Patricia Foster, BridgeTower Media Newswires
In previous columns we have discussed the importance of conducting due diligence in the process of selecting a financial services professional. There is much that you can do to screen out individuals and firms that do not deserve your trust. Once you have selected a financial advisor, it is essential to monitor your accounts to ensure that your funds are being invested in accordance with your stated objectives-and that you are developing a relationship with an advisor who is right for you. In this column we consider the importance of "post-selection" diligence.
It's been a decade since the arrest of Bernie Madoff, a once-prominent Wall Street financier, stunned the world. It's difficult to estimate the number of lives shattered, or the amount wealth destroyed, by Madoff's elaborate Ponzi scheme, especially when lost investment opportunities are taken into account. Although regulators had received information as early as 2000 that Madoff's wealth management business might be a scam, the massive fraud continued until his arrest eight years later at the height of the financial crisis.
Investment scams and schemes flourish during periods of deregulation. Examples of statutes enacted during the Clinton administration to ease governmental restraints in the financial services sector include the Graham-Leach-Bliley Act of 1999 (GLB), and the Commodities Futures Modernization Act of 2000 (CFMA). Both of these laws affected the regulatory framework in significant ways.
GLB removed the walls that had separated commercial banking and investment banking. CFMA excluded a broad range of derivatives, including mortgage-related derivatives, from regulation by either the Commodities Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC). Passed in the final days of the Clinton administration without debate in either the House or the Senate, CFMA is now recognized as having been a major contributor to the financial crisis of 2008. These unfortunate legislative initiatives reflect the failure of Congress to assess the potentially corrosive impact of legislation on market stability and the financial well-being of the citizenry.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) expanded and enhanced protections established under the Sarbanes-Oxley Act of 2002 (SOX), and, among other things, mandated the establishment of a whistleblower program aimed at identifying fraud in the financial markets. The whistleblower program provides significant financial incentives for whistleblowers to report violations of the federal securities laws to the SEC. By all accounts, the program, which is administered by the SEC's Division of Enforcement, has been enormously successful. During the 2018 fiscal year, the SEC ordered whistleblower awards of approximately $168 million to 13 individuals, each of whom voluntarily provided original information that either led to the opening of an investigation or significantly contributed to a successful enforcement action.
Despite the reforms effected by Dodd-Frank and the success of the whistleblower program, many scams, schemes and swindles continue to operate undetected. Consider the case of Michael Giokas of Clarence, N.Y., who was recently sentenced to a 52-month prison term by a federal judge and ordered to pay nearly $1 million in restitution to clients after he plead guilty to wire fraud. Unlike the Madoff Ponzi scheme, the Giokas scheme was operated on a small scale. Nevertheless, investors were deprived of their savings.
Giokas, who began his career as a stock broker in 1986, had worked for seven retail securities brokerage firms when he was barred by the Financial Industry Regulatory Authority (FINRA) in 2018 from acting as a broker or associating with any brokerage firm. While acting as a registered rep for various securities brokerage firms, Giokas also conducted business as a registered investment adviser under the name Giokas Wealth Advisors.
The scheme that he perpetrated during the final months of his career was simple: He induced clients, many of whom were elderly, to withdraw funds from other financial institutions and invest those funds in a non-existent company that he called "Trinity Council." Promising unusually high returns with no risk to principal, Goikas used $857,000 provided by his clients for investment in Trinity Council to fund a bank account that he controlled.
In filings made in 2017 in the Federal District Court for the Western District of New York, the government asserted that Trinity Council was a shell company with no business operations and that the funds obtained from investors were never invested for their benefit. In its effort to establish "probable cause" in connection with the scheme to defraud and obtain money from an individual by misrepresenting the existence of an investment opportunity, the government alleged that Giokas had used over $190,000 of the initial $200,000 invested by his first victim for his personal benefit. It appears that when Giokas obtained an additional sum of $250,000 from his first victim and deposited that second check into his Trinity Council account, the bank may have filed a suspicious activity report (SAR). Eventually, the funds were returned to the victim. The scheme unraveled in short order following a consensual telephone conversation between Goikas and his first victim that was recorded. That recorded telephone conversation would later become the centerpiece of the government's case for wire fraud.
This little vignette may leave readers of this column wondering just how easy it might be for a financial advisor to misappropriate client funds. The Giokas fraud appears to have been an instance, undetected by regulators, in which a financial advisor operated with absolutely no controls in place. It isn't clear whether Giokas ever provided his victims with any trade confirmations or account statements.
However, investors can take some level of comfort from the fact that both brokers and advisers registered with the SEC are subject to a myriad of regulations intended to establish a strong control environment for the protection of investors. Of particular importance are the regulations relating to custody of customer funds. Nevertheless, customer funds have been misappropriated by financial advisors who have developed slightly more sophisticated schemes. We will explore these schemes in future columns.
Once a consumer has established a relationship with a financial services professional, it is important that he or she understand what types of accounts have been established, how the accounts are invested, how the accounts are performing and where customer assets are held by a qualified custodian. Caveat Emptor!
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Patricia Foster is a securities law attorney who represents clients in various sectors of the financial services industry, including broker-dealers, investment advisers and investment companies. This column is a collaborative work by Patricia Foster and David Peartree. David Peartree is a registered investment adviser offering fee-only investment and financial planning advice. The information in this article is provided for educational purposes and does not constitute legal or investment advice.
Published: Tue, Jul 23, 2019
