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March 5, 2010

First Allied Securities Enters Into $1.95 Million Settlement with SEC Over Failure to Supervise Broker

sec crest.bin.jpgSan Diego-based First Allied Securities has agreed to pay $1.95 million in a settlement with the Securities and Exchange Commission (SEC) relating to the firm's failure to supervise the activities of former broker Harold Jaschke who was the subject of a related SEC action for churning, conducting unauthorized trades and giving unsuitable recommendations.

According to the SEC, Jaschke had engaged in a high-risk short-term treasury bond trading strategy for two municipalities who were his clients, the City of Kissimmee, Florida and the Tohopekaliga Water Authority. Jaschke reaped commissions of more than $14 million while trading for the two municipalities who had combined unrealized losses of approximately $60 million. When Jaschke's unusual trading activity raised red flags and generated an exception report, First Allied did not follow its customary practice of sending the customer a "negative response letter" to notify them of the suspicious activity. As its name implies, a negative response letter does not require a response from the customer unless they want to question the activity. After a nine-month delay, the firm became concerned enough that it ultimately decided to send a "positive response letter," which requires a written confirmation from the customer. However, according to the SEC's order, First Allied's letter failed to adequately alert the customers about the suspicious activity and falsely stated that the letter was being sent as part of First Allied's "annual review" process. No one at the firm, other than Jaschke, spoke with the customers about the situation. The customers signed and returned the letter based on misinformation given to them by Jaschke.

First Allied terminated Harold Jaschke on August 13, 2008. The SEC's action against him is still pending.