A former broker who sold $7 million worth of investments in a massive Ponzi scheme targeting veterans never heard that his firm had rejected his request to push the products, FINRA said.
Horsham, Pennsylvania-based Hornor, Townsend & Kent — the No. 27 firm on
The "structured cash flow investment" pitched by the unidentified ex-broker and issued by an Irvine, California-based firm called
"Had HTK conducted reasonable supervision, it would have learned that [the broker] was using firm resources to sell [the products] to firm customers, including his firm email account, and his assigned sales assistant (a non-registered fingerprint person at HTK)," according to the FINRA settlement order. "As a result, HTK failed to detect [the broker's] sales of [the products]."
Asked for the former broker's name, whether the firm has paid any arbitration awards or settlements to clients and if the firm would like to respond to FINRA's allegations in the case, representatives for Hornor, Townsend declined to comment.
For financial advisors, the case offers the latest reminder of the need to seek a brokerage firm's approval for any private securities transactions or outside business activities, according to recruiter Phil Waxelbaum of
Supervisory obligations under FINRA rules require brokerages to scrutinize their
"Nothing could be damaged by having the broker-dealer say, 'Yeah, this looks good to us,'" he said. "If your broker-dealer has approved the transaction, then you have two affirmative defenses … It's really insane, when you have this opportunity, not to exercise it."
The ex-Hornor, Townsend broker requested approval in July 2013, according to FINRA. His supervisor gave the "structured cash settlements" a green light, but the compliance team at the brokerage firm's corporate headquarters failed to review the request until the following February, investigators said. An official word from the head office took more than half a year, despite the broker's stated intention on the approval form to begin selling the Future Income products the previous July. The compliance team refused to approve the products.
"Home office supervision informed [the broker's] supervisor that [his outside business] request would not be approved," FINRA's settlement stated. "Although home office supervision recorded the disapproval in the firm's systems, no one at HTK ever communicated this decision to [the broker]."
Hornor, Townsend's flub of its "responsibility to reasonably investigate red flags" created a vacuum that became lucrative to the broker, according to FINRA. Between July 2013 and March 2016, when the representative left the firm, he sold millions of dollars worth of the products to more than three dozen investors. It's not clear what happened with the customers' investments or whether, as in
The mastermind of the Future Income scheme, Scott Kohn, received
In turn, the conspirators tapped into "a network of hundreds of financial advisors and insurance agents nationwide" to sell thousands of older adults on the "structured cash flows" of the monthly payments, the DOJ said. The schemers pledged big returns and concealed the underlying transactions with the military pensioners, all while Kohn was using much of the money to live lavishly. When the scheme finally collapsed, investors lost $310 million.
In addition to the $297 million in forfeiture from the criminal sentence, the
"Kohn and his co-conspirators reached across the country to steal from veterans and seniors who desperately needed their money," the U.S. Attorney for the District of South Carolina, Adair Boroughs, said in a statement at the time of Kohn's sentencing. "These hundreds of millions in losses will reverberate through the victims' lives long after the defendants serve well-deserved federal prison sentences."
