Broker wrong to cover client flights, meals, ‘gentleman’s club’ visits, regulators say

Terra Nova Financial LLC, a Chicago-based broker, has been fined $400,000 by federal regulators who say the firm made unauthorized payments to clients, including money to cover one hedge fund manager’s visits to a “gentleman’s club.”

All told, in 2004 and 2005 Terra Nova made $1 million in improper payments to clients in a bid to keep their business, the Financial Industry Regulatory Authority said in a statement announcing the fine Monday. The regulator also fined and suspended three people at the firm for their roles in the payments.

Terra Nova didn’t admit or deny the allegations, but it agreed to hire an independent consultant to review its policies, the statement said.

Under securities law, brokers may repay a portion of the trading fees collected from hedge funds to the fund managers to cover certain brokerage-related expenses such as research. Such so-called soft money funds may be used to cover fund managers’ personal or other expenses only if those payments are properly documented and have been approved beforehand by the investors in the fund.

Over two years Terra Nova paid five hedge fund managers more than $1 million without getting the proper approval, according to Finra. One manager received $13,700 to cover seven trips to a gentleman’s club, the statement said. One got $470,000 to cover undisclosed expenses. And Terra Nova paid for airline tickets, hotels, meals, clothing and even parking tickets without any documentation that such expenses were allowed, the agency said.

Terra Nova was founded in 1994 by Gerald Putnam, who used his ties to the brokerage to help found Archipelago Holdings Inc., a stock market that later merged with the New York Stock Exchange. Mr. Putnam became president of the NYSE.

This story originally appeared in Crain’s Chicago Business, an InvestmentNews sister publication

Related Topics: Financial Industry Regulatory Authority