OPED: Brokerages Can't Abandon Responsibility for "Abandoned" Accounts
U.S. broker-dealers are supposed to keep track of the accounts which clients may have forgotten about and ensure they have adequate procedures for changing the status of accounts from "abandoned" to active.
But one broker-dealer apparently abandoned its responsibilities. It allowed an operations executive to steal $850,000 after liquidating securities from "abandoned" retail accounts because of what the Financial Industry Regulatory Authority called "deficient procedures."
The case involving Wachovia Securities, now called Wells Fargo Advisors, should serve as a warning sign to brokers to pay closer attention to unclaimed accounts. They are prime target for misconduct -- and potential regulatory penalties.
Why? Brokerages, say operations executives contacted by ISS Magazine's online edition, typically pay little attention to unclaimed accounts because they aren't money-making accounts, And the Securities and Exchange Commission has not, until recently set any guidelines for the procedures brokers must undertake to track down the owners of unclaimed accounts. They are the accounts for which the brokerage firm can't find the investor who likely either died or didn't bother to provide to update an address or cash a payment. If the account holder doesn't care why should the brokerage, right.
Brokerages still incur administrative costs in maintaining these accounts, sending out correspondence to notify the investor the account may be flagged as abandoned, reactivating the account or filling out the paperwork necessary to "escheat" or transfer the account to the state of the investor's last known address. The admin and due diligence work is typically assigned to specialist "escheatment" departments, units of operations departments which are supposed to have written procedures on how they will "restore" or reactivate an account. Wachovia which managed its "escheatment" unit as a "subgroup of the performance reporting" unit apparently didn't.
"The firm failed to establish supervisory procedures addressing the restoration of abandoned accounts," says FINRA, the self-regulatory agency for broker-dealers in fining Wachovia $350,000. In its ruling, which is cited on FINRA's December bulletin about its disciplinary actions, the agency blames Wachovia's bad policies for allowing a operations executive in its Miami branch office to "convert" customer accounts and escape detection by the firm. Convert is apparently a euphemism for stealing the money in 11 retail accounts which righfully belonged to investors.
The wrongdoing occurred between October 2005 and March 2007 so Wachovia's policies -- or lack thereof-- were to really to blame. Wells Fargo & Company unfortunately inherited Wachovia's liabilities -- and other headaches -- when it bought the firm in December 2008 and has agreed to cough up the $350,000 fine-- and be censured --without "admitting or denying guilt." In its ruling made in October 2011, FINRA never explains just how the wrongdoing was discovered and only identifies the operations executive as "TT." In its December bulletin summarizing its fine, FINRA refers to the executive as a female with supervisory responsibilities. Well Fargo officials were not available to immediately comment on the case by late Friday afternoon.
Here is a summary of what happened. And didn't happen. Wachovia's procedures stated that the firm considered an account abandoned when three statements were returned-- presumably in an envelope with some sort of designation that the resident could not be tracked. Fair enough. Lots of other brokerages do the same.
But let's say that the firm did eventually track down the investor or the investor contacted the broker on the account to say he or she was "alive and well" living at another address. Someone at Wachovia would need to send a request to the firm's "escheatment unit" to change the status of the investor's account from abandoned to active status. That change would ensure that the account wouldn't be "escheated" or transferred to the state of the last known address of the investor about three to five years after the account is marked as "abandoned." U.S. states collect billions of dollars in unclaimed accounts each year and the money often goes to closing their budget deficits. They do have to return the money to the investor when he or she comes calling but not all of the states are diligent in tracking down investors -- or their heirs so once an account is escheated its twice as hard to reclaim it.
Mistake one: Wachovia apparently didn't require "TT", the operations executive to obtain any approvals from a supervisor to have the status of the abandoned accounts changed to active status. TT might have been stopped at this point because her supervisor would have known about her request.
Mistake two: TT didn't provide any documentation to the escheatment department that the customer had been located when asking for the accounts to become activated. Simply sending an email requesting the accounts be activated was apparently enough. If TT were required to provide documentation he or she might have been stopped at this stage.
Mistake three: Wachovia also didn't require the firm's escheatment unit-- part of the performance subgroup of the operations department -- to notify the Miami branch manager of the operations executive when an account was switched from abandoned to active status. TT might have been stopped here because the branch manager might have caught on to the scam.
The expression three strikes and you're out apparently didn't apply to Wachovia. The firm didn't send out letters to the customers telling them that their accounts had been reactivated. That policy fits in line with the firm's policies -- and every other brokerage's policies, but there is still one more problem.
Mistake four: The letters were sent to the investors' old addresses which would have been invalid. And the letters were also sent to the investors' new supposedly correct addresses. Only they weren't correct. TT had somehow managed to change the new addresses to phony ones he or she controlled. The result: the investors never got any correspondence from the firm. It is unclear how the operations executive was allowed to alter the addresses without anyone verifying her authority to do so or whether the new addresses were actually correct. TT might have been stopped at this stage if he or she were denied access to Wachovia's database to change the addresses. Presumably the new accounts department at Wachovia should have picked up what was going on and attempted to verify the new addresses.
It wouldn't be the first time Wachovia screwed up its supervisory procedures in how customer addresses were to be changed. According to FINRA's ruling, Wachovia had previously paid the New York Stock Exchange a fine of $300,000 for failing to correctly review how it changed addresses for customers holding "command asset program accounts." The lax procedures allowed a registered representative of the firm to get away with stealing $630,000 from customer accounts from July 2002 to September 2003.
The ultimate oversight in the case of the unclaimed accounts: TT was somehow able to liquidate the securities positions in the supposedly activated accounts and collect the $850,000. Mistakes five and six apply here. Whose permission did TT have-- or apparently not have- to liquidate the positions in the first place and how was she able to get her hands on the $850,000. FINRA never explains. U.S. operations executives familiar with unclaimed accounts tell ISS Magazine's online edition that even if TT did have the authority to liquidate the accounts the funds should have been transferred to another account TT could not possibly have accessed. One operations executive ISS spoke with speculates that the funds were were wired to a bank account TT owned. If that is the case it begs yet another question -- who authorized the wire transfers?
Perhaps the entire mess could have been nipped in the bud from the start. It's really not clear whether TT even had any authority to request that the escheatment department change the status on an investor's account. The reason: Wachovia apparently didnt have any procedures specifying who should have been given that clout.
How many accounts were really affected? About 11 retail accounts and they were all international accounts -- accounts from overseas investors. That's just a fraction of the 50,000 abandoned accounts Wachovia was responsible for. But still one too many. TT had good reason to target international accounts: overseas owners might be less likely to claim them than U.S. investors, say operations executives, citing potential money laundering activities.
TT isn't the first operations executive to be caught up in shennanigans involving abandoned accounts. The most publicized example: in September 2000, BJ Kingdon, the former head of Bankers Trust's securities services department pleaded guilty in a New York Federal Court for his role in helping to transfer $19.1 million in unclaimed customer funds into the bank's own account; also implicated were former colleagues Kenneth Goglia, a controller and Howard Plante, a vice president. Kingdon had fled to Ireland where his family had relocated, but eventually returned to the US to face the music. Deutsche Bank bought BT in June 1999, after the former BT paid criminal fees of about $60 million to the U.S. government and $3.5 million to New York State. Brokerages and banks are supposed to eventually ship off unclaimed client accounts to the state of the last known address of the investor within about three to five years after the accounts are considered abandoned so New York State said it was entitled to the accounts.
In the case of the former Bankers Trust, Kingdon and his colleagues never ran off with any of the $19.1 million. They simply credited the money on their books as revenues so their unit would look more profitable. And they could earn higher bonuses. TT's rationale was far cruder: make easy and fast money.
The common thread: Nobody at the firms was paying attention to whether the correct procedures were being followed- if there were any outlined in the first place. They should have. The money ultimately belongs to investors.
Written by Chris Kentouris, Editor-in-chief (Chris can be reached at Chris.Kentouris@hotmail.com).
