Yesterday we posted a story about WFG Investments, a Texas based independent broker dealer that is struggling after it reported to the SEC that it faces a $650,000 penalty. We expressed our concern, then, about many indie brokerage firms and their ability to survive if faced with a large claim. Less than 24 hours, our fears were realized.
InvestmentNews reported today that Resource Horizon Group, another independent broker dealer with roughly the same amount of brokers as WFG, was hit with a $4 million arbitration award. Unfortunately, the firm reports that it only has less than $500,000 excess net capital. If it can’t immediately find the funds, it could be forced to shut down within days.
Going out of business is bad for employees, bad for other customers and bad for the victim of the stockbroker fraud loss.
Most members of the public would be shocked to know that brokerage firms need only keep $100,000 in capital on hand and are not required to carry insurance. That means the actions of a single stockbroker fraud claim could wipe out the company and leave the victim collecting just pennies on the dollar.
Business Threatened Because of a Single Bad Broker
The $4 million arbitration award stems from a former stockbroker at the firm, Robert Gist. Last year both the SEC and the Financial Industry Regulatory Authority barred Gist from the securities industry for life after the SEC found that he stole millions from dozens of his customers. He was ordered to pay $5.4 million but has not done so leaving Resource Horizons Group on the hook.
Brokerage firms are responsible for the actions of their employees. A FINRA panel found that the firm was negligent in hiring Gist and failed to supervise him. At the time of his hiring, Gist already had several black marks on his record.
How bad was Gist? BEFORE he was hired by Resource Horizons, Gist was denied a license to sell securities by Ohio because he was “not of good business repute.” He was also twice accused of stealing from a clients’ account in 1991 and 1992. His then employers paid to settle those claims.
According to InvestmentNews, Resource Horizons attorney called the award “beyond frustrating” and claimed the award of punitive damages was “inexplicable.” We disagree.
Need for Stockbroker Fraud Insurance
What is frustrating to us is the refusal of many broker dealers to purchase insurance to protect against these risks. What is unfortunate, is the real risk that Gist’s victims will not be able to collect because Resource Horizons failed to carry liability insurance. One industry person commented on the story, “The ‘supervisors’ at RHG were statutorily required to reasonably supervise this leper and they failed miserably.”
Resource Horizons may otherwise be a clean business. But by hiring a broker with a checkered past and not properly supervising him, everyone was put at risk.
Brokerage firms should be mandated to carry insurance to protect against stockbroker fraud claims. Over half the brokerage firms that sold phony TIC investments promoted by Carlton Cabot and DBSI are now out of business. Many closed their doors after just a single claim!
[Ed. Note: The victims’ claims were prosecuted by John Chapman and Jason Albin of Cleveland. They are two of the best stockbroker fraud lawyers in the industry. hats off to a well deserved victory.]
If you are the victim of a stockbroker fraud claim, seek legal help immediately. Often smaller firms are uninsured and have insufficient capital to handle multiple claims.
Need more information? Call the investment fraud lawyers at Mahany & Ertl. Most cases can be handled on a contingent or “success” fee basis. For more information, contact attorney Brian Mahany at (414) 704-6731(direct).
With some exceptions, we generally do not accept claims with less than a $200,000 loss.