Attorney Mark Tepper was interviewed by the Tampa Bay Business Journal for its Cover Story on financial fraud:
Robbed without a gun: Tampa Bay is one of the nation’s hot spots for financial fraud
New tools, tactics to fight financial fraud in one of the nation’s hot spots
UPDATED: Apr 30, 2015, 11:57am EDT
Margie Manning
Print Editor- Tampa Bay Business Journal
More than two dozen investors handed over nearly half-a-million dollars to Albert Scipione and Matthew Ionno before regulators stopped them from stealing.
The pair, who operated Traders Café in downtown Tampa, lied to customers about low commissions and fees, high trading leverage and the safety of their assets, according to the U.S. Securities and Exchange Commission.
“Scipione portrayed Traders Café as a broker-dealer for customers interested in day trading, but it became merely a depository from which he stole investor funds for himself,” Eric Bustillo, director of the SEC’s Miami regional office, said in a statement in November.
While Ionno and Scipione each have pleaded guilty to federal fraud charges, been ordered to repay the people they swindled and face prison sentences, the case is just one of hundreds of similar schemes. Florida is among the states where scams are most prevalent. Financial service providers say the high prevalence of fraud in the state casts a black eye on the industry and could keep investors from backing legitimate businesses that need capital to get off the ground.
Regulators are fighting back against fraud. There’s been a significant rise in the number of formal enforcement actions nationwide, as well as proactive steps to keep fraud from occurring. New rules require investment firms to beef up their background checks on new hires. Later this year, states will have additional tools for sharing information about problem stockbroker firms. Brokers with spotless records are speaking out as well, urging investors to be skeptics before handing over their money.
“People who are bamboozled by these shysters are robbed. It’s just that a gun was not used,” said Bob Doyle, president and chief investment officer at Doyle Wealth Management, a registered investment advisor in St. Petersburg.
Pervasive problem
A Wall Street Journal report published in November found 16 “hot spots” nationally where brokers with troubled regulatory records cluster. Sarasota, along with nearby Collier and Lee counties, and three communities in southeast Florida, made up five of the 16 hot spots.
The state’s lack of personal income tax draws wealthy people who often rely on others to manage their money, said Mark Tepper, a Fort Lauderdale attorney who specializes in securities fraud.
There’s also a concentration of seniors who can be more susceptible to get-rich-quick pitches as they try to live off fixed incomes, said Drew Breakspear, commissioner of the Florida Office of Financial Regulation.
More than 80 percent of adults ages 40 and older have been solicited to participate in potentially fraudulent schemes, according to OFR.
State securities regulators across the country have taken action. Formal enforcement actions against both licensed broker/dealer/sales agents and unlicensed individuals and firms was up 34 percent in 2013, according to The North American Securities Administrators Association.
The Florida OFR, with staff in Tampa and other targeted high-risk areas, attacks fraud on two fronts. The Division of Securities investigates allegations of wrongdoing by the 300,000 brokers registered in the state. In 2014, the division issued 105 final orders — written administrative enforcement actions — against 173 respondents. While the number of orders was down slightly from 110 in 2013, the number of respondents was up from 118 in 2013, a 47 percent increase.
Fines were up substantially, from $4.4 million in 2013 to $7.8 million in 2014.
Courts ordered $51 million in restitution in 2014, although very little of that is ever returned to investors, said Robert Kynoch, chief of the Bureau of Financial Investigations, the state’s criminal justice agency that handles complex investigations involving securities and mortgage fraud on the part of unregistered individuals.
Many “bad actors” in the industry come to the bureau’s attention through customer complaints and tips.
“Unfortunately by the time action is undertaken the assets have tended to be dissipated. Rarely do we see crooks squirreling the money away in an off-shore bank account. Most of the time, as the money comes in they spend it, whether to live the high life or keep the veneer of a legitimate business going,” Kynoch said.
His office collaborates with local law enforcement agencies. In Tampa, there’s a Suspicious Activity Review group that examines bank filings for potential criminal activity, and an identity theft task force.
Coordination is key, said Pam Epting, director of the securities division, which works with the SEC as well as with the Financial Industry Regulatory Authority, the industry’s self-funded regulatory agency. “No single regulator has unlimited resources,” she said. “We share intelligence to maximize our resources.”
Building the toolbox
State securities regulators in Florida and elsewhere will have more tools, starting this year, when the NASAA expands NEMO, a computerized system for state regulators to share information. The latest iteration of the program lets examiners preparing to go to a particular firm check the database to see how the other branches of the firm anywhere in the country fared on their exams. Regulators can’t look up individuals, only firms.
Separately, the SEC has approved a FINRA plan that requires brokerages to strengthen the background checks they perform on new hires. Due diligence on prospective hires is key for brokerage firms, said Susan Axelrod, executive vice president, regulatory operations, at FINRA.
“The brokers with continued complaints, the challenge is some firms are still willing to hire those folks,” Axelrod said. “Once you take on someone who has a checkered past, the obligation is on the firm to supervise them.”
FINRA launched a program to evaluate the highest-risk brokers in 2013. While Axelrod said there’s no specific formula that determines high risk, the organization looks at brokers’ disciplinary history, the number of complaints filed against them and their work history, including whether they move from firm to firm frequently.
“We are laser focused on the highest-risk folks and getting them out of the industry quickly,” she said.
Under that program, FINRA has barred more than 115 brokers nationwide.
“The average time to bar brokers under the program has been 100 days, but we have barred people in as short as eight,” Axelrod said.
FINRA launched a broader program last year to look at each of the 660,000 brokers nationwide. When analytic tools flag a broker under that effort, FINRA will launch an examination, Axelrod said.
Disclosure debate
One step investors can take to protect themselves is to log onto BrokerCheck, a FINRA online database disclosing customer complaints, regulatory actions, terminations for cause and personal bankruptcies. Since some of those most vulnerable to fraud are seniors who may not be computer savvy, there’s also a telephone number to call (1-800-289-9999), Axelrod said.
Critics contend BrokerCheck is not complete because it does not include information about settlements that resulted from mandatory arbitration. FINRA arbitration procedures foster secrecy of information, according to the Public Investor Arbitration Bar Association, an organization of lawyers that primarily represents investors.
BrokerCheck is not perfect, but FINRA remains committed to improving the system as a “best in class tool,” according to a statement issued in response to PIABA’s call for greater public disclosures.
Arbitration is a closed-door proceeding, but the parties involved can disclose details if they choose to do so, and awards are made public through an online database and via BrokerCheck, a FINRA spokeswoman said. Settlements also are disclosed.
Tepper, the securities lawyer, has won cases in arbitration, including a 2010 decision in which his clients were awarded compensatory and punitive damages and fees. “Those are the kinds of things you think would have a chilling effect on bad brokers. But most of this information never makes it to the sources that most people read,” he said.
Mistrust of authority and embarrassment keeps victims from speaking out and allows fraud to flourish, Tepper said.
Florida’s OFR Commissioner Breakspear wants to hear more from those who have fallen victim to scams.
“If we could convince the consumer not to be embarrassed when they fall into the trap, if they can get the information to us,” he said, “they may not get their money back, but it will keep their neighbor from being scammed.”
Ask the hard questions
Investors too often are taken advantage of because they grab on to the false hope offered by the unscrupulous, said Bob Doyle, president and chief investment officer at Doyle Wealth Management.
“I will often talk to a client who sees an investment, perhaps a publicly traded security, with a 10 percent yield. Take your blinders off. Why is it yielding 10 percent? Because it’s excessively risky,” he said.
He says investors should be professional skeptics and ask hard questions of any prospective broker, including:
Are you licensed? Can you show me?
Have you been in trouble with securities regulators?
Have you been sued, arbitrated, mediated? Has anyone brought action against you?
Have you, your boss or your firm ever had to pay a settlement?
How do you get paid?
Those are tough topics to broach, Doyle said.
“Who wants to ask those questions? You’re sitting in front of a guy with a suit on, a professional. But I’m not offended by those questions, and if they don’t ask me, I tell them to ask me,” he said.
—Margie Manning