Minnesota is home to the Twin Cities, Minneapolis and St. Paul. Like other affluent cities, they are a magnet for financial fraudsters seeking to prey on Minnesota investors. In its “Top Investor Threats for 2022,” the Minnesota Department of Commerce flagged its priorities to address the following threats:
The above threats were determined via a national survey of securities regulators, though it is clear that Minnesota investors are not exempt from threats of fraud and need to keep alert like everywhere else. The investment loss recovery lawyers at Malecki Law are experienced in holding large financial firms to account. Malecki Law is a national securities fraud law firm that has helped Minnesotans recover millions in financial losses due, whether due to supervisory neglect or outright fraud. Despite having a legal duty to watch over investor accounts and to supervise their financial advisors for suspect activity, financial firms – large and small – often fail to adequately supervise their business.
The Minnesota Department of Commerce is keenly aware of this, which is why in January 2021 the regulator reminded regulated firms of their obligations to investors in this volatile market, according to Maxwell Zappia, the Commerce Deputy Commissioner of Financial Institutions: “Regulated entities have an obligation to their customers. Commerce will work with fellow regulators to ensure that investor protection, fairness and transparency are upheld in the public securities markets….We are closely monitoring this developing situation and will examine actions by online brokerages and others to ensure that they are in compliance with their client obligations.” While reporting fraud to regulators, it is not usually the fastest or surest way to recover lost investment funds. In most cases, it makes sense to bring a parallel civil lawsuit against the wrongdoer. Choosing the right investment fraud attorneys, such as the experienced team at Malecki Law, is a good first step to recovering investment losses due to fraud and, usually its accomplice, lax supervision by the financial firm.
Securities firms have a duty to supervise their financial advisors, even for closely monitoring social media and outside business activities away from their workplace. The workplace trend following the pandemic has moved many employees to working from a home office, including financial advisors. But even federal regulators like FINRA and the SEC have long been clear that remote branch offices (which includes home offices, which must also be registered) require exactly the same standard of supervision that any main office must receive. In March 2004, the SEC states its position in Staff Legal Bulletin No. 17 on remote office supervision stems from how much easier it is to hide misconduct:
“Some broker-dealer firms have geographically dispersed offices staffed by only a few people, and many are not subject to onsite supervision. Their distance from compliance and supervisory personnel can make it easier for registered representatives (representatives) and other employees in these offices to carry out and conceal violations of the securities laws. The supervision of small, remote offices, therefore, can be especially challenging. The Commission staff has examined branch offices and the Commission has brought numerous enforcement cases involving inadequate supervision of these small, remote offices. These cases address situations in remote offices where supervisory mechanisms failed to detect and prevent misconduct. These cases illustrate gaps in firms' supervisory systems and provide insight into the steps that can help firms achieve effective remote office supervision. The purpose of this bulletin is to remind broker-dealers that vigilant supervision is a necessary component of a firm's policies and procedures and highlight those practices to improve supervision that have been suggested by recent Commission enforcement cases.”
The Financial Industry Regulatory Authority (FINRA) also recently issued important legal guidance via Regulatory Notice 22-10, which highlighted its position on its own supervision rule, FINRA Rule 3110, regarding the direct, individual liability that senior management may face for a firm’s failure to supervise a customer account or one of its financial professionals:
“Rule 3110 (Supervision) imposes specific supervisory obligations on member firms.2 The responsibility to meet these obligations rests with a firm’s business management….Accordingly, FINRA will look first to a member firm’s senior business management and supervisors to determine responsibility for a failure to reasonably supervise…. A firm’s supervisory obligations under Rule 3110 rest with the firm and its president (or equivalent officer or individual, e.g., CEO) and flow down by delegation to the firm’s supervisors. The firm’s president (or equivalent officer or individual) [] “bears ultimate responsibility for compliance with all applicable requirements unless and until he [or she] reasonably delegates particular functions to another person in that firm, and neither knows nor has reason to know that such person’s performance is deficient.” Accordingly, the president (or equivalent officer or individual) and designated principals are responsible for fulfilling the firm’s supervisory obligations under Rule 3110.”
Expressly placing individual liability on senior executives sends a strong message to financial firms, especially smaller ones, who are often undercapitalized if required to make an investor whole from firm wrongdoing. Thus, when hiring an investment loss recovery law firm to recover investment losses, it is important that its investment loss recovery attorneys understand that there are certain circumstances where it is beneficial to name a CEO, executive, or other senior supervisor as a defendant in the action. If a firm is undercapitalized and unlikely to be able to make an investor whole, it is possible that a senior executive (or its covering insurance policy) could make up the difference by being named in the lawsuit.
Whether in court or in FINRA Arbitration, the investment loss recovery lawyers at Malecki Law are experienced in bringing failure to supervise claims against financial firms big and small. If you are a Minnesotan investor or retiree and have suffered financial losses with your investment firm, call the national law firm of Malecki Law for a free consultation. Many of our customers choose a contingency arrangement, which means we don’t get paid for our work unless we make a recovery for our customers to get paid first.