LPL Financial has been charged by the Securities and Exchange Commission with failing to comply with its Customer Identification Program rules and allowing a client to defraud a Puerto Rican municipality via wire transfers.
The broker-dealer has agreed to pay about $5 million, including more than $4 million it has already repaid to the city, to settle the charges.
According to the SEC’s order, LPL failed to verify and respond to conflicting information when it opened a customer account and processed wire transfers at the request of Eugenio Garcia Jimenez Jr.
As alleged in the Commission’s Dec. 1, 2020 complaint against Garcia, he acted as an unregistered investment advisor and misappropriated $7.1 million of taxpayer funds from the Municipio Autónomo de Mayagüez, Puerto Rico, over the course of seven months in 2016.
“The City entrusted Garcia to provide advice and carry out his promised strategy to invest $9 million of City funds such that they had principal protection and 8-10% returns,” the order states.
Garcia approached LPL in April 2016 to open an investment account.
“After misappropriating $4.1 million of the City’s funds through an account” at an unnamed brokerage firm, Garcia approached LPL in April 2016 to open an investment account, the order states.
During its review before opening the account, LPL failed to comply with its Customer Identification Program procedures and, despite various individuals in different departments questioning the account’s beneficial ownership, source of funds and reason for transfer from the brokerage firm.
“Garcia opened an account controlled by him at LPL in June 2016. LPL subsequently processed wire transfers that Garcia requested. In the less than one month before LPL froze (and later liquidated) the account, Garcia was able to misappropriate an additional $3.1 million of City funds,” according to the order.
Through certain failures, LPL was a cause of Garcia’s violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act Section 206(2), which prohibit fraudulent conduct in the offer or sale of securities and upon any client or prospective investment advisory client, the SEC order states.
LPL also willfully violated Exchange Act Section 17(a) and Rule 17a-8 thereunder, which require broker-dealers to comply with reporting, recordkeeping and record retention, the SEC said.
Since 2016, LPL has undertaken significant remedial measures through modifications of its policies and procedures designed to prevent violations such as those described herein.
In a statement shared with ThinkAdvisor, LPL said that “We take our compliance and fraud governance obligations seriously, and have made significant investments in the last few years to address the underlying issues related to this matter. We fully cooperated with our regulators and law enforcement to resolve and fully remediate this matter.”
LPL has paid $3,269,975, plus interest of $848,901, to Mayagüez Economic Development Inc., representing the loss suffered by MEDI and the city as a result of LPL’s causing violations, according to the order.
LPL must also pay disgorgement of $114,318 and prejudgment interest of $26,884.
The SEC ordered LPL to pay a civil money penalty in the amount of $750,000 within 10 days of the entry of the order.