatory scrutiny.

What Happens When Broker-Dealers Don’t Follow the Rules?

Between 2014 and 2017, an investment adviser pulled off one of the largest Ponzi schemes in Connecticut history by using shell companies to disguise his transfers of client money. As a registered broker with LPL Financial, this advisor was able to maintain the appearance of a legitimate advisor.  In order to maintain his scheme, he fabricated LPL Financial statements to make it look to investors as though their money had been invested as promised. Many of these withdraws of client funds ended up going toward the advisor’s personal expenses, or toward Ponzi-like payments to other investors who wanted to withdraw their money.

According to an SEC complaint, the advisor had investors write checks or wire funds to a bank account under the name “Insurance Trends Inc.” The advisor later claimed that this company started out as a legitimate insurance brokerage, but eventually became a shell company for his fraudulent transfers. Those transfers of client money should have led to a compliance officer at his firm filing a Suspicious Activity Report.

Many of this broker’s investors were elderly — an all-too-common factor in suspicious activity. They had the advisor’s assurances that their money would end up in safe investments. At one point, a client wanted to withdraw money, only to have their advisor tell them they should wait until the stock market improved. It was clients raising concerns about the advisor not being able to transfer their money that led to the eventual collapse of the illegal scheme. The complaint from the SEC alleges that this advisor’s activity should have raised suspicion among other brokers, who either knew or should have known what was happening with the elderly investors’ funds.

What Happens When a Firm Doesn’t Report Suspicious Activity?

Broker-dealers have a duty to supervise their registered members. It’s common for broker-dealers to have systems in place that automatically flag transactions for review, in the case of a particularly large sum of money, or for transactions that could potentially result in losses for an investor. Although the task of reviewing a vast number of transactions might seem daunting, it is possible, and responsible broker-dealers regularly flag transactions for review even when they don’t suspect fraud.

And yet time and time again, we see that financial institutions fail to make the appropriate reports, in spite of risking serious trouble with FINRA. For instance, in January 2020, FINRA imposed a fine of $400,000 after a firm consented to the findings that it had “failed to enforce its procedures, or, in certain instances, respond reasonably to red flags of potential misconduct in processing wire transfers and check requests through which thefts were perpetrated.” Two of the broker-dealers’ registered representatives, acting independently of each other, stole a total of more than $3,800,000 from four customers. In addition to the fine, the firm also had to return the money to the defrauded customers. Unsurprisingly, the firm in question has other disclosures related to their failure to supervise.

What if I Lost Money Because a Firm Failed to Prevent Fraud?

Investors should seek legal counsel if they lost money due to their firm’s negligence and failure to supervise. If you believe you lost money through fraud, contact the securities attorneys at Fitapelli Kurta for a free case consultation. Call (877) 238-4175 or email

Leave a Comment