Source: http://securities.mikameyers.com/david-ferwerda/
Timestamp: 2019-04-26 16:53:41+00:00

Document:
The Financial Industry Regulatory Authority (FINRA) recently barred David Ferwerda of Grand Rapids, Michigan from the securities brokerage industry after he refused to cooperate with the self regulator’s investigation into allegations that he sold unregistered securities issued by the Woodbridge Group of Companies. Ferwerda was fired from his position as a registered representative of Signator Investors last year after the firm discovered that he was selling the Woodbridge securities on the side.
Customers of Ferwerda who purchased the unregistered Woodbridge securities may have legal claims against Signator Investors, even if they did not have an account with the firm. To prevail on a claim against the firm, investors will likely have to demonstrate that the firm either knew or should have known about Ferwerda’s unlawful conduct. See, e.g., McGraw v. Wachovia Securities, L.L.C., 756 F. Supp. 2d 1053 (N.D. Iowa, 2010); As You Sow v. AIG Financial Advisors, Inc., 584 F. Supp. 2d 1034 (M.D. Tenn. 2008).
[L]ack of notice or approval of a representative’s particular outside activity or private securities transaction does not relieve a firm of its duty to monitor or investigate a representative’s outside activities or private securities transactions. . . . The court agrees that the plaintiffs have generated genuine issues of material fact that “sufficiently suspicious” circumstances here may have placed the defendants on notice that Lovegren was engaged in improper conduct as to them, giving rise to a duty to monitor and investigate Lovegren’s outside activities or private securities transactions.
Specifically, the McGraws have generated genuine issues of material fact that . . . they received documentation of and other communications about their purported “investments” with Lovegren sent from Lovegren’s offices and company e-mail accounts at SCI/Wells Fargo or A.G. Edwards/Wachovia.
Thus, the court concludes that, notwithstanding that there is no documentation that Montross ever had an account with A.G. Edwards/Wachovia, and Pestka was no longer a client of A.G. Edwards/Wachovia when she invested in Lovegren’s fictitious investment in “Bond Management,” all of the plaintiffs may nevertheless have been owed a duty by A.G. Edwards/Wachovia and/or SCI/Wells Fargo to monitor and investigate Lovegren’s activities, and that the defendants may have breached that duty by failing to monitor, discover, or investigate Lovegren’s outside activities and private securities transactions.
Stokes’s duty was to complete securities transactions in accordance with securities laws and NASD rules. To that extent, the acquisition and disposition of Plaintiffs’ assets were within the actual scope of Stokes’s duties as the Defendants’ agent. Federal courts that have held that broker-dealers are liable under principles of respondeat superior where their affiliated agents steal client’s money. See Henricksen v. Henricksen, 640 F.2d 880, 887 (7th Cir.1981), cert denied, 454 U.S. 1097, 102 S.Ct. 669, 70 L.Ed.2d 637 (1981); Alvarado v. Morgan Stanley Dean Witter. Inc., 448 F.Supp.2d 333 (D.P.R.2006). A contrary rule would cause injury unfair to the investing public.
Broker dealers may not enjoy the benefits of their relationships with affiliated agents without discharging their supervisory duties, including the supervision of private securities transactions. Significantly, the NASD defines “private securities transaction” as a transaction “outside the regular course or scope” of the affiliation. Rule 3040(e) (emphasis added). A private securities transaction is therefore not outside the scope of the affiliation, but simply outside the “regular” or primary scope. Consistent with these principles, the Sixth Circuit has held that “a dispute that arises from a firm’s lack of supervision over its brokers arises in connection with its business,” even when the investor had no accounts with the firm. Vestax Securities Corp. v. McWood, 280 F.3d 1078, 1082 (6th Cir. 2002). For this tort [negligent supervision], numerous courts have ruled that broker dealers may be held liable under the common law for negligently supervising their registered representatives, even on dealings with investors who had no accounts with the firm.
There are many other examples of courts ruling against FINRA member firms in selling away cases, even when the investors who were involved did not hold accounts with the member firms. McAdam v. Dean Witter Reynolds, Inc., 896 F.2d 750 (3d Cir. 1990): Vucinich v. Paine, Webber, Jackson & Curtis, Inc., 803 F.2d 454 (9th Cir. 1986); Berthoud v. Veselik, 2002 WL 1559594, *6–7 (N.D. Ill., 2002); Javitch v. First Montauk Fin. Corp., 279 F. Supp. 2d 931, 940 (N.D. Ohio, 2003)(denying motion to dismiss claims that brokerage firm had negligently supervised its broker); Burns v. Prudential Secs., Inc., 167 Ohio App. 3d 809, 821, 857 N.E.2d 621 (2006) (affirming multi-million dollar verdict in investor suit alleging negligent supervision by broker dealer).
As a result of the Respondents’ deficient supervisory systems and procedures for email review, numerous emails that contained indications of misconduct by representatives escaped detection. For example, during the relevant period, two MSI registered representatives engaged in undisclosed outside business activities and private securities transactions without detection by MSI, although the misconduct was reflected in more than 100 separate emails that were sent or received during that period using MSI assigned email addresses. It was ultimately revealed that one of those registered representatives had participated in numerous private securities transactions to raise capital for real estate development companies that he owned, controlled, or had contracted with, and that the representative had misappropriated nearly $6 million from his customers.
Respondents’ written supervisory policies and procedures prohibit their registered persons from engaging in outside business activities or private securities transactions without prior written authorization. During the relevant period, to monitor compliance with that policy, Respondents’ written supervisory procedures directed supervisors to review the incoming emails of registered persons for any indications of unauthorized outside business activities or private securities transactions, and upon identifying any such indications, to take immediate corrective action. However, that procedure was inadequate due to its dependence upon registered persons forwarding their own emails to a supervisor for review. As a result of this inadequate procedure, numerous email communications containing clear indications of Rule 3030 and/or Rule 3040 violations escaped detection.
In FINRA Department of Enforcement v. MML Investors Services, LLC , FINRA brought an enforcement action against a member firm that failed to follow up on numerous red flags that its registered representatives were engaging in the unauthorized sale of real estate promissory notes, including email communications sent through the firm’s email system. FINRA found that “the Firm did not reasonably monitor for or review these indications to determine whether unapproved private securities transactions were occurring at the Firm.” FINRA further found that “[a]s a result of the Firm’s supervisory failures, certain [registered representatives] recommended unapproved promissory notes to investors, . . . who sustained losses of up to $760,000 when the issuers of these promissory notes discontinued interest payments.” As a result of the enforcement action, the member firm was required to pay restitution to the bilked investors, which including several non-account holders.
In FINRA Department of Enforcement v. Portfolio Advisors Alliance, Inc., FINRA brought an enforcement action against a member firm and its Chief Compliance Officer for failing to follow up on red flags indicative of broker misconduct and for failing to properly review the registered representative’s email communications. In that case, the registered representative had repeatedly disclosed to the member firm and the CCO that he engaged in investment related “outside business activities”; however, the firm and the CCO did nothing to investigate the nature of those activities. Furthermore, the firm and the CCO knew that the registered representative conducted securities business using an outside email address, but never bothered to review the emails transmitted to and from that address.
If you suffered investment losses as a result of the malpractice or misconduct of David Ferwerda, the experienced securities law attorneys at Mika Meyers, PLC may be able to assist you in recovering some or all of your losses. Call us toll-free at 888-607-4819 for a free consultation or send us an email message through our “Contact” page to schedule a consultation.

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