While broker-dealers may try to wash their hands of brokers’ outside business activities, time and again securities industry watchdog, FINRA (the Financial Industry Regulatory Authority) has made it clear that firm are responsible for what their brokers get up to outside of the normal course of business. Outside business activities, also known as “selling away,” allows financial advisors to shop products and deals to clients that aren’t otherwise available through or sanctioned by the broker’s registered firm. And it’s a huge parallel industry.
Woodbridge Judgment Raises Issue of Selling Away
Thanks to the recent implosion of a multi-billion dollar Ponzi scheme, however, selling away and how it gets regulated has again come under regulatory scrutiny. That’s because, in order for the Woodbridge Group of Companies, which is now bankrupt and subject to a billion-dollar judgment, relied on an extensive network of brokers to shop its promissory notes around to investors. Since these notes were not available through broker-dealers themselves, they were sold to investors through brokers’ outside business activities.
All selling away activity conducted by a registered broker must be reported to his or her broker-dealer, and those B-Ds are obligated to monitor that activity. It’s no use for a firm to insist that it did not “know” what its broker was getting up to. Indeed, as the method of funding the Woodbridge Ponzi has come to light, the large holes in oversight in supervision among brokers who sell away has revealed its in stunning detail.
Broker-Dealers May Be Responsible for Investor Losses in Selling Away Deals
Regulators and arbitrators eager not to allow such a scandal to happen again are taking a closer look at selling away, and punishing broker-dealers and brokers who shop bad deals to investors. A recent judgment in FINRA arbitration for nearly a quarter of a million dollars against a broker who sold Woodbridge notes to investors has struck fear in the hearts of many B-Ds that weren’t paying attention to their brokers over the past few years. If one firm can be held responsible for the failings of a broker, they all potentially can. And that’s a billion-dollar problem.
Common Signs of a Ponzi Scheme
Once you're inside a Ponzi Scheme, it can look and feel a lot like a normal investment opportunity, especially if the scheme operator is adept at creating false investment documentation. The key is not to get draw into a Ponzi Scheme in the first place. The most common signs of these frauds are evident from the beginning - that's when you have the greatest chance of identifying them.
Inflated investment returns
Guaranteed investment returns
Tax-free investment returns
Vagueness about the actual investments
Overly simplified investment documentation - or none at all
Lack of true expertise or history in sophisticated investing