SEC Says Broker Churned Municipal Accounts

The SEC’s complaint alleges that Harold H. Jaschke, while associated with the brokerage firm First Allied Securities, Inc., churned⁽¹⁾  the accounts of the City of Kissimmee, Florida, and the Tohopekaliga Water Authority and lied to both customers about his trading practices on their behalf, “putting them at risk of losing millions of dollars while he reaped commissions of more than $14 million for himself,” according to a press release .      

“Jaschke was unscrupulous with the municipalities’ funds and ignored their interests for his own personal gain,” said Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office. “He lied to his customers, took advantage of their trust, and risked their financial well-being.”      

‘High-Risk, Short-Term Strategy’    

The SEC’s complaint, filed in federal court in Orlando, Florida, alleges that Jaschke engaged in a high-risk, short-term trading strategy involving zero-coupon U.S. Treasury bonds that were very sensitive to interest rate changes. For example, if interest rates were to increase by only 1%, the value of a 30-year bond could drop by 25%, according to the SEC.  The complaint says that Jaschke’s trading strategy involved buying and selling the same bond within a matter of days, and sometimes within the same day—exposing the municipalities to greater risks when he leveraged their accounts using repurchase agreements to finance the bond purchases that they otherwise would not have been able to afford. “This strategy dramatically increased the risks as Jaschke caused the municipalities to borrow large sums of money to hold larger bond positions,” according to the SEC.

Additionally, the SEC alleges that Jaschke knew the municipalities’ ordinances prohibited his trading strategy and required that their funds be invested with the paramount consideration to be safety of capital—and that he also knew that the municipalities’ ordinances prohibited the use of repurchase agreements for investment. According to the SEC’s complaint, had the bond market not swung sharply in Jaschke’s favor allowing the municipalities to close their accounts with a modest profit, they could have lost approximately $60 million over a two-year period as a result of his misconduct.

The SEC’s complaint alleges that Jaschke violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aided and abetted violations of the broker/dealer books and records provisions, Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) thereunder. The SEC’s complaint seeks a permanent injunction and disgorgement with prejudgment interest and a financial penalty.

Related Enforcement Action      

In a related enforcement action, the SEC charged Jeffrey C. Young, First Allied’s former vice president of supervision, for failing to reasonably supervise Jaschke, failing to respond adequately to red flags relating to Jaschke, and failing to take reasonable steps to ensure that First Allied’s procedures regarding suitability were followed. Young agreed to settle the SEC’s enforcement action without admitting or denying the findings.       

The SEC’s order instituting settled administrative proceedings against Young suspends him from acting in a supervisory capacity for nine months and orders him to pay a $25,000 penalty.

 ⁽¹⁾ Churning is a fraudulent practice that occurs when a broker engages in excessive trading in order to generate commissions and other revenue without regard for the customer’s investment objectives.