The Securities and Exchange Commission's Division of Enforcement last week brought civil fraud charges against Raymond James Financial Services, Inc., a registered broker-dealer and investment adviser headquartered in St. Petersburg, Fla., based on the conduct of one of its former brokers, Dennis Herula. In the Order Instituting Proceedings, the Enforcement Division alleges that, in 1999 and 2000, Herula and others fraudulently solicited a number of investors to deposit approximately $44.5 million in a Raymond James brokerage account held in the name of Brite Business, promising them astronomical returns with no risk if they did so. The Division alleges that Herula, acting in his capacity as a Raymond James registered representative, used Raymond James' facilities and letterhead to carry out the scheme. As alleged in the Order, approximately $16.5 million of the investor funds raised - most of which were subsequently transferred to Herula's wife's brokerage account at Raymond James - were dissipated and never returned to investors, and Herula and his wife misappropriated approximately $8.7 million of those funds.
The Order also alleges that Raymond James, J. Stephen Putnam, the firm's former president and chief operating officer, and David Ullom, Herula's former branch manager, failed reasonably to supervise Herula. According to the Division, Putnam and Ullom were aware that Herula was conducting activities for a suspicious business venture and was making or had made misrepresentations on behalf of Raymond James in connection with that business venture, but failed to take timely or adequate steps to address those misrepresentations or to stop Herula from making further misrepresentations. The Order also alleges that Putnam and/or Ullom facilitated the dissipation of the investor funds raised in the scheme by approving the transfers from the Brite Business account to Herula's wife's account. In addition, the Order alleges that Raymond James and Putnam failed to establish and/or implement procedures concerning the supervision of registered representatives who worked away from the office (as Herula did), heightened supervision of registered representatives, monitoring or auditing operating accounts of branch offices, and investigation of suspicious fund transfers.
Stephen M. Cutler, Director of the SEC's Division of Enforcement, said, "Today we are charging Raymond James with fraud in connection with a scheme by its former employee, Dennis Herula. Raymond James was aware at the highest levels that Herula was making misrepresentations to potential investors and yet failed to put a stop to Herula's activities. Brokerage firms cannot turn a blind eye to the fraudulent activities of their employees and expect to avoid the consequences."
Walter G. Ricciardi, District Administrator of the Commission's Boston District Office, said, "The responsibility of broker-dealers to adequately supervise their employees is a critical part of the overall regulatory scheme to protect investors. Broker-dealers need to pay close attention to the activities of their registered representatives and they need to act promptly and decisively when there is even the slightest hint of impropriety on the part of a registered representative. Here, Raymond James and its highest level management were aware that one of its registered representatives was using his position at Raymond James to promote a very suspicious business venture and was sending correspondence to investors on Raymond James letterhead that made false representations on Raymond James' behalf."
The Division of Enforcement alleges in its Order Instituting Proceedings that as a result of Herula's fraudulent conduct, Raymond James violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Division also alleges that Raymond James, Putnam and Ullom failed reasonably to supervise Herula, a person subject to their supervision, with a view to preventing or detecting Herula's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. According to the Order, Raymond James also violated Section 17(a) of the Exchange Act and Rule 17a-4 thereunder by failing to preserve for three years, the first two years in an accessible place, electronic mail communications, and by failing to promptly furnish certain electronic mail communications to the Commission staff.
The Commission previously brought fraud charges against Herula and others in connection with the Brite Business scheme on April 1, 2002. A Rhode Island federal court froze Herula's assets and subsequently granted the Commission's request for a default judgment against Herula on Oct. 17, 2002. See Commission Litigation Release Nos. 17461 (April 5, 2002) [emergency civil injunctive action filed and temporary restraining orders entered against Herula, Capalbo, and others]; 17800 (Oct. 23, 2002) [permanent injunction entered against Dennis Herula]; and 17957 (Jan. 29, 2003) [permanent injunction entered against Dennis Herula's wife, Mary Lee Capalbo].