The SEC has very stringent rules that require all broker-dealers to adopt and comply with rigid customer identification rules. These rules are intended to limit the probability that a prospective customer for the broker-dealer does in fact have sufficient assets to cover the trades that the customer wants to make.
The SEC requires broker-dealers to prevent their employees from using the brokerage communication facilities to make fraudulent trades. The SEC has just charged LPL with violating these rules.
The allegations
In April 2016, LPL opened an investment account for the individual defendant, Eugenio Garcia Jimenez, Jr. LPL opened the account without verifying conflicting information provided by Garcia. A number of employees at LPL questioned Garcia’s information and expressed concern about his beneficial ownership of the new account. Nevertheless, the new account was opened in June 2016 under Garcia’s ownership and control.
Garcia then used the new account to solicit funds from the Puerto Rican municipality of Mayaguez for alleged investments. Garcia told the city that he intended to invest $9 million of the municipality’s funds and earn 8-10% returns.
The SEC used these facts as the basis of its charge that Garcia acted as an unregistered investment adviser to misappropriate funds from Mayaguez over a seven-month period in 2016. LPL processed requests for wire transfers that Garcia used to steal the city’s money.
The settlement
LPL ultimately froze the Garcia account, but in the month before the account was frozen, Garcia managed to misappropriate an additional $3.1 million of city funds. LPL has paid more than $3.2 million, plus interest of $848,901 to settle the SEC’s claims. The SEC has also ordered LPL to pay a civil penalty of $750,000.
As demonstrated by the penalties and settlement amounts, the charges in this case are very serious. Any person or entity who faces similar charges may wish to secure the advice of an attorney who is knowledgeable about the Securities Exchange Act and the Advisors.