Aiding and Abetting Fraud: Understanding the Liability of Brokerage Firms and Banks

Fraud cases, particularly those involving Ponzi schemes, often reveal significant lapses in supervision by brokerage firms and banks. At Malecki Law, we frequently handle cases of aiding and abetting fraud, often alongside failure to supervise claims, to hold financial institutions accountable when their negligence enables fraudulent activity.

Brokerage firms and banks are responsible for ensuring that their employees and representatives adhere to securities laws and ethical standards. This responsibility extends to monitoring all business activities conducted within their branch offices. Unfortunately, fraud—including Ponzi schemes—can and does occur, especially in relatively unsupervised or poorly managed branch offices.

It is often clear that the failure of a firm or bank to meet its supervisory obligations directly contributes to fraudulent activity. These institutions are required by law to actively oversee and investigate outside business activities (OBAs) conducted by their representatives. If these activities are investment-related, the firm or bank must supervise them as though they were conducted within the organization itself. When this responsibility is neglected, it opens the door for fraudulent schemes to thrive.

Aiding and abetting fraud occurs when a brokerage firm or bank knowingly or negligently allows fraudulent activity to take place. This can happen in several ways:

• Turning a Blind Eye: Institutions may be aware of suspicious activities or OBAs, but choose not to investigate further.
• Inadequate Oversight: Failure to implement robust supervisory systems and compliance programs creates an environment where misconduct can flourish.
• Ignoring Red Flags: Signs of irregularities, such as unusual fund transfers or discrepancies in documentation, may be overlooked rather than investigated.

For instance, if a Ponzi scheme is orchestrated within a branch office and the firm failed to supervise the involved employees adequately, it could be held liable for aiding and abetting the fraud. Even without direct participation, the institution’s inaction or negligence can be seen as enabling the fraudulent conduct.

The obligations of brokerage firms and banks to prevent fraud are outlined in various regulatory frameworks. For brokerage firms, FINRA imposes stringent rules requiring the supervision of all associated persons and business activities. Banks, on the other hand, operate under both state and federal banking laws, which similarly mandate active oversight to prevent illegal practices.

These regulations are designed to protect investors and ensure the integrity of financial markets. When institutions fail to meet these standards, they not only harm their clients, but also undermine public trust in the securities and banking industries. Aiding and abetting fraud claims often seek to address these failures by holding negligent firms accountable.

In aiding and abetting cases, plaintiffs typically argue that the institution’s failure to supervise violated securities and banking laws, thereby contributing to the fraud. This is often coupled with failure to supervise claims, which highlight how lapses in oversight directly facilitated the misconduct.

For example, if a brokerage firm knew or should have known about an employee’s involvement in a Ponzi scheme, but failed to act, the firm could be held liable for aiding and abetting fraud. Similarly, if a bank disregarded evidence of suspicious transactions linked to a fraudulent scheme, it could face similar claims.

The consequences of aiding and abetting fraud can be severe. Brokerage firms and banks found liable may face:

• Substantial financial penalties
• Damaged reputations and loss of client trust
• Increased regulatory scrutiny
• Potential criminal investigations for willful misconduct

These repercussions highlight the importance of proactive supervision and compliance. By failing to meet their obligations, institutions risk not only legal action, but also long term harm to their business operations.

At Malecki Law, we represent clients in cases involving aiding and abetting fraud and failure to supervise. Our experienced securities lawyers have a deep understanding of the regulatory framework governing brokerage firms and banks, enabling us to build strong cases against negligent institutions. If you have been harmed by fraudulent activity and believe a brokerage firm or bank may have contributed through inadequate supervision, we can help. Call Malecki Law today at (212) 943-1233 or contact us online to schedule a consultation. We are committed to holding institutions accountable and securing justice for our clients.

Transcript:

We frequently bring eating and abetting cases alongside of failure to supervise cases against broker dealers and Banks where a Ponzi scheme has occurred in let’s say a branch office it would be prized how frequently this happens where there is a relatively unsupervised branch office of a broker dealer or a bank where a Ponzi scheme is being perpetrated in those cases we would say that their failure to effectuate their supervisory responsibilities under the Securities and banking laws has brought rise to a cause of action against them for both aiding and abetting and failure to supervise some broker dealers and Banks turn a blind eye to the conduct they know of outside business activity and they’re not actively looking at it they are required under the rules if there is an outside business activity to fully vet that and if it is investment related to in fact supervise that activity as if it is happening in the broker dealer or the bank so we bring those cases based on those theories.