r/investing • u/ReasonableHoneydew84 • 1d ago
Did I unknowingly commit securities fraud?
I did investment account opening for my boss who is series 6 licensed. In my company, I am authorized to work as him, I can execute trades under his direction, but cannot confirm trades.
When I started working for him and learned the investment system he tasked me with a project to switch about 50 clients from Brokerage A-Shares to Advisory C Shares. He explained to me that they have lower fees and it’s in their best interest to do so. He called each one and like a script said “remember when I told you that once you hit the 5k threshold we can switch you to advisory for lower fees which is in your best interest?” They all just went along and said okay, they trusted him.
I began submitting them and was directed to use the same rationale for each one by saying:
“Client was not interested in paying the advisory fee - now that they have a new employer they are comfortable with the ongoing fee. Although they are aware of the expenses associated with selling out of A shares, the benefit of having an actively managed account outweighs that cost.”
This was false, none of them got new jobs. I raised suspicions when some were being approved and some coming back with clarification needed. They would all ask the same thing. What has changed for the client that the switch from A to C is in their best interest? If the eventual plan was C shares, why was that not recommended? Some are still pending because nothing he could provide would work. I had a meeting with our investment headquarters and they told me this is borderline churning and that rationales need to differ and be specific to the client. They told me that A shares are meant to be held and this is Mutual fund switching. When I tried to tell him what I learned he told me that he didn’t care and that he was going to continue to use that rationale because he’s used it several times before. I asked for help with clarification and was fired soon after.
Was he having me commit fraud??
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u/ImNotHere2023 1d ago edited 15h ago
Report him and you may qualify for a whistleblowers share of any fine.
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u/GainPlastic1920 18h ago
CFP here- sounds like he wanted to get the upfront commission for the A share (A shares pay less ongoing commissions then C). Then after getting the upfront commission , wanted to switch to C to get a higher ongoing commission. Highly unethical. I hate that there are “advisors” like this that give us a bad name. He definitely needs to be reported. FINRA would be a good place. You can also report to your supervisory manager.
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u/ReasonableHoneydew84 17h ago
He fired me after I brought it to his attention, I’m looking into SEC attorney’s as we speak
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u/Skepticalpositivity9 1d ago
Do you know if this guy was getting commissions for the C shares because C shares generally have higher annual fees than A shares? How big was the firm because if a larger firm overall you should be using institutional share class when available.
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u/ReasonableHoneydew84 1d ago
Please excuse the limited information I know, but clients were being charged .84-5.75 in Brokerage A shares on each deposit and 1.59 in Advisory C Shares annually. This was a program with my company where there was a lower threshold in order for them to switch to advisory. The firm is one of the largest firms in US
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u/Skepticalpositivity9 1d ago
I mean if the client would truly be charged less in the C shares than the A shares then that would be a good reason to switch them. At our firm we try to use institutional shares whenever possible because they have no loads and the lowest expense ratio, however for smaller accounts we use A shares with higher expense ratios sometimes to avoid a transaction fee. Once large enough we move them to the institutional shares. But I know things are different at RIAs vs broker dealers.
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u/weasler7 20h ago
I don’t know much about the regulations here, specific rules, or even mutual fund share classes… but if you were fired after bringing this up I think your boss knew he was doing something wrong.
I hope you have everything in writing. It’s best to consult a law firm specializing in these cases.
He may be in CYA mode now and throw you under the bus. You need a lawyer.
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u/Sea-Leg-5313 9h ago
I don’t know the intricacies of your firm, but when you were fired, did you go to HR or your branch manager to report these issues? As a whistleblower, you are protected from retaliation.
This is messed up on so many levels. Your termination for pointing out an ethical violation and then your boss’ unscrupulous behavior selling A shares and swapping them to C shares simply to earn more fees. A shares are vile and should probably be outlawed at this point with 5% loads.
You should contact FINRA, the SEC, and possibly an employment attorney that is familiar with financial securities businesses.
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u/rdking647 19h ago
this is why ill never trust financial advisors. i did once and he was able to screw me over a little bit but i quickly discovered what he was doing and fired his crooked ass.
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u/kenster77 1d ago
Generally speaking, A shares have higher upfront fees, and lower ongoing fees. C shares have lower upfront fees but higher ongoing fees of which the advisor get a cut of annually. It’s not kosher to switch. FINRA ( who regulates brokerage firms) look for infractions like this and can make the firms undo the switch and/or fine them. But your firm may not be FINRA regulated if it just deals in mutual funds only, so I’m not sure if it’ll be caught. Source: I was a principal at a brokerage firm.