Financial adviser Ronald W. Hannes faces federal fraud charges

Nearly two years after a former financial adviser settled a state case alleging he defrauded clients of millions of dollars, he faces 10 counts of criminal fraud.

Ronald W. Hannes, an advisor at Advisor Group’s Woodbury Financial Services, directed $2.9 million from at least 19 clients by having them write checks to his Spokane, Wash.-based firm and simply entering the money rather than making the promised investments in bonds and mutual funds, according to the State Securities Division’s Statement of Allegations. Prosecutors won a criminal indictment last month in federal court in Spokane charging Hannes with wire, mail and investment counsel fraud.

The allegations represent a “classic sales case,” according to Israel & Neuman attorney David Neuman, who became familiar with Hannes through former clients who approached him about their losses a while ago. a few years. “Distance selling” refers to transactions made outside the supervision of a brokerage or advisory firm without the knowledge of their compliance teams. Hannes sold his clients “short-term, high-yield” bond products, the indictment says.

“The money went directly to [Hannes’ practice] then he just deposited the money into his own account,” Neuman said.

Hannes’ attorney, Phillip Wetzel, said he and his client are reviewing the allegations and will respond later. Despite regulation the state’s administrative case in September 2020 for $50,000 in investigative costs and fines, Hannes pleaded not guilty to the criminal rap, according to an article in the Spokane Spokesman-Review, which first reported the federal case.

Woodbury has compensated affected customers.

“Advisor was terminated for cause and Advisor Group has cured its clients,” spokesman Donald Cutler said in a statement.

Since the end of Woodbury Hannes in December 2019 and FINRA expelled him months later for failing to produce documents and information for its investigation, the paper trail of the case provides a lens on one of tens of thousands of fraudulent arrests each year and the collaboration of the regulatory authorities responsible for protecting investors. Financial advisors play an essential role notifying regulators of potential cases. In it, the company’s dismissal and FINRA’s review of the allegations led to the state case and ultimately a criminal referral.

The Washington Securities Division typically sends one or two cases each to federal authorities and county prosecutors each year, according to chief enforcement officer Brian Guerard. Unlike federal anti-fraud rules, state law does not require authorities to prove that an adviser demonstrated intent to break the law, he pointed out. Guerard’s team keeps these factors in mind when considering whether to refer a possible criminal case, as well as the amount of alleged losses and whether the investors were from out of state.

“In the Hannes case, we contacted the FBI office in Spokane shortly after receiving the complaint package from FINRA because the investment loss seemed high, there were out-of-state investors, and there there was a high probability of postal and electronic fraud,” Guérard said in an email.

Federal prosecutors don’t discuss their investigations into ongoing cases, but Neuman said there were two possible factors that led to the time gap between state and federal cases. First, the pandemic delayed many cases in 2020 as authorities figured out how to conduct them remotely. Additionally, federal prosecutors often give themselves and defendants time to pursue a plea deal because very few such cases ever go to trial, Neuman said.

“I suspect there were negotiations, and maybe they just couldn’t come to a consensus on a sentencing recommendation,” he said.

An indictment adds “a little more teeth to your case” for clients seeking restitution in arbitration or other litigation, Neuman adds. With Woodbury offering restitution to customers who said they lost money, they will avoid the fate of other alleged victims who often have trouble getting it.

Hannes had committed the “extensive and long-term fraud” for 16 years, until his 2019 dismissal from Woodbury, according to the state’s case. Offering investors returns of 5% to 7% with the ability to transfer the bonds or mutual funds into new vehicles at the end of their purported 2- and 5-year terms, Hannes brought client checks to Hannes Financial Services and used their money for “unknown purposes”, according to investigators.

He tricked them into maintaining their investments with fake account statements, investigators say. Investigators say the scheme wasn’t undone until November 2019 when a married couple, longtime clients, decided to see a new advisor and couldn’t find the checks they had written reflected in their official statements from Woodbury.

Federal agents arrested the 33-year-old former veteran adviser on July 26, ahead of his arraignment and bail. His judge has set a date next month for a pretrial conference and hearings beginning Oct. 3, according to court records.

The case is just one of many that are popping up every week across the country. For example, a federal judge in Philadelphia sentenced a former financial adviser on August 9 to five years in prison for his fraud conviction and ordered him to pay $7.5 million in restitution. Also this week, FINRA Posted a regulatory notice alerting brokerage firms to a growing number of reports of falsification of transfers, account opening documents and other forms.

Fraudsters evade detection for long periods of time because they become adept at “stunning investors into thinking their investments are doing well,” said Guerard of the Washington Securities unit. Advisers have provided some of his most promising advice in recent years, he said.

“If they ever have a knee-jerk reaction that something doesn’t make sense, I recommend that they file a complaint with a state securities regulator because they might be right,” Guerard said. . “They could help other investors – not just their clients, but others as well.”

Geraldine L. Melton