- October 21, 2021
By Francis X. Gilpin
Dennis S. Herula is dealing with 16 years in federal prison. Raymond James Financial Services Inc. could soon be dealing with a daunting prospect of its own because of Herula.
An administrative law judge is expected to decide this summer whether Raymond James Financial Services should stop expanding until the brokerage improves oversight of its independent contractors.
Herula, 56, was one such contractor in Rhode Island from 1999 to 2000 for Raymond James Financial Services, a broker-dealer with more than 3,800 independent financial advisers who are affiliated with the subsidiary of St. Petersburg's Raymond James Financial Inc.
Touting the good name of Raymond James, Herula talked six rich investors into sinking $44.5 million into what the U.S. Securities and Exchange Commission contends was a sham company. Then Herula allegedly diverted $8.7 million from Raymond James accounts for personal use. His wife, Rhode Island attorney Mary Lee Capalbo, and Charles W. Sullivan, son of the founder of the New England Patriots football team, were in on the scheme, according to an SEC complaint.
Last fall, the SEC filed civil fraud charges against Raymond James Financial Services. The federal securities regulator is seeking $16.5 million from the brokerage to give back to investors.
The SEC's administrative complaint also names J. Stephen Putnam, 61, of Tarpon Springs, former president and chief operating officer of Raymond James Financial Services, and David Lee Ullom, 66, Herula's boss in the Cranston, R.I., office.
The Herula case is part of a pattern of legal difficulties for Raymond James over the past five years. The lawsuits and sanctions have been accorded only sporadic coverage in the local news media.
In 2000, Raymond James & Associates Inc. was one of seven brokerages to pay a total of $21.4 million to settle National Association of Securities Dealers charges that it mishandled the refinancing of municipal bonds.
In 2002, Raymond James Financial Services was hit with lawsuits from Houston area clients who claimed millions of dollars in losses from what the company terms "an alleged mortgage lending program" set up by two of its investment advisers. The company has settled some suits and others are in arbitration.
In 2003, the SEC and NASD fined Raymond James & Associates and Raymond James Financial Services $2.6 million to not passing along trading discounts to mutual fund clients. The companies also refunded $4.1 million.
Just last month, the same two companies were fined $750,000 by regulators and paid $138,000 in restitution for poor monitoring of fee-only investment accounts.
Raymond James executives display few concerns about their operations, even while settling these and other complaints, typically without an admission of wrongdoing. They profess a belief that the implicated employees and independent contractors didn't act in bad faith.
But the SEC is taking a hard line in the Herula case.
The administrative proceeding against Raymond James Financial Services came after two years of fruitless negotiations. It was the first fraud complaint against a firm since 1996, when the SEC shut down a Long Island boiler-room operation, according to the investment trade journal Registered Rep.
Raymond James Financial Services reacted by calling the fraud charge "wholly unjustified" and accusing the regulators of acting out of spite.
"In the many months we have spent discussing the possible resolution of this case with the SEC staff, there was never any suggestion by them of a claim of fraud until after we advised them of our unwillingness to settle the initial allegations of inadequate supervision," Raymond James Financial Services Chairman and Chief Executive Richard G. Averitt says in a Sept. 30 news release.
The SEC apparently wasn't cowed. At the conclusion of a lengthy administrative hearing over the winter in Tampa, the SEC recommended the judge halt broker hiring and office openings until Raymond James Financial Services shows it can weed out and protect clients from rogue brokers.
With Herula brought to justice, federal regulators shifted their focus to what they perceive to have been lax supervision by his Raymond James bosses, Putnam and Ullom.
Herula used Raymond James stationery to promise risk-free returns of up to 120% for investors who backed Brite Business Corp., a venture formed in 1999. Raymond James independent contractors usually cover their own overhead in exchange for getting higher commissions than regular employees and the freedom to work for unrelated businesses.
Brite Business used some of the invested capital to secure margin loans from Raymond James to buy U.S. Treasury bills that were supposed to qualify the company to bid on Third World development projects.
The SEC says Putnam and Ullom were skeptical, but went along. Raymond James earned $1.8 million in margin interest, commissions and fees from the T-bill purchases, according to the regulators.
Putnam later ordered Ullom and Herula to cease contact with Brite Business. The then-Raymond James Financial Services president had learned that Brite Business was paying more to borrow from his firm than it was earning from the T-bills.
But Putnam didn't follow up with Ullom, whom the SEC says received $190,000 from Herula and his lawyer-wife Capalbo in 1999 and 2000.
Herula kept right on pitching Brite Business using Raymond James letterhead. In one letter, Herula proclaimed Brite Business to be a valued Raymond James client with a nine-figure account balance at the firm. The account actually contained less than $2 million at the time, the SEC says.
When that letter came into the possession of a Raymond James compliance officer, Putnam sought to approve all future disbursements from the Brite Business account as well as all correspondence from Herula to potential investors.
Putnam and Ullom subsequently received another complaint about a Herula letter, but the SEC says they still did nothing.
Meanwhile, between March and September of 2000, Herula and his wife allegedly looted the Brite Business account. Putnam along with Ullom allowed multimillion-dollar transfers out of the account to Capalbo, according to the SEC.
The SEC contends Putnam and Ullom took no action against Herula until $16.5 million of investor cash was gone from the Raymond James account.
Gulf Coast Business Review calls to the press office of Raymond James went unreturned before deadline. But the company has informed the administrative judge in the Herula case that it has drastically improved monitoring of Raymond James brokers.
Securities lawyer Christopher T. Vernon says he has found lax supervision of Raymond James independent contractors while representing former clients of the firm.
"People view Raymond James as a major company with a name in the industry," says Vernon, a partner with Treiser, Collins & Vernon PL in Naples. "But when you look at how they supervise these advisers, it doesn't seem like what you would expect from a top-tier firm. That's what troubles me."
Vernon is litigating claims on behalf of several ex-customers of a Raymond James contract broker in Naples whose alleged mishandling of investments occurred between 1999 and 2002. The broker later ended his association with Raymond James and now attends law school, says Vernon.
Perhaps Raymond James has tightened up on independent brokers since 2002, but Vernon says the firm's unapologetic response to complaints suggests executives believe they didn't need to do anything in the first place.
"They seem to take the position that they were doing it right back then," says Vernon.
Independent contractors, who make up about 80% of the private client group's sales force within Raymond James Financial, are a key driver of revenue growth.
The parent corporation reported better than 15% increases in commissions and other incentive payments within the private client group last year, citing increased production from the independent contractors. The private client group accounted for two-thirds of Raymond James Financial's total revenue for the quarter that ended March 24.
But the independent contractors are a mixed blessing.
Along with the SEC tussles, Raymond James Financial Services and Raymond James & Associates have shelled out more than $2 million for NASD-arbitrated awards to former clients within the past year. Some of those disputes concerned the work of independent contractors.
Regulators and Raymond James
Raymond James Financial Inc. subsidiaries have faced a series of regulatory allegations in recent years. The following dates reflect the month when the National Association of Securities Dealers formally notified members of disciplinary action:
May 2000 - Raymond James & Associates Inc. and six other brokerages settle charges of excessively marking up the price of bonds being refinanced by public agencies, thereby jeopardizing the tax-exempt status of the issues, for a total of $21.4 million.
May 2001 - Raymond James & Associates Inc. pays a $25,000 fine and $1,137 in restitution to settle alleged trading violations.
April 2002 - Raymond James & Associates Inc. is fined $10,000 for violating NASD rules for making a market in certain securities.
October 2002 - Raymond James Financial Services Inc. pays a $10,000 fine for failure to report customer complaint statistics.
March 2004 - Raymond James Financial Services Inc. pays a $2.6 million fine for failure to provide appropriate trading discounts to mutual fund customers.
December 2004 - Raymond James Financial Services Inc. is fined $400,000 for late reporting of potential broker misconduct and $12,500 in a separate case for inaccurate municipal bond transactions.
January 2005 - Raymond James Financial Services Inc. is fined $10,000 for failure to supervise a partnership with a public customer of the firm.
May 2005 - Raymond James & Associates Inc. and Raymond James Financial Services Inc. are fined $750,000 and ordered to pay $138,000 in restitution for poor supervision of fee-based accounts for clients.