LPL Financial LLP (“LPL”) will pay $9 million following a FINRA investigation of LPL’s email system. Of that, $7.5 million will be paid as a fine for “35 separate, significant email system failures which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails,” according to FINRA. FINRA also found that LPL made “material misstatements” to FINRA during its investigation of LPL’s email handling. FINRA further ordered LPL to pay $1.5 million to establish a fund to compensate brokerage customer claimant who may have been affected by LPL’s failure to produce email.
“This is the largest fine Finra has imposed for an e-mail case,” said FINRA spokeswoman Michelle Ong.
In its investigation, FINRA found that from 2007 to 2013, LPL’s email review and retention systems failed at least 35 times, which meant that LPL was unable to meet its obligations to capture email, supervise representatives and respond to regulatory requests. Some examples of LPL’s 35 email failures include:
- Over a four-year period, LPL failed to supervise 28 million “doing business as” (DBA) emails sent and received by thousands of representatives who were operating as independent contractors.
- LPL failed to maintain access to hundreds of millions of emails during a transition to a less expensive email archive, and 80 million of those emails became corrupted.
- For seven years, LPL failed to keep and review 3.5 million Bloomberg messages.
- LPL failed to archive emails sent to customers through third-party email-based advertising platforms.
In addition, LPL made material misstatements to FINRA concerning its failure to supervise the 28 million DBA emails. Primarily, in a January 2012 letter to FINRA, LPL told FINRA that it had discovered the issue with DBA emails in June 2011, even though certain LPL personnel had information that would have uncovered the problem as early as 2008. In the same correspondence, LPL falsely stated that there were no “red flags” to suggest issues with DBA email, when many LPL employees were aware of numerous red flags regarding supervision of DBA emails.
As a result of its deficiencies in retaining and reviewing emails, LPL also failed to produce requested emails to arbitration claimants, private litigants, and federal and state regulators. Customer claimants who brought arbitrations or litigations against LPL as of January 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that LPL failed to provide them. Claimants will be compensated out of the $1.5 million fund, and if the total amount of eligible claims exceeds $1.5 million, then LPL will pay the additional amount.
LPL, which has 13,000 registered reps and advisers, had its initial public offering in 2010 after a decade of rapid growth, according to Investment News. FINRA’s statement regarding the email failures confirms that as LPL experienced growth, its compliance resources were overwhelmed: “As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its e-mail system, which became increasingly complex and unwieldy for LPL to manage and monitor effectively. The firm was well-aware of its e-mail systems’ failures and the overwhelming complexity of its systems.”
In concluding the settlement, LPL neither admitted nor denied the charges.
LPL also recently has paid a $500,000 fine to the Massachusetts regulator and $2.5 million in restitution to Massachusetts investors. LPL paid the fine to following charges that LPL failed to supervise registered representatives selling non-traded REITS and engaged in dishonest and unethical business practices in violation of state securities regulations and LPL’s internal rules.
If you have been a client of LPL and have suffered investment losses, please contact Sonn Law Group to explore your legal options. Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies. To learn more, please call us at 844-689-5754 or complete our “contact form.”