Don’t Get Caught Up With A Bad Broker

Posted By:
Kreller Group
May 18, 2023

Several days ago the Wall Street Journal published an article about a financial adviser in Beverly Hills, California (article is behind a paywall) named Mr. Kay who had promoted a supposedly high-yield, low-risk investment. Unfortunately, the company behind the investment is now in bankruptcy and is being investigated as a Ponzi Scheme. Mr. Kay himself, it turns out, was “barred from the securities industry for allegedly running a fraud, according to public records, and later fined $5,000 for breaking that ban.” However, he had changed his name since these infractions, which would have made it more difficult for investors to know about his history.

The investment he was promoting falls into the category of “private placements” a type of private investment a surge in popularity among accredited investors and companies looking to raise money for a variety ventures.

However, because they are more lightly regulated than other investments, and many stockbrokers have started marketing private placements to individuals who may not be as sophisticated investors, these kinds of less regulated investments can be very attractive to fraudsters and unscrupulous brokers.

Worse yet, according to the Wall Street Journal:

"the brokers who sell them are far more likely than other brokers to have sketchy records, a Wall Street Journal analysis has found. One in eight brokers marketing private placements had three or more red flags on their records, such as an investor complaint, regulatory action, criminal charge or firing, the Journal found in a review of data including Securities and Exchange Commission records from September 2008, when they became electronically available, through 2017. That compares with one in 50 among all active brokers. Brokers selling private placements also are six times as likely as the average broker to report at least one regulatory action against them, the Journal analysis found."

Of course you don’t have to be putting your money into exotic investments to run across risky brokers. Any time you decide to make a big investment you should look carefully at who’s selling it and any partners in the investment.

But just making a few google searches is not enough. In the above example, Mr. Kay had changed his name, a step that would no doubt make it difficult to find out about his history with the brokerage community without a very in-depth background check.

Even official tools meant to help you look up information may not always tell you everything you need to know. For example, the SEC recently created a tool to help investors learn more about actions the SEC has taken against individuals. The SEC Action - Lookup – Individuals (SALI) tool is a good new tool, but its data is incomplete. Looking up Mr. Kay under his current name or his original name brings back no results. While the SEC says that it will be updating the tool to include more records over time, SALI will only ever include SEC actions. Relying on it may leave you unaware of sanctions that might have come from organizations like FINRA and other industry groups. There may also be other information beyond official sanctions and punishments from any of these organizations that you might need to know about.

If you’re making a large investment it can be worthwhile to hire professionals to make sure they are who they say they are, and don’t have a history of problems. Smith Brandon International can conduct in-depth Due Diligence checks anywhere in the world to help you uncover any risky history your broker or partner might have, even when they’ve taken steps to try to hide their past.

Call us today to let us help you conduct proper due diligence and background checks before you invest your money with someone you may not want to trust.

About the Kreller Group

For nearly 30 years, Kreller has relied on “extensive boots-on-the-ground” research, conducted by investigators who are well-versed in worldwide military, law enforcement, business and government matters to deliver the concise information our clients need to make decisions.


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