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E-mail Communication Failures - What a Terminated CEO, WhatsApp Broker, Woodbridge & FIP Have in Common

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What makes the termination of Jamie Silber Bennett's registration from his own firm, Silber Bennett Financial (Encino, CA), so notable is not just a founder and CEO paying the piper for misconduct, but the high importance FINRA places on communication and correspondence requirements, such as e-mail and record retention in the fight to detect broker misconduct and fraud. And for good reason.

From the Woodbridge Group of Companies Ponzi scheme, which relied on a network of rogue representatives, many of whom perpetuated their fraudulent conduct by sending e-mails from personal accounts and violating other communication rules, to Future Income Payments (Scott A. Kohn of Newport Coast, California), some of the securities industry's most harmful frauds exacerbate their damage by selling away and/or skirting correspondence and recordkeeping regulations so as to avoid detection and rules enforcement.

In Broker-Dealers Still May Be Held Liable for Selling Away Losses: A Woodbridge Case Study, a FINRA arbitration panel held Quest Capital liable for the actions of broker Frank Roland Dietrich, who sold $10.8 million of fraudulent Woodbridge promissory notes to 58 investors away from his firm. Quest had argued it shouldn't be held liable for Dietrich's actions, but the arbitration panel rejected the firm's argument and awarded damages.

In 2019, FINRA fined and suspended Silber Bennett CEO Jamie Silber Bennett for failing to retain business e-mails and for using an outside e-mail address to communicate with clients. The charges devastated Bennett's firm, which conducted a general securities business through Wedbush Securities and whose registration with FINRA terminated in 2019, as did Bennett's personal registration as well.

FINRA's key findings with Bennett included his firm's failure to preserve "all communications...relating to its business" and to maintain accurate books and records.

Specifically, FINRA found that a firm representative engaged in undisclosed outside business activity, including solicitation of investments, and that reasonable review of his e-mail "may have allowed the firm, through Bennett, to discover these issues."

Furthermore, FINRA found that Bennett himself used an outside, non-Silber Bennett Financial, e-mail address to conduct business and failed to properly retain his own e-mail communications.

In February 2020, FINRA fined and suspended Paul A Falcon for using WhatsApp Messenger—a smartphone app—to conduct securities-related business with customers at his firm, Aegis Capital Corp.

FINRA hammered Falcon for going outside Aegis and violating policy to communicate with investors such that the firm would be unable to detect or retain the messages Falcon sent and received.

All told, communications conducted away from the firm could prove to be benign or could be part of massive frauds, such as the aforementioned Woodbridge Ponzi scheme and Future Income Payments (FIP) fraud.

The problem lies in the not-knowing and as long as a stockbroker's communication with customers or other members of the investing public exists outside the scope of supervision of the firm—or within the firm's systems if the firm itself fails to adequately review e-mails and supervise its investment advisers—investors remain vulnerable to becoming unknowing victims of potential frauds or other nefarious and financially harmful behavior.

Similarly, brokerage firms have to design and execute a supervisory system which is reasonably designed to achieve compliance with "... applicable securities laws and regulations, and with applicable FINRA rules."  Importantly, firms not only have to keep records of electronic communications, but backups of that data, too.  In arbitration, the failure of a firm to comply with FINRA rules and retain communications such as e-mails and/or text messages can be devastating to a firm's defense.  Firms are also obligated to reasonably respond to red flags such a broker using a non-firm e-mail account or non-approved app to communicate with customers. 

If you invested with a broker or financial adviser who sold investments or communicated with you via unapproved or unauthorized communication methods—such as through personal e-mail accounts at Gmail or Yahoo, or other non-firm avenues including text messages and WhatsApp—and you experienced losses related to investments sold or discussed in these violative communications, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation with an experienced FINRA arbitration attorney.

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