SEC fines broker-dealer for procedural failures in Mayagüez fraud case
By The Star Staff
The U.S. Securities and Exchange Commission has levied fines against LPL Financial for its role in allowing an unregistered investment adviser, Eugenio García Jiménez Jr., to misappropriate over $7.1 million from the city of Mayagüez, leaving Mayor José Guillermo Rodríguez facing allegations of negligence.
García Jiménez and seven other employees were accused in March of engaging in a scheme to defraud the city of Mayagüez and the Mayagüez Economic Development Inc. (MEDI) of funds belonging to the city council, by falsely representing that some $7.1 million that were invested had a significant rate of return.
In 2016, García Jiménez told municipal officials that he could invest some $9 million of the municipality’s funds with no risk to principal and earn the city annual returns of around 10%. The city intended to use returns from this investment to fund municipal projects, including the construction of a new trauma center. Instead, García Jiménez falsified documents, including bank correspondence and brokerage opening documents, to convince municipal officials to entrust him with the municipality’s funds. Instead of executing an investment strategy designed to generate the promised returns, García Jiménez purchased U.S. Treasury notes, immediately took out a margin loan pledging the notes as collateral and, over a period of six months, misappropriated $7.1 million by transferring funds to himself, entities he controlled, and his associates.
The scheme took place through MEDI, a public for-profit corporation created with the purpose of promoting the economic development of Mayagüez and the western region of Puerto Rico, generating jobs, supporting infrastructure projects, and improving the quality of life of citizens. But García Jiménez and the other defendants, including former Judge Alejando Irizarry Irizarry, allegedly transferred, distributed and spent the money for their own personal benefit.
The SEC punished LPL Financial for failing to verify when it opened a customer account and processed wire transfers at García Jiménez’s request.
After misappropriating $4.1 million of the city’s funds through an account at Brokerage Firm 1, García Jiménez approached LPL in April 2016 to open an investment account.
“During its review before opening the account, LPL failed to comply with its Customer Identification Program procedures and, despite various individuals in different departments questioning the account’s beneficial ownership, source of funds, and reason for transfer from the Brokerage Firm 1, Garcia [Jiménez] opened an account controlled by him at LPL in June 2016,” the SEC complaint issued over the weekend said. “LPL subsequently processed wire transfers that Garcia requested. In the less than one month before LPL froze and later liquidated the account, Garcia was able to misappropriate an additional $3.1 million of City funds.”
“Through certain failures, LPL was a cause of Garcia’s violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act Section 206(2), which prohibit fraudulent conduct in the offer or sale of securities and upon any client or prospective investment advisory client,” the complaint states. “Further, LPL willfully violated Exchange Act Section 17(a) and Rule 17a-8 thereunder, which require broker-dealers to comply with reporting, record keeping and record retention.”
Although required by LPL’s procedures, the LPL representative never verified that the identification document photograph matched García Jiménez’s physical appearance before processing the account opening paperwork. MEDI’s corporate records list Puerto Rico physical and mailing addresses for MEDI and has never conducted business or maintained an address outside of Puerto Rico, However, García Jiménez’s MEDI account application listed a Newport Beach, Calif. mailing address and a separate Newport Beach, Calif. physical address for MEDI.
“LPL’s automated CIP system flagged the inconsistency between the addresses listed on MEDI’s corporate documents and the two unverified California addresses. LPL never verified the California addresses and the CIP alert was instead resolved after the account was approved when Garcia updated the address to a Puerto Rico address, which was again different from the address listed in MEDI’s corporate documents,” the complaint said.