In a textbook example of red flags and warning signs to watch out for, prosectors charged former Wells Fargo Advisors Financial Network representative John Gregory Schmidt with 128 felony counts, encompassing over 14 years of alleged fraud and forgery resembling a Ponzi scheme and echoing a prior SEC civil complaint that accused Schmidt of defrauding several elderly clients out of $1.1 million in which Schmidt purportedly "targeted his most vulnerable customers—i.e., the customers least likely to notice that money was missing from their accounts."
According to the SEC's September 2018 complaint, Schmidt (FINRA CRD #708094) sold at least seven clients' securities, secretly transferring over $1 million in proceeds to 10 other customers to cover shortfalls in their accounts. According to prosecutors, "he had to keep stealing from more investors in order to cover for the thefts from other investors."
Several pending and settled customer disputes in Schmidt's BrokerCheck file allege misappropriation of funds and misrepresentation. For instance, one dispute settled for $1.5 million alleged that Schmidt "absconded with monies belonging to client" from 2006 through 2017.
The SEC alleged that Schmidt effected a series of unauthorized transactions from variable annuities (VAs) through fraudulent authorization letters, and issued fabricated account statements to cover his tracks and mask the deficits from his targeted clients, who were vulnerable due to age or illness, with little or no financial sophistication (for instance, five of his clients actually died during the scam while others suffered from Alzheimer's disease or dementia). In addition to the secret $1 million transfers, Schmidt reportedly received over $230,000 in commissions.
Schmidt's actions touched on several areas of suspicious behavior. When Wells Fargo terminated Schmidt in October 2017, they did so based on allegations of "unauthorized money movement" and "inaccurate account statements" not approved by Wells Fargo.
Schmidt also explicitly told customers to rely on the fake statements he sent them and to ignore the accurate account statements sent to them by Wells Fargo.
Red Flag 1: Receiving two different statements for identical accounts from different sources that contain conflicting information is unusual and something to investigate. A broker instructing a customer to disregard the firm's account statement in favor of a conflicting statement is a suspicious act.
Red Flag 2: Securities and funds alike, once placed in an account, should not disappear or move for no reason and all transactions, even those effected on a discretionary basis (in an account approved for the broker to trade securities without obtaining a client's prior authorization), should be subject to reasonable explanation. The SEC report states that Schmidt targeted customers who rarely made withdrawals for themselves, so that they would be less likely to discover the fraud by overdrawing their accounts. Even so, periodic vigilance regarding an account's status/balances/holdings is a healthy habit and allows quicker and more accurate detection of unusual activity.
Red Flag 3: Communications and explanations for significant transactions should be documented in writing and on firm letterhead or via a firm e-mail address (e.g., not from a broker's personal account [@gmail.com], etc.). The SEC report states that Schmidt provided his customers with verbal explanations only, and went so far as to create fake e-mail accounts that he gave to the annuity issuers to send confirmation documents to in order to prevent his clients from seeing what was going on in their accounts.
If you have encountered a situation where a broker moved your assets or provided you with unusual account statements or correspondence—including delayed account statements indicating unusual losses or unreasonable excuses for transactions, excessive fees, or commissions—that have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.