Washington, D.C., Sept. 30, 2004 – LAWFUEL – Best law news, legal, SEC, attorney, law firm news The Securities and Exchange Commission’s
Division of Enforcement today brought civil fraud charges against Raymond
James Financial Services, Inc., a registered broker-dealer and investment
adviser headquartered in St. Petersburg, Fla., based on the conduct of one
of its former brokers, Dennis Herula. In the Order Instituting Proceedings,
the Enforcement Division alleges that, in 1999 and 2000, Herula and others
fraudulently solicited a number of investors to deposit approximately $44.5
million in a Raymond James brokerage account held in the name of Brite
Business, promising them astronomical returns with no risk if they did so.
The Order alleges that Herula, acting in his capacity as a Raymond James
registered representative, used Raymond James’ facilities and letterhead to
carry out the scheme. According to the Order, approximately $16.5 million
of the investor funds raised – most of which was subsequently transferred to
Herula’s wife’s brokerage account at Raymond James – was dissipated and
never returned to investors, and Herula and his wife misappropriated
approximately $8.7 million of those funds.
The Order also alleges that Raymond James, J. Stephen Putnam, the firm’s
former president and chief operating officer, and David Ullom, Herula’s
former branch manager, failed reasonably to supervise Herula. According to
the Order, Putnam and Ullom were aware that Herula was conducting activities
for a suspicious business venture and was making or had made
misrepresentations on behalf of Raymond James in connection with that
business venture, but failed to take timely or adequate steps to address
those misrepresentations or to stop Herula from making further
misrepresentations. The Order also alleges that Putnam and/or Ullom
facilitated the dissipation of the investor funds raised in the scheme by
approving the transfers from the Brite Business account to Herula’s wife’s
account. In addition, the Order alleges that Raymond James and Putnam
failed to establish and/or implement procedures concerning the supervision
of registered representatives who worked away from the office (as Herula
did), heightened supervision of registered representatives, monitoring or
auditing operating accounts of branch offices, and investigation of
suspicious fund transfers.
Stephen M. Cutler, Director of the SEC’s Division of Enforcement, said,
“Today the Division is charging Raymond James with fraud in connection with
a scheme by its former employee, Dennis Herula. Raymond James was aware at
the highest levels that Herula was making misrepresentations to potential
investors and yet failed to put a stop to Herula’s activities. Brokerage
firms cannot turn a blind eye to the fraudulent activities of their
employees and expect to avoid the consequences.”
Walter G. Ricciardi, District Administrator of the Commission’s Boston
District Office, said, “The responsibility of broker-dealers to adequately
supervise their employees is a critical part of the overall regulatory
scheme to protect investors. Broker-dealers need to pay close attention to
the activities of their registered representatives and they need to act
promptly and decisively when there is even the slightest hint of impropriety
on the part of a registered representative. Here, Raymond James and its
highest level management were aware that one of its registered
representatives was using his position at Raymond James to promote a very
suspicious business venture and was sending correspondence to investors on
Raymond James letterhead that made false representations on Raymond James’
behalf.”
The Division of Enforcement alleges in its Order Instituting Proceedings
that as a result of Herula’s fraudulent conduct, Raymond James violated
Section 17(a) of the Securities Act of 1933 and Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder. The Division also alleges that
Raymond James, Putnam and Ullom failed reasonably to supervise Herula, a
person subject to their supervision, with a view to preventing or detecting
Herula’s violations of Section 17(a) of the Securities Act and Section 10(b)
of the Exchange Act and Rule 10b-5 thereunder. According to the Order,
Raymond James also violated Section 17(a) of the Exchange Act and Rule 17a-4
thereunder by failing to preserve for three years, the first two years in an
accessible place, electronic mail communications, and by failing to promptly
furnish certain electronic mail communications to the Commission staff.
The Commission previously brought fraud charges against Herula and others in
connection with the Brite Business scheme on April 1, 2002. A Rhode Island
federal court froze Herula’s assets and subsequently granted the
Commission’s request for a default judgment against Herula on Oct. 17, 2002.
See Commission Litigation Release Nos. 17461 (April 5, 2002) [emergency
civil injunctive action filed and temporary restraining orders entered
against Herula, Capalbo, and others]; 17800 (Oct. 23, 2002) [permanent
injunction entered against Dennis Herula]; and 17957 (Jan. 29, 2003)
[permanent injunction entered against Dennis Herula’s wife, Mary Lee
Capalbo].
