Brokerage firms are responsible for the unsanctioned extracirricular activities of their stockbrokers or registered agents selling unregistered investments.
See, e.g. , LustgRoyal Alliancef v. Behrens, 619 F.3d 867 (8th Cir. 2010)(plaintiffs stated a claim for control person liability against a broker-dealer whose registered representative conducted a Ponzi scheme, even though the fraud was conducted through a third-party brokerage firm); Harrison v. Dean Witter Reynolds, Inc., 79 F.3d 609 (7th Cir. 1996), cert. denied, 519 U.S. 825 (1996)(broker-dealer liable for Ponzi scheme run by two registered representatives in Dean Witter's Boca Raton branch office, despite that customers did not deal directly with Dean Witter in purchasing them); Jairett v. First Montauk Securities Corp., 153 F.Supp. 2d 562 (E.D. Pa. 2001)(broker-dealer "control person" liable for registered representative’s sales of mortgage interests through a wholly separate entity); Hunt v. Miller, 908 F.2d 1210 (4th Cir. 1990)(broker dealer responsible for registered representative’s sale of limited partnership interests sold away from firm); Martin v. Shearson Lehman Hutton, Inc., 986 F.2d 242 (8th Cir. 1993), cert. denied, 114 S.Ct. 177 (1993)(Shearson's status as employer [of the registered representative] is sufficient to establish it as a controlling person); See also, In re Royal Alliance Assoc., Exchange Act Rel. No. 38174, 1997 SEC Lexis 113 (Jan. 15, 1997) (disciplining firm that failed to stop two branch managers from selling Ponzi schemes); In re Kolar, Exchange Act Rel. No. 46127, 2002 SEC Lexis 1647 (June 26, 2002) (suspending Dean Witter supervisor who failed to detect and prevent broker's sales of investments, promoted as collateral-backed promissory notes); In re Kunz, Exchange Act Rel. No. 45290, 2002 SEC Lexis 104 (Jan. 16, 2002) (disciplining broker-dealer that failed to prevent broker's sales of "Wholesale Mortgage Loan Participation Interests"); In re Consolidated Investment Serv., Exchange Act Rel. No. 36687, 1996 SEC Lexis 83; 52 S.E.C. 582 (Jan. 5, 1996) (suspending firm for failing to detect and prevent broker's sales of $5 million of non-existent "Agency CD Notes"); In re Stuart, Coleman & Co., Exchange Act Rel. No. 38001, 1996 SEC Lexis 3266 (Dec. 2, 1996) (disciplining firm where branch manager had permitted registered representatives to sell fraudulent limited partnership interests, even though firm had explicitly refused written request for permission).
If your broker solicits you to purchase securities away from the brokerage firm, your broker is "selling away," which is a violation of self-regulatory rules and federal securities laws. Typically, these investments are in the form of private placements, or other non-public investments. If you are the client of a brokerage firm, and your broker solicits the sale of these securities away from the brokerage firm. The sale of unregistered securities is a form of stockbroker fraud or misconduct. Under certain circumstances, you may recover from the brokerage firm.
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