What is Embezzling Money?
Embezzlement is a type of theft committed by someone in a position of trust. CEOs, lawyers, accountants, and financial advisors have access to funds for business reasons. If any of these professionals steal these funds for their personal use, they may face a criminal charge of embezzlement.
“Embezzling” refers to a crime and is not a term that is typically used in the securities industry, since securities regulators do not charge individuals with crimes, but rather violations of securities laws. Investor complaints are different from criminal cases, and they are usually resolved through FINRA arbitration, not a criminal court.
In the securities industry, if a broker steals their customer’s money, it is typically referred to as “misappropriation” or “conversion.” If a broker is accused of stealing a customer’s funds, they may face a criminal case as well as a regulatory action by either FINRA or the SEC.
Siphoning, Money Laundering, and Check Kiting: The Embezzler’s Toolkit
Embezzlers have several different methods at their disposal for hiding their theft of investor funds.
Siphoning is another word used to describe misappropriation. An SEC litigation release from 2016 alleges that a Florida-based investment advisor siphoned $3 million from investors through undisclosed fees.
Embezzlers might use money laundering to conceal the true source of their funds. Suspicious activity might involve buying securities only to immediately sell them and transfer the proceeds. It might also involve buying and selling investments with no apparent purpose. FINRA Rule 3310 requires brokerage firms to have anti-money laundering supervisory procedures in place. Brokers must file a Suspicious Activity Report (SAR) if they note a securities transaction that seems suspicious.
Check kiting is a form of fraud where an individual writes a check, knowing that the checking account does not contain sufficient funds to cover the amount stated on the check. Once the check is deposited but before the funds are confirmed, the fraudster withdraws cash that is backed up by nonexistent funds. The bank eventually discovers the overdraft – at which point the check kiter may have fled the country.
In one case, an accountant forged her employer’s checks to inflate the available deposits in her company’s accounts, to increase the amount of money she could embezzle. She allegedly used check kiting to help obtain $2.8 million in embezzled funds that she allegedly spent on gambling and vacations.
Broker Embezzlement Examples
Because embezzlement is a criminal charge, it does not normally appear in FINRA or SEC allegations. For instance, a broker was barred from the securities industry in 2022 following allegations that he had made unauthorized transfers of $1.2 million from an investor’s pension plan to his personal bank account. Nowhere do the FINRA allegations mention “embezzlement,” but the broker also faced criminal charges for embezzlement in California. A California court sentenced him to time served as well as 16 months of supervised release. The criminal charges specifically refer to his crime as embezzlement.
If a stockbroker has a criminal conviction for embezzlement, they may be subject to statutory disqualification. Statutory disqualifications are certain misdemeanors and felonies that disqualify brokers from registering with either FINRA or SEC.
Broker Theft or Misappropriation
The SEC and FINRA pursue complaints of theft or misappropriation rather than embezzlement. Cases of broker theft and misappropriation often involve an element of elder financial abuse. Sadly, brokers have been known to take advantage of the trust between themselves and a long-time client, only to misappropriate their funds.
For example, in 2018 the SEC alleged that Lion Share Financial and affiliated companies raised $1 million from 12 investors, including elderly retirees, on the allegedly false pretense that he would invest their money in private placements. The SEC alleges that instead, the financial adviser spent their money on Super Bowl tickets and luxury vacations.
In another recent example, the SEC charged a formerly registered financial advisor with stealing money from elderly advisors using unauthorized wire transfers. He allegedly wired $1.5 million from brokerage accounts to his personal accounts, in some instances selling securities to access to more money. He also allegedly stole from an advisory account that belonged to an elderly client, diverting funds from a 529 college savings account he had set aside for his grandchildren. The broker is also facing criminal charges in Maryland for his alleged fraud.
How Do I Prevent Broker Embezzlement?
Make sure to regularly review account statements. If you are concerned about broker embezzlement, it may help to review your statements with a securities lawyer.
Research your stockbroker before signing an agreement with your brokerage firm. Ask for their Central Depository Record (CRD) number and look it up on BrokerCheck. BrokerCheck is a database provided by FINRA that contains a broker’s record of regulatory actions and customer complaints.
You should also review your brokerage firm’s disciplinary history. Under Regulation Best Interest, brokerage firms are required to provide you with the firm’s and financial professionals’ disciplinary histories.
Kurta Law Defends Victims of Broker Embezzlement
If you believe you have been the victim of embezzlement, or another type of broker theft, do not hesitate to speak with our investor attorneys. Our experienced securities lawyers provide free case evaluations to concerned investors. Contact us today: (877) 600-0098 or firstname.lastname@example.org.