Expect to see more of this uncovered in the coming months:
msnbc.com
Jan. 23 — Federal authorities are investigating whether a Lehman Brothers broker cheated investors out of tens of millions of dollars over a 15-year period through a scheme in which he falsified brokerage-account statements for a group of wealthy clients, people familiar with the matter say.
THE BROKER, Frank Gruttadauria, has been missing since Jan. 11, after sending what local agents of the Federal Bureau of Investigation have said was a note describing in detail how he falsified account statements, inflated investor holdings and improperly took millions of dollars of client funds, people at Lehman say. The FBI, which received the letter earlier in the month, notified Lehman about the matter last Thursday, people at the firm say. Lehman, a unit of Lehman Brothers Holdings Inc., has referred the case to the Securities and Exchange Commission and the National Association of Securities Dealers.
William Ahearn, a Lehman spokesman, said in a statement that the firm “is working closely with the FBI and the local authorities to solve this.” Spokesmen for the FBI and the SEC declined to comment on the matter. Gruttadauria couldn’t be reached to comment.
The case has stunned Lehman officials. Gruttadauria, 55 years old, had been working at Lehman’s Cleveland, Ohio, branch office since October 2000, joining the firm when Lehman bought the brokerage arm of S.G. Cowan Securities from Societe Generale SA, a French bank. Lehman Brothers alleges that since that time, Gruttadauria may have misappropriated as much as $25 million from investors. Officials at Cowan, who say they learned about the inquiry Tuesday, declined to comment.
But the $25 million accounts for just part of the potential issue, people at Lehman say. They say federal authorities are investigating whether Gruttadauria carried out the alleged scheme since he broke into the brokerage business with Hambrecht & Quist Inc. in 1987, and whether he has inflated clients’ profits over that time by $250 million, or possibly more.
It is unclear how much of that amount Gruttadauria could have kept for himself during this time, the people familiar with the matter say, but one senior Lehman executive says the total could be “a multiple” of the $25 million investigators say he may have improperly taken while at Lehman. H&Q, now part of J.P. Morgan Chase & Co., declined to comment.
“If these numbers turn out to be accurate, this appears to be the largest scam of retail investors ever” by an individual broker, says New York securities lawyer Jacob Zamansky. “It certainly eclipses the high-profile boiler-room cases of the early 1990s.”
Lehman, with roughly 475 brokers, has been making gains attracting wealthy clients to the firm in recent years. A firm spokesman says Lehman brokers average annual commissions of around $2 million. (That compares with an industry average of about $200,000 in 2000, according to the Securities Industry Association, a trade group.)
Gruttadauria had generated annual commissions of as high as $6 million, people at Lehman say, though that number had dropped off significantly in recent years. He had about 300 clients, about two dozen of whom may have received false statements, according to a Lehman official.
The alleged activity could have ripple effects throughout the brokerage business. Already, people familiar with the matter are alleging that the bulk of the potential misdeeds occurred before Gruttadauria began working at the firm. (Gruttadauria had worked at Cowan since 1989, according to regulatory records.) People at Lehman say federal authorities are investigating whether most of Gruttadauria’s activities occurred while he worked at Cowan. A spokesman for S.G. Cowan declined to comment.
Lehman officials began investigating the matter late last week, after the FBI contacted the firm with details about Gruttadauria’s letter, which they described to the big securities firm as a possible suicide note, a Lehman executive says. Gruttadauria hasn’t been spotted since, the executive says.
Before the FBI contact, Lehman officials say they were unaware of Gruttadauria’s activities. Since then, however, Lehman has dedicated 24 people — a dozen each in Cleveland and New York — to investigate the case. Officials at Lehman say the investigation is in its early stages, and many details aren’t yet known, including whether Gruttadauria had any assistance.
People at Lehman say that Gruttadauria appeared to put a great deal of effort into the matter. They say that the firm’s internal investigation found that Gruttadauria had opened multiple post-office boxes on behalf of his clients, and directed Lehman to send brokerage-account statements to these places, instead of to the clients themselves.
Then, these people say, Gruttadauria created phony statements under the company’s letterhead, which included the inflated account statements. Gruttadauria sent the statements each month out to a selected group of his clients, which included several wealthy individuals in the Cleveland area, the Lehman officials say.
According to the company’s investigation, Gruttadauria inflated the prices of numerous individual stocks and bonds. Lehman officials say none of the broker’s clients was aware that their accounts were inflated. A Lehman spokesman says insurance will cover the losses. |
