Is the SEC taking a new tack? In an unprecedented action announced yesterday, regulators are holding a chain of command responsible for one broker's fraudulent actions.

Regulators allege that Dennis Herula, a Raymond James Financial broker, is guilty of fraud, but they don't stop there; regulators are holding the broker's former branch manager David Ullom, and Raymond James' former president and chief operating officer, J. Stephen Putnam, responsible for failing to properly supervise Herula.

Raymond James officials were quick to respond to the SEC's charges: "[b]elieving this to be an unwarranted expansion of a brokerage firm's responsibility, we feel we have no choice but to contest these charges," stated Richard Averitt, chairman and chief executive officer of RJFS.

"[I]n 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," officials stated.

Regulators allege that Herula and others, from November 1999 to March 2000, collected $44.5 million from unwitting investors, promising "astronomical returns." Herula deposited the money in a Raymond James account, promising the investors that they retained control of their own accounts and that they were safeguarded by Raymond James.

Herula transferred approximately $15.5 million to an account controlled by his wife or dissipated the funds.

The regulators also charge that Ullom and Putnam were aware of "red flags" related to Herula's behavior, but did not respond properly to the warnings. Ullom and Putnam were aware that Herula was using Raymond James letterhead and misrepresenting himself in activities related to a business venture, allege regulators.

More generally, regulators criticized Raymond James' policy of allowing representatives to work from home or off-site, but failing to supervise or audit off-site representatives' work. Raymond James also failed, during that period, to audit branch office accounts.  

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