FinancialPlanning (March 28, 2022) – A major LPL Financial hybrid RIA enterprise quietly settled a fraud victim’s lawsuit alleging its response to a former financial advisor’s scheme was “as egregious as the crime itself.”

With a joint payment of $500,000 each to “homebound” widow Dianne G. Crossland last February, Integrated Partners’ RIA — Integrated Wealth Concepts — and LPL resolved the lawsuit that accused Integrated, owner Paul Saganey and Chief Compliance Officer John Cataldo of supervisory failures and “a malicious campaign” against her, according to records on FINRA BrokerCheck, the complaint in the case and Integrated spokesman Jason Lahita. Enterprises like Integrated fuel LPL’s growth but sometimes raise compliance risks for the firm.

The payment of $1 million provided restitution for Crossland’s losses at the hands of former LPL and Integrated advisor Matthew O. Clason, who’s currently serving a federal prison sentence of more than two years after pleading guilty last year to defrauding the “elderly” client for $600,000. The 73-year-old woman’s previously unreported lawsuit sheds more light on a case in which a victim received compensation for her fraud losses after a wealth manager initially placed legal hurdles in the way of her arbitration claim then left the case out of its disclosures to RIA clients.

“The first thing that stood out to me was, ‘Why did it get to this point?’” Michael Edmiston, an attorney with Jonathan W. Evans & Associates and the president of the Public Investors Advocate Bar Association, said of the lawsuit.

“Usually, the firm or its insurers or its counsel are much more sophisticated, and they want to get that matter resolved quickly and quietly,” Edmiston said.

“Whoever was defending the firm tried to use the arbitration clause as a shield to prevent Ms. Crossland’s claim from being filed. That’s the part I found just disgusting.”

Response to allegations

Representatives for LPL didn’t respond to requests for comment on the case. The attorney who represented Clason in his criminal case last year declined to comment on behalf of the 40-year-old resident of the medium-security federal correctional facility in Otisville, New York. Clason pleaded guilty last May to one count of wire fraud.

“Sadly, when he was engaged in the instant offense, Mr. Clason knows that greed got the best of him,” according to the defendant’s sentencing memo from November. “He wants the victim to know how remorseful he is and that if he could go back in time, he would. His conduct not only affected his own family and his ability to earn a living, but it has had an impact on his relationship with his children as well. It also affected the victim as well.”

A judge in the federal court of Hartford, Connecticut, ordered Clason in December to serve a 30-month sentence with two years of supervised release and restitution of $639,580. Citing the fact that LPL and an asset manager retained by Integrated’s insurer had “jointly reimbursed” Crossland for her losses, federal prosecutors’ sentencing memo requested that the restitution be paid to the two firms.

“There have been endless phone calls and appointments to get this straightened out, and it feels like more and more things keep showing up,” according to written statements by Crossland included in the filing. “I am tired. He does the illegal thing, yet I have to find ways to fix it all.

“I will be a victim for a long time,” she continued. “I treated Mr. Clason like family, and he is a disgrace. He used my trust and care to take advantage and use me. Every day I feel anger, fear, frustration, stupidity and sadness. There is no easy way to move on from this.”

Settlements typically include clauses prohibiting the parties from discussing a case publicly. Integrated, Saganey and Cataldo never filed “an answer or other responsive pleading” to Crossland’s allegations in the lawsuit, according to the notice of voluntary dismissal last March in Boston federal court. There are “no legal, regulatory or disciplinary events involving Integrated or any of its management persons,” according to the latest SEC Form ADV brochure filing from August. The company didn’t make anyone available for an on-the-record interview.

“Matthew Clason is a fraudster who actively and carefully concealed his wrongdoing from all parties,” Lahita, the spokesman for Waltham, Massachusetts-based Integrated, said in a statement.

“When the allegations against Mr. Clason were revealed, the firm immediately terminated him,” Lahita said. “The firm provided assistance to the United States Attorney’s Office in its case against Mr. Clason. It also advised the victim of Mr. Clason’s wrongdoing to obtain a private attorney to represent her interests. We are happy that, in February 2021, the case was settled jointly with Mr. Clason’s broker-dealer in a manner that made the victim more than whole for the assets taken by Mr. Clason.”

The definition of ‘material’?

Representatives for the SEC declined to comment, citing a policy against commenting beyond public filings. In its official instructions for RIAs about the section of the Form ADV brochure on disciplinary disclosures in Item 9 of the disclosures provided to every RIA client, the SEC directs firms to list any criminal or civil cases, administrative proceedings or self-regulatory organization matters in which the company or a management person was alleged or found to be involved in violations of the rules or other investment-related breaches.

“If there are legal or disciplinary events that are material to a client’s or prospective client’s evaluation of your advisory business or the integrity of your management, disclose all material facts regarding those events,” the guide states. “You may, under certain circumstances, rebut the presumption that a disciplinary event is material. If an event is immaterial, you are not required to disclose it.”

The SEC routinely focuses on disclosure in its enforcement cases in general, though. Specifically over the past several years, the regulator has filed more than 100 cases involving other aspects of Form ADV language and 42 revolving around the new Form CRS required by the SEC’s Regulation Best Interest. In terms of the section for disclosing cases, the regulator gives RIAs leeway, said Edmiston of PIABA.

“The rule’s really quite simple. The firm has to disclose material events and information, but it’s left up to the firm to decide what is material. Obviously self-interest prevails in this area and materiality is defined very, very narrowly,” he said. “One of the important facts that they failed to disclose is that our advisors may just steal your money. Apparently that’s not material.”

At 160 advisors in 60 offices managing more than $13 billion in client assets with 140 accounting practices that are part of Integrated’s referral program, it’s among the largest of the 450 hybrid RIA enterprises that use LPL’s brokerage and custodian. Saganey and Cataldo didn’t contribute to the settlement of Crossland’s case, their detailed BrokerCheck files show.

A plaintiff who had accused Integrated of a “nonspecific failure to supervise the activities of an advisor who is alleged to have misappropriated funds” settled the case for $1 million in February 2021, according to the identical 17-word mention of the allegations on their BrokerCheck files. More particularly, Crossland’s civil lawsuit filed that same month in Boston federal court alleged that Integrated’s RIA had “embarked on a malicious campaign to harass and intimidate” her.

The underlying case

Crossland met Clason around 2015 through other older women at a beauty parlor, one of the places that he “often ‘recruited’ female clients” as “an attractive young man,” the lawsuit states. Clason and the resident of New Britain, Connecticut, with “significant health issues” eventually developed such a close relationship that he visited her up to five days a week, drove her to medical appointments and, following a stroke, received an appointment through his lawyer friend to have Crossland’s power of attorney and be her healthcare proxy, according to the complaint. In addition, Clason convinced her to open a joint bank account, which he told her would help pay living expenses such as rent, the complaint shows.

Between 2018 and August 2020, he transferred more than $668,000 from her investment accounts into the joint bank account, according to federal prosecutors. He later withdrew over $621,000 in cash from the account, paid credit card bills with it and transferred $5,000 directly to his personal holdings, investigators say.

“Clason’s crime was unsophisticated and should have easily been detected by the defendants through the exercise of reasonable care and diligence,” the complaint states. “Tragically, at no point in time did the defendants ever question: (i) sequential and near total liquidation of plaintiff’s multiple advisory accounts; (ii) dozens of wire transfers from plaintiff’s advisory account to an account belonging to Clason; or (iii) the inappropriately close personal relationship between Clason and his elderly client.”

LPL and Integrated’s RIA fired Clason in August 2020 while citing the allegations, his BrokerCheck file shows. The following month, the SEC filed a civil fraud case against Clason, which ended after he consented to a partial judgment in June enjoining him from violating the antifraud provisions of the Investment Advisers Act and accepted a bar in August 2021. FINRA had barred Clason in September 2020 after he refused investigators’ requests for information. Besides the $1 million settlement, another former client of Clason’s received a payment of $12,965 in March 2021 after alleging he made misrepresentations about certain products.

More legal wrangling in the wake

After Integrated’s chief legal officer attended the SEC’s interview of Crossland in August 2020, attorneys for the RIA spoke with her “without counsel in order to elicit harmful or false testimony from her,” according to her lawsuit. Then, “either” the RIA or Clason hired a private investigator who “gained unlawful entry” into her residential building and made multiple attempts to speak with her, the lawsuit states.

“The activity only ceased after plaintiff’s counsel threatened to contact the judge presiding over the SEC case and complained to the Assistant United States Attorney who [was] investigating this matter on behalf of the Justice Department,” according to the lawsuit.

Representatives for the Hartford U.S. Attorney’s office declined to comment on the allegations.

Under the terms of her account agreement, Crossland filed a demand for arbitration with the American Arbitration Association against Integrated’s RIA in November 2020, according to the complaint. The RIA didn’t comply with the forum’s deadline to pay fees it owed as part of the proceeding, which it had to do in order to avoid giving Crossland the right to file a case in court, the complaint states. Instead, in January 2021, Integrated’s RIA filed a lawsuit in Massachusetts Superior Court against Crossland seeking an “improper” appeal of the arbitrator’s determination that the case be tried under its consumer rules, according to the lawsuit.

Integrated’s RIA “has failed to explain the legal basis for its actions, which are clearly designed to vex [the] plaintiff and delay her right to seek compensation from [the] defendants,” according to the complaint. They “aggravated the harm” done to Crossland by “(1) interviewing her without counsel despite knowing she was under the care of adult protective services; (2) refusing to honor its account agreement with her by failing to pay various fees to AAA; and (3) filing a baseless lawsuit designed to harass her,” the complaint states.

A finding that Crossland’s arbitration claim was a “commercial” case rather than a “consumer” dispute would have raised the cost of filing it to about $20,000 to $40,000 for each side rather than shifting “virtually all” of the expense for the proceeding to Integrated under the consumer rules, according to Edmiston of PIABA. He and other critics have called on RIAs to remove provisions of client agreements obligating them to pursue any disputes through AAA or JAMS. Integrated’s RIA settled the case within a month after Crossland’s subsequent federal lawsuit.

“They obviously failed in their supervision of Mr. Clason,” Edmiston said. “When the client made them aware of the problems, they absolutely acted in the least fiduciary capacity they could in trying to play games with the arbitration agreement.”