Most financial advisors claim that they put their investors’ interests first but, all too often, customers are a distant second place to an advisor’s own interests. According to the Financial Industry Regulatory Authority (FINRA), clients of Dennis Mehringer of Pasadena, California may also have had this experience!
A quick look at Mr. Mehringer’s background shows why this news might not be that surprising. Over his career in the brokerage industry, Mr. Mehringer has bounced between thirteen different brokerage firms, including a firm that FINRA expelled from the brokerage industry. Mr. Mehringer has had at least seven customer complaints. One of his customers took legal action alleging that Mr. Mehringer failed to execute a trade, and won $47,000. Another customer brought a claim for $165,000, then settled the claim for $290,000. Usually, claims settle for less than what the customer is asking for, and if they settle for a lot less, it can be an indication that the claim lacks merit, so settling for significantly more is highly unusual, and could be evidence that the claim had merit.
FINRA’s action against Mr. Mehringer alleges three distinct categories of misconduct.
Mr. Mehringer ripped off at least one client with excessive trading in mutual fund A shares.*
To understand why what FINRA alleges Mr. Mehringer did is wrong requires a quick overview of how mutual funds work.
Mutual funds have been around for decades and even though many other investment products have cropped up over the years, mutual funds can be a perfectly good way to invest.
A mutual fund will typically offer different shares which vary based on how they charge investors. For example, B shares will typically charge investors evenly over time. In contrast, A shares typically charge a big initial fee, but charge much less over time. Therefore, buying A shares can save you money by reducing your sales charges, but only if you hold them for a long time. Generally, an investor needs to hold A shares for years to achieve any cost savings over B shares. A good financial advisor only recommends A shares for long-term investments.
According to FINRA, Mr. Mehringer did the exact opposite of what a good financial advisor should do; he bought A shares for a client, but then sold them quickly, resulting in the client paying excessive charges. While these charges depleted the client’s account, Mr. Mehringer pocketed $170,000 in commissions. This is a classic example of putting customers second!
Mr. Mehringer executed trades in a client’s account without permission.
Explaining why this is a problem requires some quick background into the brokerage industry. While there are many types of accounts, they all fall into two categories, discretionary and non-discretionary accounts. A discretionary account is one where your financial advisor has discretion, meaning he can make trades in your account without asking you first. In a non-discretionary account, your advisor can only execute a trade with your permission.
This distinction between discretionary and non-discretionary accounts matters for two big reasons. if you give an advisor discretion over your account, they are in a greater position of trust than a non-discretionary advisor, so they are legally required to place your interests first (in legalese, this means they owe you “fiduciary duties”). Second, the advisor could do more damage to your account, so the brokerage firm he works for should supervise his management of discretionary accounts even more closely than non-discretionary accounts. Mr. Mehringer evaded this heightened supervision by acting with discretion in accounts that were not marked as discretionary accounts. And, of course, he executed these trades without permission, according to FINRA.
Mr. Mehringer may have set up a bogus charitable trust, then taken funds from the trust for himself.
According to FINRA, Mr. Mehringer established a trust for a client using online legal documents. He told his brokerage firm, Western International Securities (WIS), that the trust was charitable, and that it paid tuition for poor students attending private school in Pasadena. One of Mr. Mehringer’s clients then put over $1 million into the trust, but the only money to come out paid for: 1) the client’s children’s tuition; and 2) Mr. Mehringer’s investments. These investments included flipping an Anchorage, Alaska condominium and a risky investment into another client’s nursing home.
According to FINRA, Mr. Mehringer may have also misled his employer, Western International Securities
FINRA’s complaint against Mr. Mehringer suggests that he misled his firm: 1) about the nature of the “charitable” trust as well as the nature of withdrawals from the trust; 2) about whether he had discretion in some accounts; and 3) regarding at least one secret settlement with a customer. When a customer files a complaint, an advisor is required to report it to his supervisor so his firm can investigate. Instead, Mr. Mehringer allegedly wrote one of his clients a check for losses without reporting the complaint to WIS, depriving WIS of the opportunity to investigate this complaint.
Despite all of these serious allegations, for reasons that elude us, Mr. Mehringer still has a job at WIS.
If you have questions about investment losses, the securities litigation attorneys at Investor Defense Law LLP may be able to help, and offer free consultations. Investor Defense Law LLP is a law firm dedicated to helping investors in California, Georgia, and Washington State recover investment losses. We understand investment fraud and know how to sue investment advisors, brokerage firms, and financial advisors. To learn more, contact an investment fraud attorney at 800.487.4660.
*The allegations in this article were drawn from information made available by FINRA. The allegations in FINRA’s enforcement action have not yet been proven.