Monday, September 28, 2009

Due Diligence Failure Leads to SEC Enforcement Action?

Did a failure of due diligence cause a broker to assist a fraud? The SEC has charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into a $250 million Ponzi scheme.

The complaint reflects that the broker was a top salesman for the Ponzi scheme, raising $74 million from more than 800 investors over a 5 year period. The broker is not charged with running the Ponzi Scheme. In fact, he is charged with not knowing enough about what he was selling - the Commission alleges that he failed to conduct proper due diligence on the investments that he was selling, and thus breached his fiduciary duty to his clients.

There is a whole lot more to the allegations than a simple failure to do due diligence, but we are seeing more and more noise, and some cases, from the Commission regarding the failure of firms and brokers to conduct proper due diligence on the investments that they are presenting to their clients. The work is not being properly performed, or it is being farmed out to third party "due diligence" firms who are not doing their jobs.

The last thing a firm or broker needs to be named in a SEC proceeding alleging misrepresentations that arise from a failure to perform due diligence and therefore becoming an unwitting participant in a fraudulent scheme.  The SEC's press release is here, the securities fraud complaint is here.

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