Attorney General Christopher S. Porrino and the New Jersey Division of Consumer Affairs, Bureau of Securities, have announced that a Red Bank brokerage firm will pay a $275,000 civil monetary penalty for failing to reasonably supervise one of its brokers who managed an account for a quasi-public entity.
The Bureau of Securities, in an Administrative Consent Order signed on December 7, 2017, found that Garden State Securities Inc. failed to address red flags in a Newark Watershed Conservation and Development Corporation account, managed by Darnell Deans, a broker associated with Garden State.
The Consent Order contains findings that Garden State permitted Deans to engage in “aggressive and speculative trading activity” without a reasonable basis to believe the activity was suitable for NWCDC. Garden State also failed to make and/or preserve a record of investment objectives for NWCDC and certain other customer accounts.
Certain irregularities in the NWCDC account were first discovered during an Office of the State Comptroller investigative report in 2014. NWCDC was a not-for-profit entity designated by the City of Newark to manage the city’s watershed properties. It has since declared bankruptcy.
Deans was the account’s registered representative from the time NWCDC opened the account in 2005 through its closure in 2011.
“Mr. Deans was playing fast and loose with public money, and Garden State failed to reasonably supervise his activity,” said Attorney General Porrino. “The state’s securities laws are designed to protect investors from this type of behavior. The fact that the ultimate investor here was the public makes this offense all the more egregious.”
The Consent Order includes findings that from the time the NWCDC account was opened there were issues with the account documentation. For instance, NWCDC’s New Account Form never indicated its investment objectives during the life of the account. Despite this, a Garden State supervisor signed off on the account. Further, another NWCDC form also omitted information about the types of transactions that could be entered in the account.
After NWCDC transferred approximately $880,000 in cash and securities into the Garden State account, Deans engaged in mutual fund switching, use of margin, short selling, short-term trading and excessive trading, all of which were red flags that Garden State failed to adequately investigate.
Deans was registered with the Bureau of Securities as an agent of Garden State from 2005 until 2013. The Bureau revoked his registration pursuant to a Summary Revocation and Penalty Order in 2013 which contained findings that Deans engaged in dishonest or unethical business practices in the securities industry for conduct unrelated to the NWCDC account.
The Consent Order also included findings that between 2006 and June 2016, Garden State failed to have a reasonable system of supervisory review to determine whether commissions it charged were fair and reasonable. Garden State used commission review reports and spreadsheets that were inadequate for their intended purpose, and failed to appropriately document the relevant factors taken under consideration when approving commissions in excess of 5%.
In addition to paying the civil penalty, Garden State must retain an independent consultant to conduct a comprehensive review of the firm’s supervisory policies and procedures in order to determine their suitability and compliance with existing securities laws. Garden State is also required to adopt and implement the consultant’s recommendations.
The Bureau's action was handled by Investigator Dorian Gross, Director of Complex Investigations Peter Cole and Deputy Bureau Chief Amy Kopleton of the Bureau of Securities, within the Division of Consumer Affairs.
The Bureau is charged with protecting investors from investment fraud and regulating the securities industry in New Jersey. It is critical that investors "Check Before You Invest." Investors can obtain information, including the registration status and disciplinary history, of any financial professional doing business to or from New Jersey, by contacting the Bureau toll-free within New Jersey at 1-866-I-INVEST (1-866-446-8378) or from outside New Jersey at (973) 504-3600, or by visiting the Bureau's website at www.NJSecurities.gov. Investors can also contact the Bureau for assistance or to raise issues or complaints about New Jersey-based financial professionals or investments.