The Securities and Exchange Commission announced Friday that it has reached a $1.95 million settlement with First Allied Securities Inc. for failing to supervise one of its former brokers who engaged in unauthorized, fraudulent trading in the accounts of two Florida municipalities.
The settlement follows securities fraud and other charges the SEC filed in late December against the broker, Harold Jaschke, who “churned” the investment accounts of Kissimmee and the Tohopekaliga Water Authority in Florida.
Churning is a fraudulent practice that occurs when a broker engages in excessive trading in order to generate commission and other revenue without regard for the customer’s investment objectives. Jaschke allegedly put the municipalities at risk of losing millions of dollars while reaping more than $14 million in commissions. He is fighting the SEC’s suit, which is pending before a federal court in Orlando.
In Friday’s settlement, the SEC said it found that between May 2006 and March 2008, First Allied failed to establish “reasonable systems to direct follow-up action in response to red flags regarding churning and suitability.” The SEC also cited the firm for not preserving e-mails.
“Supervising registered representatives is a job that must be taken seriously by broker-dealers,” Rosalind Tyson, director of the SEC’s Los Angeles office, said in a statement. “By failing to establish reasonable systems to prevent Jaschke’s misconduct, First Allied did not fulfill its obligation to reasonably supervise its registered representatives.”
In its own brief statement, San Diego-based First Allied said that it decided to settle after it considered “the surrounding circumstances, the current regulatory environment, and the expense and uncertainty associated with litigation.”
The firm said it had “previously accrued for this settlement” and does not expect it to have “a material adverse impact on its financial condition or the future results of its operations.”
The $1.95 million settlement is comprised of $1.46 million for the disgorgement of ill-gotten gains and prejudgement interest plus a fine of $500,000.
Jaschke’s churning scheme was allegedly facilitated by a risky investment strategy that involved trading Strips, a long-term zero-coupon Treasury bond that is highly-sensitive to interest rate movements. He would buy and sell the same Strips within a matter of days, and sometimes within the same day, to take advantage of short-term changes in their prices, while financing the trades with repurchase agreements that functioned as short-term loans.
The strategy allowed him to recoup more than $14 million in commissions while his clients suffered unrealized losses of $60 million between May 2006 and June 2007. However, they closed their accounts on March 2008 at a profit.
Attorneys for Jaschke, who was reportedly fired by First Allied in 2008, declined to comment.