The Shady Stockbroker

Fired five times and banned from trading, a stockbroker goes on trial for fraud.

Comments Views

​The stockbroker promised his clients a "no lose" investment, but now he is on trial for fraud, CBS News reports. Prosecutors allege Anthony Diaz sold high-risk, high-fee alternative investments and filed false documents with the U.S. Securities and Exchange Commission (SEC) about clients' suitability to invest in those products. Additionally, the advertised guarantee rates of return were "highly speculative" and tied up clients' money for long periods, court documents allege.

Diaz is no stranger to controversy. Five brokerage firms have fired him, and he was permanently barred from trading in 2015. The Financial Industry Regulatory Authority (FINRA) ordered Diaz to pay $4 million in damages to former clients two years ago, but the organization says he has not complied.

Lessons Learned

The stockbroker's alleged illegal activities highlight the importance of investor self-education and awareness, as well as the role of FINRA, the U.S. financial industry's self-regulatory body. FINRA oversees more than 630,000 brokers across the U.S. Its BrokerCheck system — providing information on cases of broker misconduct and illegality — lists several thousand brokers, demonstrating the huge scale of broker misconduct. The cases go back a decade or more.

While BrokerCheck is a useful tool for investors, FINRA also provides other tools, such as investor education materials, an inventory of disciplinary actions against brokers, and a whistleblower hotline. Here are some suggestions that could help FINRA in its anti-fraud efforts.

  • In its For Investors section, FINRA's website lists numerous reasons for filing a complaint, such as potential fraud and misrepresentation. However, there is only an "other" category for individuals who want to learn about how to file a complaint and the problems that FINRA may address versus those that the SEC handles. FINRA should make broker fraud and misrepresentation a more explicit category of complaint. Moreover, it should provide more detailed information about how investors can identify these activities.

  • Investors need to be aware of the types of prohibited conduct for brokers, including the kind of illegal activity Diaz is alleged to have committed. However, FINRA's Investor Complaint Center only references this information as "see definitions below." FINRA's website should display this information more prominently within its BrokerCheck, Investor Complaint Center, and Rules and Guidance sections.

  • Broker misrepresentations and falsification of investor credentials and approvals are among the prohibited conduct. FINRA requires brokers to submit this information for monitoring. However, it is less clear what FINRA's monitoring specifically consists of and whether it could be strengthened to help prevent broker fraud.

  • Any strategy to deter fraudulent activity should publicize cases where individuals have been found guilty of fraud. While BrokerCheck provides extensive information regarding individual cases of brokers' prohibited conduct or fraud, FINRA's media center does not mention these cases. FINRA should provide regular updates such as highlighting these cases quarterly or at least annually and linking readers to BrokerCheck for more information. These updates also would be an opportunity for FINRA to summarize trends, including cases where judgments and awards occurred, as well as cases that were settled, withdrawn, or denied.

  • The SEC should consider what it might do to strengthen rules and requirements over FINRA's self-regulatory efforts. Specifically, the SEC should require much greater transparency and disclosure of fraud cases, including names and details.

  • In 2017, FINRA launched FINRA 360, a "comprehensive self-evaluation and organizational improvement initiative." Part of that initiative brings together two distinct enforcement teams. The first team comprises the surveillance and examination programs that handle disciplinary actions related to trading-based matters. The second team deals with cases referred from other regulatory oversight divisions, including Advertising Regulation, Corporate Financing, Member Regulation, and the Office of Fraud Detection and Market Intelligence. Some of the previous suggestions may help this integration to better fight fraud.
Art Stewart
Internal Auditor is pleased to provide you an opportunity to share your thoughts about the articles posted on this site. Some comments may be reprinted elsewhere, online or offline. We encourage lively, open discussion and only ask that you refrain from personal comments and remarks that are off topic. Internal Auditor reserves the right to remove comments.

About the Author

 

 

Art StewartArt Stewart<p>​Art Stewart is an independent management consultant with more than 35 years of experience in internal audit, financial management, performance measurement, governance, and strategic policy planning.​​​</p>https://iaonline.theiia.org/authors/Pages/Art-Stewart.aspx

 

Comment on this article

comments powered by Disqus
  • Galvanize-September-2020-Premium-1
  • FSE-September-2020-Premium-2
  • Auditboard-September-2020-Premium-3