Peter C. Harvey, Attorney General
Bureau of Securities
Franklin L. Widmann, Chief
For Immediate Release:
June 29, 2005
For Further Information Contact:
Peter Aseltine (609) 292-4791
ATTORNEY GENERAL HARVEY REACHES AGREEMENT WITH AMERICAN EXPRESS FINANCIAL ADVISORS INC.
Firm Will Pay $5 Million For Failing To Supervise Financial Advisers,
Including Adviser In Voorhees Office Who Stole $400,000 From Clients
TRENTON – Attorney General Peter C. Harvey today announced that American Express Financial Advisors Inc. ("AEFA") will pay New Jersey $5 million and implement company-wide reforms to address allegations that it failed to reasonably supervise its financial advisers.
The settlement, reached cooperatively with AEFA, follows an investigation by the New Jersey Bureau of Securities within the Attorney General’s Office that initially focused on Arthur Davidson, of West High Ridge Road, Cherry Hill. Davidson, a financial adviser in AEFA’s Voorhees office, stole more than $400,000 from at least 22 clients. Davidson pleaded guilty Monday to a charge of theft by deception brought by the Attorney General through the Division of Criminal Justice.
The Bureau’s investigation quickly expanded with the uncovering of widespread problems involving AEFA’s failure to reasonably supervise financial advisers within its franchise offices. Under the settlement reached by the Attorney General, AEFA will reform the way it supervises financial advisers and will increase its oversight of financial advisory services to protect clients from misconduct by financial advisers.
"In investigating and prosecuting this individual, we identified a larger issue of inadequate supervision of the company’s financial advisers," said Attorney General Harvey. "To its credit, American Express has worked cooperatively with our office to address deficiencies in its oversight of financial advisers. Our shared goal is to ensure that investors who rely on the American Express brand are treated fairly and that American Express supervises its agents so that investors’ dollars are protected."
AEFA offers a range of products and services, including insurance, mutual funds and college savings plans, primarily through its financial advisers, many of whom work as independent contractors under franchise agreements. Davidson worked as a "franchisee adviser" in the company’s Voorhees branch office from 1997 until October 2004, when he was suspended by the company pending investigation of his activities.
AEFA has paid full restitution to known victims of Davidson and has agreed to compensate any additional victims who are found. AEFA also will pay the Bureau a civil penalty of $5 million.
Under the terms of his guilty plea, Davidson faces a three-year prison sentence and has signed an agreement to surrender his broker’s license and fully reimburse AEFA and any additional clients found to have lost money as a result of his conduct.
"We seek to protect investors through our enforcement efforts, both by weeding out brokers and financial advisers who break the law and by promoting practices within the industry that will eliminate fraud and safeguard investments," said Franklin L. Widmann, Chief of the Bureau of Securities. "This investigation is a good example of those dual goals."
"The first line of protection for investors who entrust their money to an investment firm should be the firm’s own supervisory procedures," said Attorney General Harvey. "We are taking a hard look at the industry. Where we find firms failing in this area and the failures are significant, we will be imposing major penalties and demanding significant reforms."
The Davidson Theft of Investor Funds
From around June 2001 through October 2004, Davidson forged client signatures on mutual fund redemption forms and financial advisory service agreements so as to liquidate investments in client accounts and withdraw commissions and fees without the client’s knowledge or consent. About 85 percent of the fraudulent charges to clients were withdrawn as commissions by Davidson for his personal use. AEFA uncovered his conduct through an internal investigation and reported it to the Bureau of Securities, which conducted its own investigation.
Through his forgeries, Davidson charged certain clients for multiple financial plans at excessive rates. For example, (1) an apartment manager in her mid-60s earning $44,000 per year with about $25,000 in assets at AEFA was charged $7,000 for four plans in a single year; (2) a retiree in her mid-60s earning $22,000 per year with about $10,000 in assets at AEFA was charged $3,500 for two plans in a single year; and (3) a recent college graduate in her early 20s earning $24,000 per year with $35,000 in assets at AEFA was charged $4,000 for two plans in a single year.
The Bureau’s investigation uncovered broader weaknesses in AEFA’s supervision and surveillance of its franchisee advisers. A critical defect identified by the Bureau was that franchisee advisers selected the person at AEFA who was to serve as their own compliance supervisor and paid the supervisor directly for acting in that capacity, creating a conflict of interest for those supervisors responsible for ensuring compliance with laws and regulations. Franchisee advisers could select a supervisor outside of their office, as Davidson did.
Reform of AEFA’s Supervisory Practices
AEFA has since implemented a system that assigns an on-site supervisor where possible and eliminates the ability of a franchisee adviser to choose his or her own supervisor. Franchisee advisers now pay AEFA, not the supervisor, for the cost of supervision. Moreover, AEFA has eliminated in New Jersey a practice that allowed supervisors who had compliance responsibilities to also act as business consultants for the same financial advisers and receive additional fees in their business consulting role.
AEFA has agreed by November 30, 2005 to, among other things, implement new training and surveillance procedures to better detect instances of forgery, unauthorized account activity and improper fees.
In addition, AEFA has agreed to hire an independent expert, approved by the Bureau, to review its supervisory procedures and consult with AEFA and the Bureau to identify areas of concern. The expert will issue a report within 90 days concerning its review. Within 30 days after it receives the report, AEFA will submit a plan acceptable to the Bureau outlining changes to be implemented in response to concerns raised by the review.
The Bureau’s investigation was conducted by Chief of Enforcement Richard Barry, Supervising Investigator Michael McElgunn, Regulatory Attorney Kevin O’Brien and Investigators Dick Smullen and Dean Kuehnen. Deputy Attorney General Anna Lascurain, Chief of the Securities Fraud Prosecution Section of the Division of Law, handled the case for the Attorney General. The Consent Order with AEFA is linked to this press release at www.njpublicsafety.com.
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