Do brokerage firms knowingly turn a blind eye and a deaf ear to the Ponzi schemes recommended by their brokers, or are there instances where brokers really are successful in hiding these schemes from even the most vigilant financial firms? Not surprisingly, the answer is “yes” to both questions. However, it should come as a surprise because firms really don’t have any upside when their brokers participate in outside business activities or private securities transactions. Pursuant to Financial Industry Regulatory Authority (FINRA) Rules 3030 and 3040, brokers are required to notify their firms of any outside business or investment opportunity they get involved in, and with regard to the investment opportunities, the brokerage firm is required to supervise the scheme just as if it was branded and endorsed by the firm. When firms don’t properly supervise these outside securities transactions, they can be held financially responsible for the victims’ losses.
According to the United States Securities & Exchange Commission (SEC) it filed 60 enforcement cases that involved Ponzi schemes, with some of the most notable being Bernie Madoff and Sir Robert Allen Stanford who made off with an alleged $50 Billion and $7 Billion, respectively. But one thing is certain, given the heyday of the last bull market and no doubt the lifestyles built by these con men and even well intending stockbrokers, there will be more PONZI schemes in the news.
For those that find themselves victims of PONZI schemes, more troubling may be the fact that the regulators such as the United States Securities & Exchange Commission (SEC), Financial Industry Regulatory Authority and various states securities regulators may have received advanced warning in these schemes, but slow to act. Many of these regulatory bodies and their employees have found themselves the target of accusations that they simply turned a blind eye and a deaf ear to obvious warning signs, and in some instances actual knowledge of the wrongdoing. While the regulators are becoming more and more zealous in their enforcement efforts, they rarely recover an individual victim’s losses.