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Investor Protection

A Broker in Financial Difficulty Spells T-R-O-U-B-L-E

June 25, 2020

by Howard Haykin



Many of us struggle with financial difficulties. And sometimes the pain or despair is so great that we’re tempted to steal from friends or family. But we don’t, in part because we don’t have access to their financial assets. [See Financialish, 6/26/20, where a relative had access.]
But what happens when your broker – who has access to customers’ financial accounts – experiences financial difficulty? Fortunately, firms like Northwestern Mutual Investment Services have policies, procedures and internal controls to protect customer assets. However, those safeguards don’t always work as intended.



WHAT WENT WRONG.    A broker at Northwestern Mutual Investment Services (“NMIS”) experienced long-term financial difficulties. From 2005 to 2017, he stole over $595,000 from at least 5 customers. On 23 occasions, he fraudulently transferred a total of $494,000 from customers’ accounts to his own bank account. On 4 occasions, he transferred another $121,000 from 2 customers’ accounts into the bank account of a third customer. The broker did so by forging customers’ signatures on variable annuity distribution requests while simultaneously submitting fictitious blank checks containing the customer’s name and address – but someone else’s bank account number and bank routing number.


It was not until March 2017, after the broker had voluntarily left the firm, that the firm discovered the broker’s misconduct – but only because a customer complained about the loan balance on one of her insurance policies. After conducting an investigation, the firm fully reimbursed all affected customers.



WHERE THE FIRM FAILED.   Northwestern Mutual Investment Services failed on several levels. In 2013, after observing a high rate of variable annuity withdrawals and surrenders by customers, the firm conducted a cursory review that revealed no violations or misconduct. Then, in April 2015, after learning that the broker was the subject of IRS tax liens for multiple years of unpaid taxes, NMIS did not investigate the broker's accounts for possible unusual transactions.


With regard to the 27 transfers, NMIS failed to adequately review and monitor transfers of customer funds to 3rd party accounts and outside entities. NMIS’s safeguards …

  • DId not adequately address multiple transmittals of funds from multiple customers going to the same 3rd party accounts.
  • Did not use exception reports or other means to monitor and review patterns of multiple wire requests and checks by multiple customers to the same 3rd party bank account;
  • Did not require comparison of customer signatures on request forms to signatures on file.
  • Did not have the capability of matching up the bank account that received 23 fraudulent transfers to the bank account where the firm was depositing the broker's commissions.



Northwestern Mutual Investment Services was fined $350,000 and required to enhance its supervisory systems and WSPs (Written Supervisory Procedures).


[For further details, click on … FINRA Case #2017054642101.]