Securities Fraud and Mismanagement

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PFS Investments broker Kevin Hobbs inappropriately invested clients in accounts away from PFS, a selling away violation. This is the allegation of regulators in a suit that resulted in Hobbs being barred from the securities industry. PFS may also have exposure because brokerage firms are required to supervise their broker’s investment activities, even activities away from the firm.

The regulatory matter originated from allegations in a customer suit disclosed by PFS in a regulatory disclosure. FINRA Rule 8210(a)(1) states that FINRA, a regulator overseeing brokers, may require a broker to provide information in writing with respect to any matter involved in a FINRA regulatory investigation. Providing false information to FINRA in connection to with an investigation violates FINRA Rules.

On October 18, 2022, in connection with FINRA’s investigation into the selling away, the regulator asked him to identify all individuals for whom he had effected a securities transaction in an account other than at PFS Investments. Hobbs provided an inaccurate response to the FINRA request that failed to identify at least one other individual whose account he had traded away from PFS Investments. This false response was enough to warrant a resolution where Hobbs would be barred from the securities industry.

The more serious charge of selling away was not resolved due to the settlement on the lesser issue. FINRA Rule 3280(b) prohibits a broker from selling investments away from the broker’s employing firm. A broker may not participate in any manner in a private securities transaction unless, prior to participating, the broker provides notice to his employing firm describing the trade. FINRA Rule 3280(e)

From April 2020 to at least November 2020, Hobbs participated in private securities transactions “away” from PFS when he effected numerous trades in at least three individuals’ third-party brokerage accounts. Hobbs never sought nor received PFS’s permission to participate in any of these private securities transactions.

Even without the approval of PFS, PFS can still be held responsible for failing to detect trades its broker made away from the firm. As a controlling entity PFS is responsible for the securities law violations of those individuals that in directly or indirectly control. The duty that brokerage firms have to supervise the actions of their representatives who invest away is well-established.  The NASD first discussed the issue in NASD NTM 94-44 and later elaborated in NASD NTM 96-33.  The NASD and now FINRA have held that this duty creates the obligation to review trades, conduct surprise examinations and take other reasonable supervisory steps to protect the investments of the clients.  The broker-dealer must supervise the participation of its representatives and associate persons in the advisory “as if the transaction were executed on behalf of the [broker-dealer].”  NASD NTM 96-33.   

The brokerage firms have the ability to control all actions of their representatives, including off-book or selling away transactions, and they are required to have specific supervisory procedures to prevent selling away. Martin v. Shearson Lehman Hutton, 986 F.2d 242 (5th Cir. 1993); Stat-Tech Liquidating Trust v. Fenster, 981 F. Supp. 1325 (D. Colo. 1997).  They also have the right to discipline the representative for violations of the supervisory provisions. Id.

Selling away is fraud against the investor. A broker chooses to sell away as a way to circumvent supervision into his trades. There is little reason to sell away other than to commit fraud. As such, selling away is considered to be a highly suspect and fraudulent act.

Hobbs had a history of these actions and this gave notice of his fraud. He had multiple suits alleging wrongdoing going back to 2002. Selling away complaints go back at least to 2021.

We have significant experience in the handling of selling away cases. Please contact us for more information.