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Compliance Concepts

A Bad Broker Operated 'Under the Radar' for So Many Years

August 15, 2017

By Howard Haykin


Here’s a sidebar story to a “What Went Wrong” story we posted this morning: CEO/CCO Suspended 13 Months for Failing to Supervise Private Offerings.” In that case, Brent Hurt (CEO and CCO of RedRidge Securities, as well as a direct supervisor) was sanctioned for his failure to supervise a Registered Rep in connection with the sale of private offerings of securities. Unbeknownst to Hurt and his firm, this Registered Rep committed several violations over a 3-year period: (i) forged subscription agreements; (ii) pre-populated a universal execution date of 18 subscription documents regardless of when investors had actually executed those documents; and, (iii) failed to obtain and submit complete subscription agreements.
The Registered Rep in that case turned out to be Eric William Johnson whom, we learned upon further investigation, has quite an interesting rap sheet background and disciplinary history – one that goes beyond the above noted violative actions. That’s when it struck me that Johnson’s “What Went Wrong” story also needed to be told.


Eric William Johnson was barred from the industry by FINRA in October 2014. That was his agreed-upon sanction for having refused to cooperate with a FINRA investigation into allegations that he had misappropriated more than $1 million from at least 6 firm customers’ brokerage accounts at his member firm.


BACKGROUND.  A resident of Hinsdale, NY, Johnson, served 23 years in the industry with 5 firms. He held the following licenses: Series 7, Series 4 (Options Principal), Series 53 (Muni Principal), Series 24 (Genl Sec. Principal). For most of his career - 15-1/2 years (March 1999 to September 2014) - Johnson was associated with RedRidge Securities.


Prior to joining, Johnson “did time” with the following broker-dealers – hardly a “sterling lot:”

  • Baring & Brown (1991- 1992) - Expelled 9/25/91
  • Emanuel and Company (1992 – 1993) - Expelled 10/13/94
  • Stein, Shore Securities  (1993 – 1996) – FINRA Registration ended 10/29/96
  • Program Trading Corp. (1996 – 1999) - Expelled 1/31/05


FINRA FINDINGS.    From December 2006 through September 2014 (the "Relevant Period"), Johnson misappropriated more than $1,000,000 in customer funds from firm brokerage accounts. He did so by effecting at least 60 wire transfers of funds from at least 6 firm customers' brokerage accounts to his own personal bank accounts. For each of the transfers, Johnson submitted a RedRidge wire transfer form that included forged signatures of a firm principal and the firm’s notary; he even forged or falsified the notarized seal. Later, Johnson refused to participate in FINRA’s investigation.


FINANCIALISH TAKE AWAYS.    Let’s delve into Mr. Johnson's background to see if we can "make some lemonade out of his lemons."


1.  Johnson’s ‘Red Flag’ Employment Record.    Prior to joining RedRidge Securities, Johnson spent 9 years with several firms that sported ‘questionable’ track records. Two of those firms were expelled, one had withdrawn its registration and the 4th would be expelled at a later date. While some may criticize me for saying this, I have to admit that I never would have hired someone who had worked for such a collection of broker-dealers. Johnson's employment record was a HUGE RED FLAG. How could the supposed bad character of successive firms not rub off on Mr. Johnson? 


CONCLUSION:  Given his employment record, RedRidge should never hired Johnson, even though he had no regulatory disclosures or customer complaints on record. However, once RedRidge did hire Johnson, the firm might have informally monitored Johnson’s activities – i.e., some sort of “heightened supervision” – to ensure that Johnson possessed upright and effective ethics or work habits. At this point in time, there's no way to 'read into' RedRidge's thinking - but knowing that RedRidge had a weak supervisory track record, it’s likely that no such efforts were ever considered.


 2.  Johnson’s Wire Transfer Forgeries.    Sixty wire transfers used to steal over $1 million from 6 customer accounts - averaging out to about $17,000 a pop. Johnson’s ability to carry out such a protracted criminal scheme would indicate that RedRidge lacked adequate supervisory controls. And, as it turns out, Brent Hurt was sanctioned in 2015 for his supervisory failures in this specific matter - $17.5K fine, and 6-month suspension as principal.


CONCLUSION:  Perhaps it’s needless to say, but firms should always obtain customer confirmations on large wire transfers.  


3.  Johnson’s Violative Actions in the Private Offerings.    From 2010 to 2013, Brent Hurt failed to adequately supervise Johnson’s activities related to 3 private placements - perhaps because Hurt figured that a broker with 20 years and 3 principal licenses didn't need much oversight. SURPRISE! It's due to Hurt's ongoing and protracted supervisory failures that probably inspired Johnson to "push the envelop" and to take further short cuts.


CONCLUSION: None of these facts excused Hurt from properly supervising Johnson. Everyone needs supervision, including the supervisors. 


ONE OUTSTANDING ISSUE:   Beats me how Johnson avoided getting a regulatory disclosure or customer complaint prior to 2014?