West Fargo, N.D., advisor Susan L. Welo is suing AdvisorNet Financial, an office of supervisory jurisdiction of Cetera Advisor Networks. Welo claims the OSJ’s oversight of her back-office functions ruined her career. AdvisorNet wants the court to dismiss Welo’s claims because it maintains it did not have a direct contract with her and it did not owe her supervision as a broker/dealer.
Welo worked at Cetera for one year, operating out of a series of bank branches in North Dakota, from 2015 to 2016. Her book of business was valued at $1.17 million before being terminated, according to the complaint filed in the U.S. District Court for the District of North Dakota.
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Welo’s BrokerCheck profile shows Cetera discharged her over a few issues, alleging she failed to mention a loan she gave to a client while working for a previous firm, accepted and filed blank client forms, and allowed her assistant to sign her name to various documents.
Cetera filed a U-5 form, a FINRA termination form, that the complaint described as a “'scarlet letter' for securities representatives, that all but ensures the representative will never work in the securities industry again.”
Following the termination, Welo, who had been a broker for 27 years, wound up in trouble with the North Dakota Securities Department because she continued to manage client accounts without a securities registration. In July 2017, the regulatory body ordered a cease and desist after it received an investor complaint. Welo’s BrokerCheck shows 10 customer disputes that followed the regulatory action. Some are still pending.
Welo and Cetera settled the dispute in FINRA arbitration, making the terms of the settlement confidential. However, Welo explained in her complaint that the loan was a monetary gift from her personal account to a friend who was also a client. And the assistant who signed her name did so without her knowing. She also rebutted the blank forms, claiming they were AdvisorNet’s doing.
Welo asserts that AdvisorNet representatives told her staff to obtain signed blank client forms and filed them without her knowledge, and she also claims that any data and communication compliance violations occurred on AdvisorNet’s watch.
“If the broker-dealer isn’t responsible for compliance, then what is the OSJ doing, and she is raising that question,” said Bill Singer, an attorney at the law firm Herskovits in New York.
Welo’s complaint shifts blame from her to AdvisorNet, a party who was not present at the arbitration nor the settlement agreement. AdvisorNet oversaw her back-office functions and administration staff during her transition and afterwards while she was busy tending to clients. Before Cetera conducted its own audit that led to her termination, the OSJ had given her firm clean audits.
AdvisorNet's contract is with Cetera, making Welo a third-party beneficiary, said Aegis Frumento, an attorney at Stern Tannenbaum & Bell who reviewed the filing.
He added that Welo should have brought a third-party contract against AdvisorNet instead of arguing that she has a primary contract.
“Under the law if I have a contract with somebody else and you’re a benefit, you’re able to sue as a third-party beneficiary,” he said. “She has been hurt by AdvisorNet’s breach of its contract with Cetera.”
The court granted AdvisorNet’s motion to dismiss, in part. U.S. District Judge Peter Welte ruled that Welo failed to prove that the OSJ was a broker/dealer, citing the nonexistence of a FINRA registration, so it did not owe her supervision. However, despite not having a primary contract with the OSJ, Judge Welte will allow Welo to prove that AdvisorNet breached its contract as her OSJ.
“Branch management agreements cause many problems because some are real and others are not—they operate under a wink and a nudge,” said Singer, suggesting the possible nature of Welo and AdvisorNet’s relationship.
Projections for the outcome are a mixed bag. Attorney Robert Herskovits, a securities litigation lawyer and founder of the Herskovits law firm, said the court will not hold AdvisorNet responsible for Welo’s compliance blunder. Singer, on the other hand, said there will be a quiet settlement or the court will dismiss the case.
Welo could not be reached for comment. Cetera and AdvisorNet declined to comment.
