TRENTON
– Attorney General Peter C. Harvey
today announced that American Express
Financial Advisors Inc. (“AEFA”)
will pay New Jersey $5 million and implement
company-wide reforms to address allegations
that it failed to reasonably supervise
its financial advisers.
The
settlement, reached cooperatively with
AEFA, follows an investigation by the
New Jersey Bureau of Securities within
the Attorney General’s Office that
initially focused on Arthur Davidson,
of West High Ridge Road, Cherry Hill.
Davidson, a financial adviser in AEFA’s
Voorhees office, stole more than $400,000
from at least 22 clients. Davidson pleaded
guilty Monday to a charge of theft by
deception brought by the Attorney General
through the Division of Criminal Justice.
The
Bureau’s investigation quickly expanded
with the uncovering of widespread problems
involving AEFA’s failure to reasonably
supervise financial advisers within its
franchise offices. Under the settlement
reached by the Attorney General, AEFA
will reform the way it supervises financial
advisers and will increase its oversight
of financial advisory services to protect
clients from misconduct by financial advisers.
“In
investigating and prosecuting this individual,
we identified a larger issue of inadequate
supervision of the company’s financial
advisers,” said Attorney General
Harvey. “To its credit, American
Express has worked cooperatively with
our office to address deficiencies in
its oversight of financial advisers. Our
shared goal is to ensure that investors
who rely on the American Express brand
are treated fairly and that American Express
supervises its agents so that investors’
dollars are protected.”
AEFA
offers a range of products and services,
including insurance, mutual funds and
college savings plans, primarily through
its financial advisers, many of whom work
as independent contractors under franchise
agreements. Davidson worked as a “franchisee
adviser” in the company’s
Voorhees branch office from 1997 until
October 2004, when he was suspended by
the company pending investigation of his
activities.
AEFA has paid full restitution to known
victims of Davidson and has agreed to
compensate any additional victims who
are found. AEFA also will pay the Bureau
a civil penalty of $5 million.
Under
the terms of his guilty plea, Davidson
faces a three-year prison sentence and
has signed an agreement to surrender his
broker’s license and fully reimburse
AEFA and any additional clients found
to have lost money as a result of his
conduct.
“We seek to protect investors through
our enforcement efforts, both by weeding
out brokers and financial advisers who
break the law and by promoting practices
within the industry that will eliminate
fraud and safeguard investments,”
said Franklin L. Widmann, Chief of the
Bureau of Securities. “This investigation
is a good example of those dual goals.”
“The
first line of protection for investors
who entrust their money to an investment
firm should be the firm’s own supervisory
procedures,” said Attorney General
Harvey. “We are taking a hard look
at the industry. Where we find firms failing
in this area and the failures are significant,
we will be imposing major penalties and
demanding significant reforms.”
The
Davidson Theft of Investor Funds
From
around June 2001 through October 2004,
Davidson forged client signatures on mutual
fund redemption forms and financial advisory
service agreements so as to liquidate
investments in client accounts and withdraw
commissions and fees without the client’s
knowledge or consent. About 85 percent
of the fraudulent charges to clients were
withdrawn as commissions by Davidson for
his personal use. AEFA uncovered his conduct
through an internal investigation and
reported it to the Bureau of Securities,
which conducted its own investigation.
Through
his forgeries, Davidson charged certain
clients for multiple financial plans at
excessive rates. For example, (1) an apartment
manager in her mid-60s earning $44,000
per year with about $25,000 in assets
at AEFA was charged $7,000 for four plans
in a single year; (2) a retiree in her
mid-60s earning $22,000 per year with
about $10,000 in assets at AEFA was charged
$3,500 for two plans in a single year;
and (3) a recent college graduate in her
early 20s earning $24,000 per year with
$35,000 in assets at AEFA was charged
$4,000 for two plans in a single year.
The
Bureau’s investigation uncovered
broader weaknesses in AEFA’s supervision
and surveillance of its franchisee advisers.
A critical defect identified by the Bureau
was that franchisee advisers selected
the person at AEFA who was to serve as
their own compliance supervisor and paid
the supervisor directly for acting in
that capacity, creating a conflict of
interest for those supervisors responsible
for ensuring compliance with laws and
regulations. Franchisee advisers could
select a supervisor outside of their office,
as Davidson did.
Reform
of AEFA’s Supervisory Practices
AEFA
has since implemented a system that assigns
an on-site supervisor where possible and
eliminates the ability of a franchisee
adviser to choose his or her own supervisor.
Franchisee advisers now pay AEFA, not
the supervisor, for the cost of supervision.
Moreover, AEFA has eliminated in New Jersey
a practice that allowed supervisors who
had compliance responsibilities to also
act as business consultants for the same
financial advisers and receive additional
fees in their business consulting role.
AEFA
has agreed by November 30, 2005 to, among
other things, implement new training and
surveillance procedures to better detect
instances of forgery, unauthorized account
activity and improper fees.
In
addition, AEFA has agreed to hire an independent
expert, approved by the Bureau, to review
its supervisory procedures and consult
with AEFA and the Bureau to identify areas
of concern. The expert will issue a report
within 90 days concerning its review.
Within 30 days after it receives the report,
AEFA will submit a plan acceptable to
the Bureau outlining changes to be implemented
in response to concerns raised by the
review.
The
Bureau’s investigation was conducted
by Chief of Enforcement Richard Barry,
Supervising Investigator Michael McElgunn,
Regulatory Attorney Kevin O’Brien
and Investigators Dick Smullen, Dean Kuehnen,
and Sylvia Kolankiewicz. Deputy Attorney
General Anna Lascurain, Chief of the Securities
Fraud Prosecution Section of the Division
of Law, handled the case for the Attorney
General.
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