Red Bank Firm Fined For Allowing Broker To Go Unsupervised

RED BANK, NJ - A Red Bank brokerage firm will pay a $275,000 civil penalty for failing to reasonably supervise one of its brokers who managed an account for a quasi-public entity, according to Attorney General Christopher S. Porrino and the New Jersey Division of Consumer Affairs, Bureau of Securities.
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In a Dec. 7 Administrative Consent Order, the Bureau of Securities said Garden State Securities Inc. failed to address red flags in a Newark Watershed Conservation and Development Corporation account, managed by Darnell Deans, a broker associated with Garden State.

Garden State permitted Deans to engage in “aggressive and speculative trading activity” without a reasonable basis to believe the activity was suitable for the conservation and development corporation, according to the consent order. Garden State also failed to make or preserve a record of investment objectives for the Newark organization and certain other customer accounts.

Robert I. Rabinowitz of the Red Bank firm of Becker & Poliakoff is the lawyer for Garden State Securities. He noted that this is the single enforcement action the state has ever taken against Garden State, which was founded in 1980, became registered as a broker with the SEC in 1981 and registered for such activity in New Jersey in 1983.

"This is the first regulatory issue Garden State has ever had over 30 years in business," he said. Further, he noted Deans was fired for cause and the firm has not had other incidents with other brokers.
"We believe there is no chance this would ever recur."

As if to support his position, he noted this issue first surfaced in 2005 and the state's enforcement action is quite "old news" when you consider what provoked it.

Deans "was terminated for cause many years ago," Rabinowitz said. "Garden State did that many years ago when they internally determined there was a problem with this broker."

The Newark agency's new account form never indicated its investment objectives during the life of the account, according to the state. Despite this, a Garden State supervisor signed off on the account, officials said. Further, another Newark organization form also omitted information about the types of transactions that could be entered in the account.

But the lawyer noted that there is a new chief compliance officer in place at the firm with a long history of securities law and enforcement.

"Supervision is a moving target," Rabinowitz explained. "It is constantly evolving and changing as the industry changes."

After NWCDC transferred approximately $880,000 in cash and securities into the Garden State account, Deans engaged in mutual fund switching, use of margin, short selling, short-term trading and excessive trading, all of which were red flags that Garden State failed to adequately investigate, according to the consent order.

The issues with the corporation were first discovered during an Office of the State Comptroller investigative report in 2014. The organization was a not-for-profit entity designated by the City of Newark to manage the city’s watershed properties. It has since declared bankruptcy.

When the Newark Watershed agency sued Garden State, it voluntarily settled, paying the agency $450,000 in compensatory damages. "This was a voluntary settlement not ordered by any court or judge," Rabinowitz said. Deans did not contribute to it. In fact, Rabinowitz said, the firm has no idea where he is. "There was no quid pro quo" for the settlement, he said. "We didn't say we would pay" if the lawsuit was dropped. "Garden State understood it had an obligation to Newark Watershed."

Deans was the account’s registered representative from the time the organization opened the account in 2005 through its closure in 2011, officials said.

“Mr. Deans was playing fast and loose with public money and Garden State failed to reasonably supervise his activity,” said Porrino in a release. “The state’s securities laws are designed to protect investors from this type of behavior. The fact that the ultimate investor here was the public makes this offense all the more egregious.”

But conditions change, said Rabinowitz. "The supervisory structure in place when Mr. Deans was here has been completely overhauled and enhanced." Changes will continue to be made as the consultant now in place continues to review operations and recommends best practices.

Still, the state had harsh words for Deans and what happened during his tenure at Garden State.

“Securities brokers are obligated to ensure that a customer’s investment objectives are met. In this case, that obligation was ignored,” said Sharon M. Joyce, acting director of the Division of Consumer Affairs. “The Bureau of Securities will continue to aggressively pursue those who do not follow the rules. The integrity of the securities industry depends on it.”

Deans was registered with the Bureau of Securities as an agent of Garden State from 2005 until 2013. The bureau revoked his registration under the terms of a 2013 summary revocation and penalty order that contained findings that Deans engaged in dishonest or unethical business practices in the securities industry for conduct unrelated to the Newark account, officials said.

“Investment firms have a duty to reasonably supervise the types of business in which it engages,” said Christopher W. Gerold, chief of the New Jersey Bureau of Securities. “If a firm breaches that duty, the bureau will hold the firm accountable.”

The consent order also included findings that between 2006 and June 2016, Garden State failed to have a reasonable system of supervisory review to determine whether commissions it charged were fair and reasonable. Garden State used commission review reports and spreadsheets that were inadequate for their intended purpose and failed to appropriately document the relevant factors taken under consideration when approving commissions in excess of five percent.

In addition to paying the civil penalty, Garden State must retain an independent consultant to conduct a comprehensive review of the firm’s supervisory policies and procedures in order to determine their suitability and compliance with existing securities laws. Garden State also is required to adopt and implement the consultant’s recommendations. The consultant is already on site working, Rabinowitz said.

The bureau's action was handled by Investigator Dorian Gross, director of Complex Investigations, Peter Cole and Deputy Bureau Chief Amy Kopleton of the Bureau of Securities within the Division of Consumer Affairs.

It is critical that investors "Check Before You Invest." Investors can obtain information, including the registration status and disciplinary history of any financial professional doing business to or from New Jersey, by contacting the Bureau toll-free within New Jersey at 1-866-I-INVEST (1-866-446-8378) or from outside New Jersey at (973) 504-3600 or by visiting the Bureau's website at www.NJSecurities.gov. Investors also may contact the bureau for assistance or to raise issues or complaints about New Jersey-based financial professionals or investments.

A Red Bank brokerage firm pays a hefty fine. Image via Shutterstock.