AUDITOR MORRISON'S OFFICE TAKES ENFORCEMENT ACTION AGAINST STOCK BROKER FOR BILKING MONTANA COUPLE OUT OF NEARLY $1 MILLION
Allegation Of Fraud Means Broker Could Face Fines In The Millions Of Dollars
Helena, Mont., October 4, 2005 - Montana State Auditor John Morrison announced that his office issued a legal action last week alleging that the broker-dealer firm Ryan Beck & Co., its insurance agency, Ryan Beck Life Agency, Inc., and two of its former employees bilked a Montana couple out of nearly $1 million dollars by fraudulently churning the couples' investment accounts. Churning is an industry term used when massive trading is done for the purpose of generating commissions.
"This case highlights some of the worst abuses that can happen to investors," said Morrison. "I will not tolerate firms taking advantage of Montanans nor will I allow stockbrokers to churn accounts so they can reap undue wealth on the backs of Montana's hard working citizens."
In the Notice of Proposed Agency Action, the Securities and Insurance Departments charge that Ryan Beck made over $800,000 in a three-year period in commissions, using the proceeds from the sales of the Montana couples' blue chip investments to trade in volatile tech industry stocks at an amazing pace. Not only were such trades unsuitable based on the couples' investment objective of long-term growth, but the firm was turning the accounts over at an average rate of 6 and 1/2 times a year. There were a total of 2,480 trades over that three-year period.
Additionally, the Auditor's staff is charging that the firm and its employees placed the couples' account on margin, meaning the couple was also borrowing from the firm to pay for this unsuitable and excessive trading.
During the period this illegal activity was alleged to have occurred, one of the alleged victims was undergoing cancer treatments. While they were focusing on family health matters, the couple relied on their stockbroker to manage their investments. The stockbroker assured them that he was trustworthy.
One of the more serious allegations in the agency action is that the firm was trading out Class A mutual funds for Class B funds, costing the couple higher commissions and fees due to the loss of potential break points in the accounts. The stockbroker also purchased variable annuities for the couple and, in one case, bought and sold the annuity within less than a two-year period, causing the couple to pay significant surrender penalties. Additionally, the Auditor's office alleges the firms ignored numerous red flag warnings generated by their own compliance department, and violated company policies across the board.
Based on the allegations of fraud in the complaint, the firms and the former employees face potential fines in the millions of dollars.