“Selling away” occurs when a securities broker buys, solicits, or sells securities that were not approved by the broker’s affiliated firm or recorded on the firm’s books and records. Selling away is prohibited under the rules of the Financial Industry Regulatory Authority (FINRA), particularly FINRA Rule 3040, as well as other securities laws. The most common securities sold away from brokerage firms are fraudulent investments, private placements and promissory notes.
From the broker-dealer’s perspective, selling away cases are often the most frustrating because they are usually cut out of the commission on sold away investments and still exposed to liability as if the firm sold the investment.
Most often, the investor is never aware that the broker is acting outside of normal securities channels. In many cases, the broker will create false account statements or confirmations. In other cases, the broker will have the investor open a self-directed account that will provide custodial services for the investments. The self-directed account helps the broker cloak the illegitimacy of the investment by having a third-party prepare statements and distribute income payments. However, these account statements can also be misleading because the broker has complete discretion to stop paying the investor.
A broker who engages in substantial selling away activities may move from firm to firm as needed to minimize questions and protect his illegal business activities. The investor does not learn that the broker’s activities were wrongful until the investment scheme is publicized or the broker stops returning their calls. The brokerage firm’s typical response to their employees selling away is to claim ignorance. However, under FINRA Rule 3010, firms have an obligation to supervise their employees.
Yet, too often, the brokerage firm’s only supervision over the broker’s outside business activities consists of documentation completed by the broker without independent verification. Also common are pre-announced visits to the broker’s office that allow the broker to clean up any signs of wrongdoing before inspection. In more egregious cases, the firm ignores red flags such as customers moving large amounts of assets away from the firm, checks to unknown companies, customer complaints concerning the investments sold away, or the broker’s prior termination for selling away.
Even if the broker is caught, a brokerage firm may allow the broker to resign without alerting FINRA or other regulators that the broker has violated securities laws. This violates FINRA rules, which require brokerage firms to disclose the reason for termination if the termination was a result of suspicion of violating the securities laws. Worse still, the brokerage firm may not even bother to inform the client that the broker may have sold an illegal security or a security not approved by the firm.
Selling away is not a rare or unusual event, and is not likely to catch a diligent broker-dealer by surprise. As far back as 1986, the NASD (which is now FINRA) warned broker-dealers that the conduct of its registered representatives most frequently resulting in violations of its rules involved unauthorized private securities transactions, or selling away.
Indeed, FINRA has explicitly directed this warning to broker-dealers that employ registered representatives stating that such firms “are responsible for monitoring their activities in a manner reasonably intended to detect violations of” FINRA Rule 3040.
Even in 2001, FINRA warned broker-dealers that there were significant number of fraudulent selling away type schemes and that firms absolutely had to regularly review their supervisory and compliance procedures to make sure that their reporting requirements were both clear and complete. Broker-dealers had to prevent selling away by training and educated their brokers on how to avoid such conduct.
Regulatory authorities such as the SEC and FINRA have steadily heightened the supervisory obligations of brokerage firms in recent years with regard to selling away. Utilizing language employed by the SEC, “effective supervision by a broker-dealer is a critical element in the regulatory scheme and its importance has increased as firms have grown . . . broker dealers must provide effective staffing, efficient resources and a system of follow-up and review to determine that any responsibility to supervise . . . is being diligently exercised.”
In sum, if you think a broker sold you a fraudulent investment away from the firm at which you have an account, contact an attorney at Gana Weinstein LLP. Our attorneys have handled dozens of cases related to selling away and we can help you analyze whether you have a case.