FINRA Sanctions Signator Investors For Supervisory Failures in the Wake of Massive Investment Fraud
The Financial Industry Regulatory Authority (FINRA) fined ( Case No. 20120327824) brokerage firm Signator Investors Inc. (Signator) concerning allegations between May 2004 and March 2014 Signator failed to enforce a reasonable supervisory system, including written supervisory procedures, regarding several aspects of the firm’s practices that allowed its broker James Glover (Glover) to engage in a massive fraud involving at least 125 investors and $13.5 million in funds.
Glover’s fraud included the recommendation and sale of Colonial Tidewater Realty Income Partners (Colonial), which he co-managed. According to the offering documents for Colonial, the offering proceeds were to be used to invest in residential and commercial real estate. Many of Glover’s investors were also customers of Signator. According to FINRA, Glover failed to disclose to Signator his involvement with Colonial or receive permission to sell securities issued by Colonial (a circumstance referred to in the industry as “selling away”). Glover was assisted in his scheme by Cory Williams (Williams), another broker with Signator. According to FINRA, Glover and Williams used the Albridge system to send consolidated reports to customers' that included their Colonial investments. After Glover's termination, Signator found over 300 Albridge reports in his client files reflecting Glover's sale of Colonial.
Signator has been a FINRA member since 1968. The firm is an independent broker-dealer headquartered in Boston, Massachusetts, and conducts a general securities business with approximately 1,555 representatives across 314 branches. Gregory Mitchell (Mitchell) was associated with Signator from 1976 through June 2015. Between 2009 and 2014 Mitchell was the Agency Compliance Specialist for the Vienna, Virginia office and the Towson, Maryland office.
FINRA’s investigation related to several areas of compliance that failed and could have possibly detected Glover’s scheme. First, FINRA found that Signator’s procedures did not contain any reference to supervising consolidated reports or the use of the Albridge system. FINRA determined that Signator did not have a review process for the Albridge consolidated reports and that the lack of procedures led to confusion among supervisors responsibility for reviewing the Albridge consolidated reports. In Glover's case, FINRA found that Mitchell believed that the Albridge reports were generally approved for dissemination by Signator.
Second, Signator’s procedures for reviewing correspondence stated that the supervisor should open and review all incoming mail and faxes. However, FINRA found that Glover maintained a private fax machine provided by Signator and dedicated to his office. FINRA found that Signator and Mitchell failed to adequately supervise Glover's use of the fax machine incoming and outgoing faxes from that machine were not reviewed. In addition, FINRA found that Signator’s procedures did not require a review of the fax machines log on a regular basis or for a duplicate copy of faxed material to be sent automatically for review.
Finally, proper supervision requires that firm’s audit branches regularly to uncover potential misconduct. In this case, FINRA found that between 2009 and 2014, Mitchell’s reviews at times included having brokers send him the files to be reviewed and/or let brokers know ahead of time which files he would be reviewing. FINRA uncovered that in November 2011 the Firm's Director of Compliance for Surveillance reprimanded Mitchell for providing brokers with advance notice of which files he would be reviewing and reminded him that he should not provide such information. FINRA found that Signator explained to Mitchell one of the most important reasons for not pre-announcing reviews is because if the broker is engaging in illegal acts that activity may be discovered if the file reviews are conducted without advance notice. Despite this reprimand, FINRA found that Mitchell continued to provide brokers with advance notice of which files would be reviewed and Signator took no additional steps to monitor Mitchell's procedures or enact additional policies or procedures.
Investors who have suffered losses may be able recover their losses through securities arbitration. The investment attorneys at Gana Weinstein LLP are experienced in representing investors in cases where their broker has acted inappropriately. Our consultations are free of charge and the firm is only compensated if you recover.