Washington, D.C.—NASD Regulation, Inc., today announced a disciplinary settlement in which it fined Tower Square Securities $200,000 and directed it to make $4.3 million in restitution to the Jefferson Parish, (Louisiana) Public School System's employees deferred compensation plan. In addition, complaints were filed against a former registered representative with Tower and his business partner, Randall J. Veselik. The three enforcement actions involve the mishandling of the investment portfolio of the school system's deferred compensation retirement plan.
The complaint filed against the former Tower registered representative, Kevin B. Dermody, alleges that in July 2000, he entered into a contract to serve as investment manager of the deferred compensation plan operated by the Jefferson Parish school system for the benefit of its employees. At Dermody's direction, the plan liquidated its holdings of approximately $10.8 million in variable annuities, incurring surrender charges of more than $670,000. Proceeds of the annuity liquidation, along with additional plan contributions, were used by Dermody to purchase securities and insurance products including investment contracts issued by Hilltopper Enterprises, L.L.C., a company organized by Dermody and Veselik. Veselik was named in a separate complaint. The majority of plan funds invested with Hilltopper was lost through speculative trading. An independent audit of the plan as of June 30, 2001 revealed that liabilities to plan participants exceeded plan assets by more than $4.2 million.
"The mishandling of investment portfolios is serious misconduct and deserves meaningful and prompt sanctions," said Mary L. Schapiro, President of NASD Regulation, Inc. "We are pleased that the school system is to receive full restitution in this case."
These actions were investigated and filed by the NASD Regulation office in New Orleans and include:
1. Kevin B. Dermody - Case No. C05020001.
Kevin B. Dermody is named in this complaint, which alleges:
- Fraudulent misrepresentations in connection with the purchase and sale of securities to the plan including misrepresentations concerning the compensation he would receive, how plan funds would be invested, his prior experience and registration status as an investment advisor, and failure to disclose his interest in Hilltopper Enterprises, L.L.C.;
- Participation in the sale of securities issued by Hilltopper Enterprises, L.L.C. without prior notice to or approval from Tower Square Securities, Inc.;
- Guaranteeing customers against losses in connection with proposed sales of securities to the plan; and
- Failure to respond to a request for information from NASD Regulation.
2. Randall J. Veselik - Case No. C05020002.
Randall J. Veselik is named in this complaint, which alleges:
- Participation in the sale of securities issued by Hilltopper Enterprises, L.L.C. without prior notice to and approval from the NASD member with which he was associated; and
- Failure to appear for testimony.
3. Tower Square Securities, Inc. - Case No C05020003.
Tower Square Securities, Inc. settled the following charges without admitting or denying NASD Regulation allegations. The findings include:
- The firm failed to supervise the activities of Dermody;
- The firm's procedures prohibit registered representatives from maintaining discretionary authority over customer accounts, yet the firm neglected to investigate Dermody's dealings with the plan after it received documentation reflecting a grant of discretionary authority to Dermody;
- The firm processed the sale to the plan of a variable life insurance contract issued by an insurance company affiliated with the firm without review and endorsement by a registered principal of the firm;
- The firm neglected to conduct a review of activity in the plan's account;
- The firm failed to ensure that an individual working with plan participants was registered with the firm; and
- The firm failed to establish, maintain and/or enforce adequate written supervisory procedures relating to review of customer account activity, providing adequate guidelines to registered representatives for recommendations to purchase variable contract products, collection and review of customer suitability information, monitoring of branch office inspections, ensuring that employees are properly registered, monitoring and maintaining copies of electronic correspondence, and monitoring wire transfers.
The firm was censured, fined $200,000, ordered to pay restitution in the amount of $4,365,167.26, and ordered to engage a consultant to make recommendations for the adoption of policies and procedures with respect to the matters addressed in the settlement.
The issuance of a disciplinary complaint represents the initiation of a formal proceeding by NASD Regulation in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint.
Under NASD rules, individuals and firms named in complaints can file a response and request a hearing before an NASD Regulation disciplinary panel. Possible sanctions include a fine, suspension, bar, or expulsion from the NASD.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD Regulation's Web Site at www.nasdr.com.
The National Association of Securities Dealers, Inc. is the largest securities industry, self-regulatory organization in the United States. It is the parent organization of NASD Regulation, Inc.; the American Stock Exchange, LLC; and NASD Dispute Resolution, Inc. For more information about the NASD and its subsidiaries, please visit the following Web sites: www.nasd.com; www.nasdr.com; www.amex.com; www.nasdadr.com.