Ohio regulators ramp up inspection of brokers

Brent Nelson’s nightmare experience with state securities regulators began last May when, out of the blue, he received a letter from Ohio’s Division of Securities telling him his license had been suspended.

The letter also said the regulators intended to revoke his license after a review.

Affiliated with WRP Investments Inc., Mr. Nelson, with the help of his firm, fought back. He quickly filed a motion in county court against the Division of Securities, arguing that he had the right to keep working with his clients.

MASSIVE SURGE

By the end of that week, the court permitted him to keep working.

Mr. Nelson had fallen afoul of Ohio regulators, who, after years of neglect, last year were in the middle of a massive surge in reviewing brokers’ records and flagged Mr. Nelson for an ugly stock scam in which he had unwittingly been a part in 1999 when he was breaking into the business.

“We were appalled by that,” said David Pintaric, chief executive of Youngstown, Ohio-based WRP. He said that regulators “are on a witch hunt” for representatives with marks on their records in the Central Registration Depository.

“You can’t disagree with the concept of vetting out brokers, but this was a case of guilty before innocent,” Mr. Pintaric said.

And it also put his customers at risk, Mr. Nelson said.

“The question we took to civil court was, who works with my clients?” said Mr. Nelson, who has been affiliated with WRP since 2001. “If they lose money, whose fault is it?”

Ohio regulators last year increasingly put registered reps under the microscope, reviewing 25% more applications, or 48,015, to do business in their state than they did in 2006.

Last year, Ohio made “an effort to go back and review old disclosures,” said Brian Misencik, acting commissioner of securities. He declined to comment “on a case-by-case basis.”

According to a report last May in the Columbus Dispatch, around the time that Mr. Nelson was suspended, state officials realized that their agency hadn’t been checking regular updates of brokers’ records from NASD — now the Financial Industry Regulatory Authority Inc. of New York and Washington — from 2000 to 2006.

That meant that regulators had disregarded thousands of potential warning signs of bad brokers.

Reviews were “overlooked,” said Barney Wolf, a spokesman with the Division of Securities, which is part of the state’s Department of Commerce. While a broker’s CRD can contain items that detail, for example, an arrest for a college prank or a history of parking tickets, Ohio regulators were looking for more-serious offenses.

“Most of the reviews we’re doing are the typical ones we do,” Mr. Wolf said. He added that the surge in reviews was due in part to an increase in reps seeking a securities license to do business in Ohio.

According to state law, reviews are done “to determine if the individual may be found of good business repute,” Mr. Wolf said.

Besides the increase in reviews, the Division of Securities, which oversees 137,000 registered reps in the state, saw turnover at the top.

G. Brent Bishop was named commissioner last February and was then fired in August. Mr. Misencik declined to discuss what happened at the division before he started there.

Ohio isn’t the only state in which changes in management at the securities division come as regulators face scrutiny.

Wayne Klein, director of Utah’s Division of Securities, said he will resign at the end of February. In November, a local state representative asked the legislative auditor general’s office to audit the division.

The representative, Jim Bird, is sponsoring a bill that would curb the powers of the Division of Securities’ director, and an independent board of advisers would have a say in determining what cases to pursue.

When Ohio regulators initially contacted Mr. Nelson last May, they gave him two choices, he said: either plead his case in a hearing in the next six to eight weeks or leave the business.

Ohio flagged him because of an NASD settlement that resulted in a 30-day suspension and $14,500 in commissions he had to pay back to clients. NASD claimed that in 1999, Mr. Nelson sold shares of phony initial public offerings provided through his firm at the time, AC Financial Inc. of Palm Harbor, Fla.

He said he was simply in the wrong place at the wrong time, with the head of AC Financial serving jail time. In defending his history in the securities business to Ohio regulators, Mr. Nelson and WRP pointed to the fact that in 2002, the state insurance commissioner’s office granted him a license after a grilling about the IPO scam.

“That had no effect on the securities division,” he said. “They wouldn’t recognize the insurance order.

Mr. Nelson attended a hearing with the division last June. In August, an arbitrator ruled in his favor, finding that the Division of Securities didn’t meet the burden of proof in the matter, he said.

The arbitrator’s decision boiled down to the fact that Ohio “had a chance every year to ask questions” about his record, Mr. Nelson said. The regulators “took something that happened eight years ago and said, ‘Go do something else,’” he said. “It would have been the end of my career.”

Some brokerage executives have complained recently about pressure from various states, including Maine and Massachusetts, in reviewing reps’ records and applications to work in their states. Officials in those states denied any increased scrutiny.

Bruce Kelly can be reached at [email protected].