What to make of a fiduciary flag-bearer's alleged misappropriation of $5 million from clients -- and his denial of the charges

One of the more interesting questions here is how he had access to client funds so that he could transfer them without being subject to an outside audit. If the investigation concluded that he used the money for purely personal gain, the the “purchase” of a bank note is excluded. On the other hand, and I suspect this is what will come out of this mess, if he used the money from the plans as a collateral deposit for a loan from a bank, with him paying on the note and the interest accumulating in the CDs, then he could make the statements he has made. That is still self-dealing and the commingling is a violation of ERISA rules, but he could have convinced himself that what he was doing was technically correct.

Then there is the issue of his receipt of the money at all. The practice of issuing a note to a client and taking the money for either speculative or personal use is not at all uncommon. This is where more frequent “light” audits by the SEC would be useful. Unfortunately, the mindset of the regulators is that each audit must put the entire firm under a microscope rather than taking a quick, unannounced look at the critical and most commonly violated areas. As a result of spending months looking for tiny errors the SEC, and for that manner, pretty much all of the regulators are searching for fern seeds while an elephant is stomping around behind them.

Jeff,

Thanks for getting into some serious nitty-gritty to add to the understanding of this situation. Were you a lawyer in a past life?

Brooke

I considered becoming an attorney, but I believe I would have a great deal of difficulty in taking the adversarial position that the legal profession requires. Attorneys must be proficient at character assassination in court, and I am not at all sure I could do that and sleep well at night.

Believe there is psychological research that often the loudest proponents of any sort of moral position are using it as an effective smokescreen for their own misdeeds.

Since pretty much everyone believes what they are told or see in the media — this tactic is very effective.

Always best to be suspicious of the righteous.

The industry has always been filled with less than qualified “unguided fiduciary missiles.” Hiding behind registration status, know nothing Joan of Arc types are everywhere.
Registration status is and has always been irrelevant. Qualifications are the issue, i.e., education, experience, team depth, resources, menu of services, scale, menu of services, ethics, morality, procedures, insurance, bonding, etc. The media will lap up anything. Independent vetting is the unmet need. That of course assumes clients are willing to pay for it.