## Facts

- Raymond James Financial Services, Inc. (RJFS) was a registered broker-dealer.
- J. Stephen Putnam was RJFS’s president and chief operating officer and had supervisory responsibility within the firm.
- David Lee Ullom managed RJFS’s branch office in Cranston, Rhode Island; he later resolved the SEC’s allegations against him by settlement.
- Dennis Herula was a registered representative in the Cranston office. RJFS permitted Herula to work from an off-site location and to engage in outside business activities.
- Herula raised money from investors for Brite Business Corporation (Brite) and connected Brite’s investor-fundraising activities to accounts at RJFS.
- Herula proposed that RJFS participate in a Brite “tax strategy” product. RJFS executives declined to participate because they were concerned about the proposal.
- Although RJFS did not join the proposed tax strategy, it allowed Brite to open and maintain a brokerage account at RJFS and to conduct substantial activity through that account.
- Through the Brite account, approximately $115 million in U.S. Treasury securities were purchased on margin and later sold at a loss, while the relationship between Brite and RJFS continued.
- RJFS’s supervision relied mainly on periodic branch audits, monthly branch-manager reports, and exception reports designed to flag suspicious trades and money movements.
- RJFS did not have a regular practice of inspecting off-site representative locations and did not have a firmwide program for placing higher-risk representatives on heightened supervision.
- The Cranston office auditor was not told that Herula worked off-site, conducted substantial business tied to Brite, or had sent correspondence to Brite investors using RJFS stationery without authorization.
- Putnam learned that Herula had sent unauthorized letters to Brite investors on RJFS letterhead and instructed Ullom to monitor Herula’s activities.
- Putnam did not require pre-review of Herula’s correspondence, did not arrange an inspection of Herula’s off-site office, did not place Herula on heightened supervision, and did not confirm that Ullom’s monitoring was occurring.
- Monthly branch-manager reports were not independently checked for accuracy.
- Exception reports reflected large transfers between Brite’s RJFS account and an account associated with Herula’s wife, as well as checks to third parties; RJFS personnel did not conduct meaningful follow-up.
- Herula and others obtained and misappropriated Brite investors’ funds through the activity tied to the RJFS accounts.
- The SEC instituted an administrative proceeding. Ullom settled before the hearing; the case proceeded to a multi-day evidentiary hearing against RJFS and Putnam.

## Issues

1. Whether RJFS and J. Stephen Putnam failed reasonably to supervise Dennis Herula, a person subject to their supervision, with a view to preventing or detecting Herula’s violations of Securities Act § 17(a) and Exchange Act § 10(b) and Rule 10b-5.
2. Whether, as a result of Herula’s fraudulent conduct, RJFS violated Securities Act § 17(a) and Exchange Act § 10(b) and Rule 10b-5.
3. Whether RJFS willfully violated Exchange Act § 17(a) and Rule 17a-4 by failing to create, maintain, or preserve required broker-dealer records.

## Decision

- The ALJ found that RJFS and Putnam failed reasonably to supervise Herula with a view to preventing or detecting Herula’s antifraud violations.
- The ALJ found that RJFS, based on the conduct occurring through the firm and the failure to act on warning signs, violated Securities Act § 17(a) and Exchange Act § 10(b) and Rule 10b-5.
- The ALJ found that RJFS willfully violated Exchange Act § 17(a) and Rule 17a-4 (books-and-records requirements).
- The ALJ ordered sanctions and remedial relief against RJFS and Putnam; Ullom’s sanctions were resolved earlier by settlement in the same proceeding.

## Legal Principles

- A broker-dealer must maintain and carry out supervision that is reasonably designed to prevent and detect securities law violations by associated persons.
- When specific warning signs arise—such as unauthorized use of firm stationery, undisclosed off-site operations, significant outside business activity, or unusual customer-account transfers—supervisors must take additional steps rather than relying on ordinary, periodic reviews.
- Delegating monitoring to a subordinate does not end a senior supervisor’s responsibility; reasonable supervision includes follow-through to confirm that monitoring is performed and is effective.
- Exception reports and similar surveillance tools must be used as investigative triggers; repeated, large, or irregular transfers require timely review and escalation.
- Broker-dealers must create and preserve required records under Exchange Act § 17(a) and Rule 17a-4; failures in required record creation, maintenance, or retention can support a finding of willful violations in an SEC administrative action.

## Conclusion

In this SEC administrative proceeding, the ALJ concluded that RJFS and its president/COO, J. Stephen Putnam, failed to reasonably supervise registered representative Dennis Herula after learning of concrete warning signs tied to Herula’s off-site work, unauthorized investor correspondence, and suspicious money movements connected to Brite. The ALJ further found that the firm’s failures allowed Herula’s fraud to proceed through RJFS accounts, supporting firm-level antifraud liability, and that RJFS also committed willful books-and-records violations under Exchange Act recordkeeping rules.


In the Matter of Raymond James Financial Services, Inc., J. Stephan Putnam and David Lee Ullom, Initial Decision Release No. 296 (2005)