A study of brokers sanctioned for financial misconduct has found that a number of these punished individuals resurface in the securities industry only to engage in further alleged instances of wrongdoing; especially troubling is that over 5,000 stockbrokers who worked for firms expelled from the industry by FINRA for various misconduct still sell securities and are still licensed to do so.
In the interest of transparency and disclosure, FINRA publishes information about firms and brokers—including instances and histories of misconduct—on their website under the label "FINRA BrokerCheck."
Former Texas commissioner Denise Voigt Crawford summed up the issue: "The problem is that the small minority of bad brokers—and brokerage firms—does a tremendous amount of damage."
Case in point, the Wall Street Journal analyzed over 550,000 brokers on the FINRA BrokerCheck system, finding that a great majority carried no arbitration claims or other issues in their disciplinary or disclosure file. The 5,000 brokers associated with a disciplined and closed firm represent just 0.1% of the entire broker database.
Similar to the notion of prison recidivism, WSJ's findings show that brokers who left at least two expelled firms had over eight times as many arbitration claims against them than the industry average.
Additionally, 58% of those 5,000 brokers had at least one disciplinary action or disclosure on file; 25% had three or more. By contrast, just 13% of all 550,000 brokers studied had at least one disclosure.
In a phenomenon called "cockroaching," such brokers who live in the shadows of compliance jump from one problem firm to another, often times finding their way to or establishing new firms after FINRA shuts down an old firm for various industry violations, occasionally including the dreaded grandaddy of them all, "fraud."
WSJ cited the BrokerCheck profile of Kenneth Dwyer, a "frequent migrator" with alleged damages to customers in excess of $85 million. According to the findings, Dwyer repeatedly earned disclosures alleging poor or unsuitable stock recommendations, excessive trading, excessive commissions, churning, mismanagement, misrepresentation and, according to FINRA, "possibly fraud."
The most recent of Dwyer's 10 migratory firms, John Thomas Financial, was recently shuttered and accused of penny stock fraud with damages exceeding $45 million.
Dwyer and brokers like him are able to migrate from FINRA-targeted firms to similar firms because, as WSJ explains, the "cockroaches" jump ship—or hold positions at multiple firms simultaneously—before FINRA can complete the process of shutting down Firm A. When FINRA shuts down Firm A and sets its sights on Firm B, these individuals have already started working at Firm C, and so forth.
The result for investors is lost money, accusations of damages and a defunct firm with no real motivation or obligation to pay up with or without a drawn out arbitration, mediation or civil judgment. Often times these early firms file for bankruptcy or otherwise vanish, disrupting, impeding or outright obstructing the recovery process.
If you have invested with Kenneth Dwyer, John Thomas Financial or any other broker or brokerage firm whose misconduct has resulted in a financial loss or you suspect a "cockroach" has engaged in fraudulent or violative conduct that has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.