REGULATORS OUT WEST CRACK DOWN ON UNAUTHORIZED SALES: WILD WILD REPS PLAYING GAME BY THEIR OWN RULES

The West is wild with wayward brokers.

States are seeing an increase in unauthorized securities sales as the economy heats up and record stock market performance lures investors into all types of deals.

In Arizona, for example, regulators say they are seeing a jump in the number of registered representatives “selling away” — transacting business without the approval of their brokerages so the sales are off the books. Across the border in Colorado, regulators say more and more reps are unsupervised by their brokerages, making it easier for them to stray off the straight and narrow. Up north in Oregon, regulators say, insurance salesmen are getting into activities for which they’re not licensed.

While a spokesman says examiners from the National Association of Securities Dealers have not reported an increase in such activity elsewhere in the country, state regulators in the West say they’re lassoing more scoundrels.

Arizona securities regulators say scamsters tend to be attracted by the state’s large concentration of elderly residents. But Arizona and several other Western states are known for their tough securities regulators so it could just be that they corral more strays.

Some brokerages recognize they are responsible for all activities of their reps — and the states are making them pay when brokers stray — but regulators complain that not enough brokerages provide proper guidance.

The Arizona Corporation Commission, which calls its state a “hotbed for securities fraud,” included the practice of selling away on a list of schemes it says are on the rise.

“This means the brokerage hasn’t reviewed the product so there is a potential for fraud,” says Stephen S. Berkeley, senior counsel for the Arizona commission.

In the first three months of the year, the commission’s securities division initiated actions against five salesmen for selling away.

Most recently, Arizona suspended the registration of Alan Frank Sue for 20 days, according to a commission release. Mr. Sue also is required to pay a $500 penalty and to retake the Series 63 state securities law examination.

The state says Mr. Sue sold an interest in a trust to a married couple for $99,000, but he didn’t record the transaction on the books of his brokerage, Concord, N.H.-based Chubb Securities Corp. Chubb Corp. executives won’t comment, since the company recently sold its life insurance division — which includes the brokerage — to Jefferson-Pilot Corp.

Mr. Sue, however, disputes the state’s findings.

“They are totally misinterpreting what happened,” Mr. Sue says. “I was not selling away.”

Following his lawyer’s advice, Mr. Sue declines to discuss the specifics of the case.

Brokerages can be dragged into these actions even though they did not sign off on the offending investment vehicle.

Arizona recently ordered Allmerica Investments Inc. to pay a $50,000 penalty and reimburse investor losses resulting from what the state alleged was fraudulent conduct on the part of Denise E. Brittain, a former saleswoman for the Worcester, Mass.-based firm.

According to the state, Ms. Brittain sold limited partnerships to clients, many of whom were residents of the Navajo Reservation. Allmerica has repaid a total of $458,895 to 27 of Ms. Brittain’s former clients.

For its part, Allmerica maintains that it brought the case to the attention of Arizona authorities after its auditors found incriminating documents during a routine examination.

brokerages are responsible

Ms. Brittain signed a consent degree admitting that she had commingled investor funds, says Pam Johnson, a lawyer with the Arizona securities division, and did not admit or deny the fraud allegations. Ms. Brittain could not be reached for comment.

According to Allmerica’s chief compliance officer, Ed Berger, Ms. Brittain had a “very good record” with the company before the partnership records were found. Although he says her case was not the catalyst, the company has been conducting unannounced audits at its branches since Jan. 1.

“Brokerages are responsible for all activities of their registered reps,” Mr. Berger says. “We have an obligation to conduct a reasonable program of supervision.”

But not enough brokerages are providing such guidance, says Colorado Securities Commissioner Philip A. Feigin.

“They have brokers who are working out of their homes and specialize in financial planning instead of individual stocks,” Mr. Feigin says. “In a sense it’s an administrator’s nightmare because the brokers are out there in Fort Apache.”

Supervision was at issue in a case that resulted in a six-year prison sentence for James P. Duficy, a former Securities America broker from Littleton, Colo. Mr. Duficy pleaded guilty last month to criminal fraud charges involving a bogus investment club that Mr. Feigin says bilked “investors” of about $1 million. The Omaha, Neb.-based firm, in turn, was ordered to repay a total of $565,000 to his clients, most of whom were elderly.

“That’s a lot more than they would have spent on satisfactory compliance,” Mr. Feigin says of Securities America, which now is owned by American Express Financial Advisors Inc.

Securities America had beefed up its compliance division immediately before its merger with the Minneapolis-based American Express unit, but Amex spokesman Thomas Joyce says Mr. Duficy’s case had nothing to do with it.

a better moth trap

In Oregon, the problem has been insurance salesmen selling both unregistered insurance policies and investment vehicles they’re not licensed to peddle.

For example, reps who have a Series 6 license, which would allow them to sell variable annuities and mutual funds, are branching into alternative investments, including limited partnerships.

According to David Tatman, chief of enforcement for Oregon’s division of financial and corporate securities, “The products aren’t nearly as viable when compared to the insurance investments and mutual funds they’re pulling their clients out of. They’re representing them as comparable and they’re not. Those are just words printed on a piece of paper.”

Heftier commissions, he notes, draw salesmen like moths to a flame.