There’s No Business Like the Brokerage Business

This article originally appeared in Bloomberg View on November 1st, 2012.

If regulators and brokerage firms are serious about restoring public confidence in the markets, they will have to do better than they did in the pathetic case of Mark C. Hotton.

Hotton is the 46-year-old former stockbroker who allegedly duped the producers of the Broadway musical “Rebecca” into believing he had lined up $4.5 million in financing. According to law enforcement officials, he even concocted a fictitious Australian guy, Paul Abrams, who would have been good for $2 million if only he hadn’t keeled over from malaria when it was time to write his check. While the clueless backers fell for his stories, Hotton pocketed finder’s fees. “Rebecca” has been “postponed indefinitely,” according to the show’s website.

It’s distressing, but it shouldn’t have come as much of a surprise from a man whose brokerage industry records since 1993 reveal a stolen-property charge, 16 customer disputes, a firing, a lien and a bankruptcy.

The real disgrace here isn’t Hotton, who is being held without bail after his arrest on two counts of fraud last month. The bigger scandal is trumped-up claims like this one:

“Ultimately, Hotton’s imagination was no match for the FBI, which uncovered, with lightning speed, his alleged financial misdeeds,” said Manhattan U.S. Attorney Preet Bharara in an Oct. 15 press release.

Lightning speed? Now that is what I would call a real whopper.

First Queries

I first began to contact Hotton’s lawyers a year ago this month when I saw that Hotton continued to work as a broker after filing for Chapter 7 bankruptcy, but they weren’t very talkative. Michael S. Finkelstein, a lawyer on Long Island, told me to call him back at 4 p.m. on Nov. 22, but didn’t answer that day, and never responded to voicemails. Similarly, voicemails and e-mails that I left with three other Hotton lawyers since Oct. 8 after the “Rebecca” flap erupted have gone unanswered. I couldn’t reach Hotton for comment.

Hotton has faced allegations of financial misdeeds as far back as 1990, yet moved on to work at six brokerage firms, including Ladenburg, Thalmann & Co. and Oppenheimer & Co. He was accused of fraud in multimillion-dollar lawsuits filed before anyone involved in “Rebecca” had ever heard of him. But there was nothing speedy about law enforcement’s response until the victims were attention-grabbing show-business types.

Hotton got a modest $60,000 from the producers of “Rebecca,” according to the U.S. attorney, and I suppose the crack investigators at the Federal Bureau of Investigation deserve credit for getting to the bottom of one of his punier swindles.

Anyone truly interested in watching out for the public might have started paying attention after Hotton bounced a check for $31,550 to Vilsmeier Auction Co. in Montgomeryville, Pennsylvania, on April 25, 1990. Hotton took possession of a 1985 Ford van and three other vehicles, thanks partly to a forged letter from a Westminster Bank officer assuring that his account had sufficient funds. Four months later, the real manager at the bank said in an affidavit that the letter was bogus and signed by a person who didn’t exist.

People who bounce checks and forge documents don’t belong in the securities business, but Hotton, who pleaded not guilty to two fraud counts last month, managed to get a broker’s license three years later anyway.

I asked Michelle Ong, a spokeswoman for the Financial Industry Regulatory Authority, how a broker like Hotton could stay in the business as long as he had. She said that before 2009, the complaints against Hotton had either been denied by his employers, or “settled for little money.” She says Finra began to investigate Hotton in 2009. That’s nice, I suppose, but three years later, Finra still has not announced any sanctions.

Finra Knew

Ong said that Finra knew Hotton had been convicted of criminal possession of stolen property, which apparently isn’t enough to convince regulators that a broker shouldn’t be in charge of other people’s money.

In the securities business, there is this brilliant idea that firms have a self-interest in tossing out bad guys. So I checked in with two firms that employed Hotton. I sent a list of 11 questions about Hotton’s criminal record and customer complaints to Paul Caminiti, a spokesman for Ladenburg, and all he had to say was that Hotton left the firm in 2005 to join Oppenheimer.

It gets worse.

On Oct. 15, the day Hotton was arrested, I called Noah Sorkin, a securities lawyer who worked at Oppenheimer when Hotton was there. Today, Sorkin is general counsel in New York at AIG Advisor Group, a network of independent brokers. “Lemme do this if it’s OK with you,” he said when I began to ask about Hotton. Sorkin said he would be happy to chat with me, but would first have to talk with lawyers at Oppenheimer. I’m still waiting for that call back.

An Oppenheimer spokesman, Brian Maddox, said this: “Investigations were conducted by both Oppenheimer and a securities regulator and no evidence of misconduct was uncovered. Any claims involving Mr. Hotton’s activities came to Oppenheimer’s attention after he left Oppenheimer.” He added that Oppenheimer employees who hired Hotton are no longer with the firm.

That probably would come as a surprise to Philip R. Schatz, a lawyer who filed an affirmation on June 25, 2010, in a multimillion-dollar lawsuit against Hotton while he was working at Oppenheimer, which wasn’t named as a defendant. Schatz said that, in previous lawsuits he had been involved with, Hotton’s actions at Oppenheimer and Ladenburg left him with serious reservations about the broker. In fact, he wrote that he had urged Sorkin in 2006 to investigate Hotton. “I told Mr. Sorkin that if I were in his position, as a matter of prudence, I would conduct a thorough review” of Hotton’s history, he wrote.

Yet for almost three more years, Hotton worked at Oppenheimer before moving to another firm. His story is but the latest example of the joke that securities regulation has become.

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