by Brian Mahany
Unfortunately the financial services industry attracts fraudsters and scam artists like sh*t attracts flies. If you have money, rest assured their plenty of criminals out there who want to take it from you. Thankfully, the securities industries does a fair job of policing its own. At least those who are registered with the SEC or Financial Industry Regulatory Authority (FINRA). Some startling reports, however, reveal that those who lose their license to sell securities sometimes continue to sell investments by relying on state issued insurance licenses.
InvestmentNews Daily and the St. Petersburg Times recently ran feature stories examining stockbrokers who lost their license because of fraud but were able to continue fleecing clients by utilizing their insurance licenses.
In one instance, Neal Smallbach had his securities license suspended back in 2008. According to FINRA’s BrokerCheck system, he was let go twice by brokerage firms. According to the InvestmentNews, he left with 37 pending complaints.
What did Smallbach do? I think we all know the answer. He kept selling financial products and apparently defrauding his clients. Smallbach was recently charged with insurance fraud and organized fraud, each felonies in Florida.
Smallbach isn’t alone. In another Florida case, a stockbroker named Jeffrey Donner permanently lost his license for failing to disclose an “automatically billed 30% annual advisor’s fee!” Donner maintained an insurance sales license, however.
Florida has amended their laws to allow state regulators the ability to suspend or revoke insurance licenses if another regulatory suspends that person for fraudulent behavior. Without such laws, however, its difficult for state agencies to suspend insurance licenses if the holders bad behavior is not related to insurance.
There is also very poor communication between the various agencies. With over one hundred regulatory agencies nationwide, its hard to know what is happening in other states or jurisdictions. The industry largely relies on self-reporting – you are supposed to tell regulators if you have been charged or accused of wrongdoing. Obviously, that only works with the honest professionals.
For years we have advised everyone to verify that the professional they are dealing with is properly licensed. It takes just a few minutes to check out securities professionals with BrokerCheck and the SEC plus its on-line and free. Many states also have similar systems or a telephone number you can call for information.
Based on the recent stories of fraudsters simply using a different license, my new advice is to check everyone out both locally through the state licensing authorities and nationally through BrokerCheck and the SEC. Just because someone tells you they are licensed by the Maine Insurance Commission, for example, doesn’t mean they recently had a license pulled for securities fraud.
Today’s financial products are very complex. The lines between insurance and securities is very blurry if it even exists for many products. Trusting your money to a relative stranger requires a huge leap of faith – be very careful and don’t rely on the fact that they claim to have a license. Make sure they don’t have any skeletons in their closets before you invest a penny.
Mahany & Ertl is a full service, boutique law firm concentrating in fraud, asset recovery and tax resolution. If you are the victim of a financial fraud or bad advice from a stockbroker or insurance agent, call us. The call is confidential and free. We represent people across the United States. In many instances, cases can be handled on a contingent fee basis. For more information, contact Brian Mahany at (414) 704-6731 (direct) or at