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FIRST ALLIED SECURITIES PAY SEC $2M FOR FAILING TO SUPERVISE BROKER

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First Allied Securities was warned as early as 2006 that their broker, Harold H. Jaschke, appeared to be churning his customer’s accounts, according to the San Diego Union-Tribune. On March 5 the firm agreed to pay $2 million to the SEC, settling charges that it failed to properly supervise Jaschke during the length of his employment.

First Allied, which is based in San Diego, licenses over 900 financial advisors and maintains approximately 600 branch offices in the United States. The broker-dealer is owned by Advanced Equities Financial Corporation.

“Supervising registered representatives is a job that must be taken seriously by broker-dealers,” said Rosalind Tyson, Director of the SEC’s Los Angeles Office in a statement. “By failing to establish reasonable systems to prevent Jaschke’s misconduct, First Allied did not fulfill its obligation to reasonably supervise its registered representatives.”

Churning is a financial slang term for a broker excessively trading on a client’s account, with the sole purpose of generating higher commissions. Jaschke, who was a registered representative with First Allied from June 2005 to June 2008, was charged last December for churning the accounts for two Florida municipalities, the City of Kissimmee and the Tohopekaliga Water Authority.

Jaschke’s financial numbers would raise SEC red flags. From 2006 to 2008, Jaschke earned $14.2 million in commissions from the municipalities’ accounts, while they earned only $9.8 million from investments.

In doing so, Jaschke engaged in what the SEC called “a high-risk, short-term trading strategy involving zero-coupon U.S. Treasury bonds that were very sensitive to interest rate changes.” These bonds, otherwise known as STRIPS, were purchased without customer knowledge or consent.

The SEC gave further details in its statement, which can be read in full here:
Jaschke’s risky trading strategy involved buying and selling the same bond within a matter of days, and sometimes within the same day. Jaschke exposed the municipalities to greater risks when he leveraged their accounts using repurchase agreements to finance the bond purchases that they otherwise would not have been able to afford. This strategy dramatically increased the risks as Jaschke caused the municipalities to borrow large sums of money to hold larger bond positions.

The SEC alleges that Jaschke knew the municipalities’ ordinances prohibited his trading strategy and required that their funds be invested with the paramount consideration to be safety of capital. Jaschke also knew that the municipalities’ ordinances prohibited the use of repurchase agreements for investment. According to the SEC’s complaint, had the bond market not swung sharply in Jaschke’s favor allowing the municipalities to close their accounts with a modest profit, they could have lost approximately $60 million over a two-year period as a result of his misconduct.

In addition to First Allied’s settlement, the SEC had also charged Jeffrey C. Young, vice president of supervision, for also failing to supervise Jaschke. Young is suspended from being a supervisor for nine months, and will pay a $25,000 fine.

When Jaschke’s customers had first complained to him that their accounts were losing large amounts of money, Jaschke blamed the losses on Bear Stearns, the clearing broker for First Allied-a clearing broker is the intermediary between a broker buying securities and corporations selling securities. When those customers then turned to Bear Sterns, according to the SEC, the broker-dealer warned Young about suspected churning in Jaschke.

Young opted not to inform Jaschke’s clients of what he had heard, and First Allied would not directly contact the municipalities about the alleged churning until January 2008, the SEC said.

As the SEC noted, Jaschke should have never purchased STRIPS for either municipality, for two reasons. First, both municipalities had non-discretionary accounts with Jaschke, meaning the broker had to get client authorization-by engaging in multiple short-term trades without his clients’ knowledge, Jaschke was violating this rule. Second, these municipalities were required, by law, to invest only in safe and conservative investments.

Many citizens of each municipality will never know how close their local governments came to financial doom. The SEC’s complaint and civil suit against Jaschke is still pending, and their settlement with First Allied points to a larger systematic failure.

By using his personal e-mail account, Jaschke was able to sidestep e-mail supervision from First Allied, according to the SEC, and much of his contact with clients was done off the radar. When Jaschke deflected customer attention to Bear Stearns, a move the SEC said was meant to buy more time, he was permitted to trade until 2008.

If you have invested with Jaschke or First Allied Securities, check your accounts for unusual account activity. If you suspect financial misconduct on behalf of your boker, contact us for a free evaluation of your case

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