Bellbrook resident and former Dayton broker John Gregory Schmidt misappropriated more than $1.16 million from accounts owned by seven customers, transferring that money to at least 10 other customers — in effect, “robbing Peter to pay Paul,” civil charges filed in federal court late last month by the U.S. Securities and Exchange Commission said.
It’s the type of scam that financial officers are seeing increased cases as baby boomers retire and begin relying on investment advisers to protect their life savings and investments.
While the SEC details much of what they say was Schmidt’s activity, SEC officials aren’t commenting on why he allegedly maneuvered the money, lied to customers about dwindling funds and targeted some of the most vulnerable clients imaginable — elderly investors, some of whom suffered from dementia and Alzheimer’s disease.
During the course of what the SEC says was Schmidt’s deception, five of his alleged victims died.
“It’s a big challenge that FINRA (the Financial Industry Regulatory Authority) has been working on for years — the senior investors,” said Brad Bennett, former enforcement chief for FINRA, now an attorney working in Washington, D.C.
Too often, brokers become social lifelines for older customers who may be otherwise isolated. A bond of trust is created. Sometimes, brokers even end up as beneficiaries in wills, Bennett said.
“The price to keep the relationship going with the broker is, you have to buy some of their stuff,” Bennett said.
In its federal court complaint, the SEC presents a picture of a Schmidt forging “close personal relationships” with clients, all while he was moving funds from their accounts, even accounts relied on for living expenses.
Said Bennett: “This is not an atypical story. It’s a tragedy. With these victims, it’s usually the last penny they have.”
The case is scheduled before U.S. District Judge Walter Rice. As of last Thursday, no attorney for Schmidt was listed in court documents.
Several attempts to reach Schmidt have not been successful.
The SEC is asking the court for a permanent injunction against Schmidt, an order to “disgorge ill-gotten gains,” as well as appropriate civil penalties.
The SEC says that in an interview in March, Schmidt refused to answer questions and asserted his Fifth Amendment rights against self-incrimination.
A relative of two former Schmidt clients declined to comment for this story, citing settlement talks with a former employer of Schmidt. Another former Schmidt customer also declined.
‘Robbing Peter to pay Paul’
What Schmidt is alleged to have done has been likened to a “ponzi” or “pyramid” scheme — using new income to pay original customers their returns, presented as profit from legitimate transactions.
In this case, the SEC charges that Schmidt repeatedly sold securities without the authorization of his brokerage customers, secretly transferring the sale proceeds to cover shortfalls in other customers’ accounts.
In doing do, from February 2013 through October 2017, the SEC says Schmidt received more than $230,000 in commissions from customers who were either the source of — or recipient of — misappropriated funds.
The case “sounds a lot like Bernie Madoff, only on a smaller scale,” said Bill Ragle, associate professor of finance at Cedarville University.
Madoff is serving 150 years in federal prison for his multi-million ponzi scheme. He pleaded guilty in 2009 to living large on his clients’ money, taking funds from new clients to pay early investors and trying to cover up the fraud.
Joel Levin, director of the SEC’s Chicago office, said fraud against seniors will be a growing problem as baby-boomers age.
There are reasons why older investors are sometimes seen as more vulnerable.
“Sometimes people are afraid to ask questions because they’re afraid they’ll be perceived as unsophisticated.” Levin said.
Bennett agreed. “They’re talking to you in a way that you would feel stupid if you said ‘No,’” he said. “People are afraid to admit their ignorance.”
Lee Oliver, a Milford resident who leads a team of AARP volunteers who speak on fraud, said investors should understand that if a sales pitch seems too good to be true, it probably is.
“Start asking questions,” Oliver said. “Why is this investment good for me?”
Levin declined to detail how Schmidt was identified or missteps he made. But he said: “This is a priority for us. We’re very vigilant in this area. And we have many sources of information.”
Ohio Department of Insurance representatives, who were involved in the investigation of Schmidt, referred questions to the SEC.
Inflated balances, fake statements
According to Schmidt’s employment history found on brokercheck.org, Schmidt was employed by Wells Fargo Advisors Financial LLC from 2006 to 2017. He worked for Stifel, Nicolaus & Co. Inc. from 2002 to 2006, years covered by the SEC’s charges.
The web site lists Schmidt’s status today as “barred.”
“We are cooperating with all legal and regulatory investigations, and Mr. Schmidt is no longer affiliated with Wells Fargo,” Jackie Knolhoff, vice president, external relations, for Well Fargo Advisors, said in an email.
A spokesman for Stifel declined to comment.
By the time he was fired from Wells Fargo last October, Schmidt had about 325 retail brokerage customers, at least half of whom had been relying on him for more than a decade, according to the SEC.
John North, president and chief executive of the Better Business Bureau of Dayton and the Miami Valley, said investors should arm themselves with knowledge. He points to a web site for the National Association of Personal Finance Advisers, or www.napfa.org.
There, investors can look up brokers by name or the firm for which they work. Similar checks can be made at www.finra.org or brokercheck.finra.org.
“Make sure you understand from independent sources who you’re dealing with,” Bennett advised.
The SEC complaint does not directly name Schmidt’s customers in its filing, referring in some as “shortfall customers” or “misappropriation customers” or in one case, “customer X.”
Without authorization, Schmidt is accused in the complaint of withdrawing from the accounts of “shortfall customers,” while creating fake account statements that materially inflated account balances and listed fictitious securities holdings.
To satisfy the continuing withdrawals of shortfall customers, the SEC contends that Schmidt, no later than 2003, began selling securities in the accounts of another set of customers, dubbed “misappropriate customers,” again without authorization.
Proceeds from those sales went to the original shortfall customers.
By the summer of 2017, Schmidt was asked to respond to an investigative inquiry from the Ohio Department of Insurance, the SEC said in its filing. But even then, the SEC charges that he attempted to “ensnare a new victim, “Customer X,” a 69-year-old retiree.
By October 2017, Schmidt had been fired from what the SEC called “Broker A.”