LPL Financial Supervisory System Failure
It may not have a household name, but LPL Financial is one of the country’s largest brokerage firms. With approximately 13,500 brokers and 6,500 offices, LPL is the country’s fourth-largest brokerage firm behind only Wells Fargo, Morgan Stanley, and Merrill Lynch. As LPL has grown over the past decade, it has been the subject of more and more claims of stockbroker misconduct and securities law violations, in large part because of its maligned supervisory system.
LPL operates as an independent brokerage firm. Unlike brokers at firms such as Wells Fargo, Morgan Stanley, and Merrill Lynch, LPL brokers are essentially contractors. They get LPL e-mail addresses and are subject to LPL compliance but pay for their own office space, staff, and other overhead. And because LPL’s overhead costs are relatively low, it pays a large percentage of commissions and fees to its brokers – ranging from 75% to 95%. This is substantially greater than what well-known, full-service brokerage firms pay. But LPL’s low-cost business model, which aided its explosive growth, comes with major risks to investors.
Specifically, LPL brokers generally work in small, one-person or two-person offices located in rural America. These offices often do not have an on-site supervisor or compliance professional. As such, brokers are left to supervise themselves, which runs contrary to common sense and violates FINRA’s best practices. LPL appears to have let the fox guard the henhouse, exposing investors to stockbroker misconduct or investment fraud.
Complaints Are a Result of Broker Supervision
With such little oversight and the high-payout compensation structure, LPL brokers arguably are motivated to recommend and sell high-commission products, regardless of whether the investment makes sense for the investor. As such, it is no surprise that numerous customer complaints have been filed accusing LPL of causing investment losses as a result of the failure to supervise brokers. State and federal securities regulators have censured LPL and its brokers for selling complex, high-commission investments to unsophisticated investors, speculative trading in customer accounts, and even outright stealing from clients.
LPL Financial Faces Claims in Multiple States
In the last year and a half, securities regulators in Illinois, Massachusetts, Montana, Oregon, and Pennsylvania have penalized LPL for failing to oversee brokers properly.
For example, a Montana LPL broker named Donald Chouinard was convicted of operating a Ponzi scheme. He has been sentenced to 10 years in prison and LPL paid Mr. Chouinard’s clients $1.3 million and a $150,000 regulatory fine. But Montana regulators say that little has changed in LPL’s compliance culture. The regulators are preparing to bring further charges involving LPL’s sales of complicated real estate investment trusts, or non-traded REITs, to unsophisticated investors.
In Massachusetts, regulators settled claims against LPL for $2.5 million. Those claims involved risky, high-commission products that were not sold properly. Massachusetts regulators cited a “complete lack of supervision” and accused LPL of failing to control to whom the products were being sold and failed to disclose high commissions.
In California, LPL and its former broker Alberto Neira are the subjects of millions of dollars of FINRA arbitration claims related to the recommendation and sale of the now-defunct Silver Oak Leasing – a business operated by Alberto Neira that purportedly engaged in luxury car financing in Southern California. The claimants ultimately suffered a complete loss on their investment in Silver Oak Leasing. LPL terminated Mr. Neira in January of 2011 for failing to fully disclose his participation in the Silver Oak business. Then, in December 2012, FINRA barred Mr. Neira for defrauding at least fourteen investors, including a number of LPL customers.
Have you Invested with an Independent Brokerage?
Regulatory sanctions and fines and investor-related arbitration claims against LPL and other similarly run independent brokerage firms likely will continue to arise until and unless LPL and the other firms enhance their supervisory and compliance oversight of their brokers.
Until then, investors should be wary of entrusting their money to brokers at independent brokerage firms. While it is prudent for investors to pay close attention to their brokerage accounts, such attention should be especially close when accounts are maintained with independent brokerage firms.
Call a Securities Fraud Attorney Today
The Dimond Kaplan & Rothstein, P.A. have recovered more than $100 million from banks and brokerage firms for their wrongful actions.
Contact us to schedule an appointment or consultation today to review your rights and options.