FINRA Bars Brokers in Multimillion-Dollar Ponzi Schemes

The latest Ponzi schemes keep with the theme of brokers allegedly bilking from the elderly, including those close to them.

The Financial Industry Regulatory Authority (FINRA) has permanently barred two brokers, Oren Eugene Sullivan, Jr., of Rock Hill, South Carolina, and William Walter Spencer, Sr., of Franklin, Tennessee, for running Ponzi schemes targeting a wide range of investors, including the elderly and mentally and physically impaired.

FINRA said Sullivan, a broker for NYLife Securities, misappropriated approximately $3.7 million in a decades-long Ponzi scheme involving more than 30 clients, including 15 widows, two Alzheimer’s victims, and an individual with developmental impairments. At least eight of the clients were older than 80 and another four were older than 70. Many of the clients considered Sullivan a close friend.

Spencer allegedly “borrowed” nearly $2 million from elderly members of his church and from customers of his broker/dealer, Wiley Bros.-Aintree Capital, LLC, according to FINRA.

“The protection of seniors and other vulnerable investors from unscrupulous brokers remains one of FINRA’s highest priorities, and we will continue to identify and expel those within our jurisdiction who take unfair advantage of their clients,” said Susan L. Merrill, FINRA’s executive vice president and chief of enforcement. “The misconduct of these brokers was nothing short of egregious—and their financial exploitation of the elderly, the infirm and people who considered them trusted friends shocks the conscience.”

Amid financial turbulence, Ponzi operations have been collapsing at record speeds (see “Recession Foils Ponzi Schemes”). As was the case with Bernard Madoff, it is common for Ponzi schemes to involve friends, family, and church members (see “FINRA Bars Broker for Operating Ponzi Scheme” and “Ponzi Schemes: Side by Side”).

Background 

FINRA found that from late 1988 to October 2008, Sullivan obtained money for personal use by leading his victims to falsely believe that they were investing in promissory notes or other legitimate financial products issued by NYLife or its affiliates.

In exchange for the money he took from customers, Sullivan usually provided a one-page "note" stating the amount of principal and promising an annual interest rate, ranging from 6% to 12%. The borrower was listed as a made-up entity called IFP, standing for “insurance financial product” or “insurance financial professional.”

Clients wrote out checks to “IFP-NYL” or “IFP-NYLife,” which Sullivan was allowed to deposit into his own accounts. In total, Sullivan obtained approximately $3.7 million from his scheme and, at the time he was caught, owed approximately $2.2 million, which was since paid back to customers by NYLife.

Sullivan’s vast Ponzi scheme unraveled when a customer’s daughter became suspicious, leading to an internal investigation by Sullivan’s superiors.

In the case of Spencer, who ran a Ponzi scheme from December 1997 to May 2008, investors were also induced to invest in promissory notes. The notes falsely promised rates of return 10% to 12% higher than rates available on traditional investments, according to FINRA.

Overall, there were 234 transactions and most of the investors were elderly members of Spencer’s church community. All of the individuals were of “modest means,” such as a 62-year-old school bus driver who loaned Spencer $60,000. Spencer failed to repay many of the individuals as promised and used the proceeds of new loans to satisfy existing loans, FINRA found.

Both Spencer and Sullivan consented to the entry of FINRA's findings without admitting or denying charges.

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IMHO: Looking Class

Next week PLANSPONSOR and PLANADVISER will open nominations for our Retirement Plan Adviser of the Year awards.

Each year we receive a number of inquiries from advisers about the awards, and many of these fall into a category I tend to think of as “exploratory”—feelers as to what we are looking for. 

Well, at its core, what we hope to acknowledge—and, thus, what we are looking for—hasn’t changed at all: advisers who make a difference by enhancing the nation’s retirement security, through their support of plan sponsor and plan participant information, support, and education.  And, since its inception, we’ve focused on advisers who do so through quantifiable measures: increased participation, higher deferral rates, better plan and participant asset allocation, and delivering expanded service and/or better expense management.

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A Different World

Of course, the world has undergone much change since we first launched those awards, and advisers now have an expanded array of tools at their disposal to make those results a reality—legislatively sanctioned automatic enrollment, contribution-acceleration designs, qualified default investment alternatives, and a broadly greater emphasis on transparency and disclosure of fees.  These steps have been good for our industry, great for participant retirement security and, IMHO, have served to raise the bar for our award at the same time. 

So, what will we be looking for this year?  Well, last month I wrote a column outlining advice I have given to plan sponsors over the year about choosing an adviser.  Of those seven areas (see “IMHO: ‘Right’ Minded”), several fall into what I would consider to be a personality match between plan sponsor and adviser—important to a productive working relationship, but not within the scope of our award. 

Standards Setting

On the other hand, there are areas—critical areas—that absolutely apply.  Now, I’m only one judge (albeit, IMHO, an influential one) on the panel, but advisers I am looking for:

Have established measures and benchmarks for plan success.  Those benchmarks should include the measures noted above: participation, deferral rates, asset allocation.  If you can’t tell me what your targets are and how your client base stands in relation to those targets, IMHO, you’re using the “wrong” benchmarks.  I’m also interested in advisers who not only use those as a matter of course in running their business, but who develop them in partnership with their plan sponsor clients—and who regularly and routinely communicate results to their plan sponsor clients.

Fully and freely disclose their compensation.  I’m frankly a lot less concerned with how you get paid than that your plan sponsor clients know what they are paying for your services. 

Work at staying current on trends, regulations, and product offerings. The best advisers read, attend conferences and/or informational webcasts, have attained (and maintained) applicable designations, and commit to a regular course of continuing education during the course of the year.  This business is constantly changing; if you’re not constantly learning, you—and your clients—are being left behind.

Encourage and inspire their clients. Client referrals have always been a key element in our award, and as the overall quantitative standards rise, the significance of the qualitative element afforded by client references (and award nominations) will almost certainly increase.   How often do you talk with your clients?  How often do you visit?  How—and how often—do you communicate with them regarding regulatory and legislative changes?  You know what you’re trying to do for your clients—do they?   

Are willing to accept fiduciary status with the plans they serve.  This is an area our judges have debated vigorously over the years.  I’ll admit some great advisers have been barred from accepting fiduciary status by forces they don’t control.  I’m not (yet) saying you have to be willing to accept fiduciary status in order to get my vote, but it’s a factor—and, IMHO, an increasingly important one.

We launched our Retirement Plan Adviser of the Year award in 2005 to acknowledge “the contributions of the nation’s best financial advisers in helping make retirement security a reality for workers across the nation.”  It has always been our goal to bring to light the very best practices of the nation’s very best advisers (and adviser teams), and in so doing, to help set—by their example—new standards for excellence in dealing with workplace retirement plans.

That’s what we’re looking for—and looking forward to acknowledging—this year as well. 

 


 

P.S. Information about the nomination form/process will be published in the September 8 issue of PLANADVISERdash.

 

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