An ex-Scottsdale financial advisor has been banned from the industry and could lose his state license over allegations he solicited millions of dollars in investments in violation of industry regulations.
According to the Financial Industry Regulatory Authority, or FINRA, Scott Reed, a former employee of Wells Fargo Advisors in Scottsdale, is accused of “selling away” at least $3.5 million in investments in Pebblekick, a California-based entertainment content developer.
“Selling away” refers to offering investments that are not approved by the advisor’s brokerage firm – in Reed’s case, Wells Fargo.
Selling those investments without proper disclosures could mislead investors who mistakenly believe the potentially-risky investments are endorsed by the company.
“So if he’s working for Wells Fargo, you would assume, and at least this is why the protection exist…that Wells Fargo signed off on it,” said Dax White, a securities litigation attorney.
FINRA, the industry’s regulatory body, prohibits advisors from selling investments not approved by their firm unless the advisor first discloses what, if any, compensation they will receive for the sale.
Reed did not disclose the sale of Pebblekick investments or the fact that he was paid $191,340 by the company, according to FINRA.
White, who is not a party in the Reed case, said there were “all kinds of red flags, but again, if the client thought Wells Fargo signed off on it, then they’re probably thinking it must be okay.”
On Feb. 19, FINRA announced it had barred Reed, a Mesa resident, from acting as a broker or working with broker-dealer firm as part of a settlement.
Reed agreed to the settlement without admitting or denying guilt, according to a letter of acceptance and consent signed by Reed, his attorney and a FINRA representative.
Investigators with the Arizona Corporation Commission’s are also asking the commission to revoke Reed’s state licenses and registration.
Reed allegedly “sold away” investments in Pebblekick to at least six individuals who invested a total $3.5 million, according to a notice filed by Mark Dinell, director of the commission’s securities division.
Two of those investors were also Wells Fargo Advisors customers who invested $200,000 and $1.1 million, respectively.
The investors are cited but not named in the notice to the corporation commission.
According to Dinell, in early 2020, Reed allegedly promised the first investor a return of $30,000 after just three months and personally guaranteed $100,000 of the investment if Pebblekick failed to yield returns. But investigators alleged Reed was in no position to make that guarantee as he was personally over $1.4 million in debt at time.
“Reed’s debt exceeding $1.4 million was a material fact that he needed to disclose in order to not mislead Investor One with respect to his $ l00,000 guaranty of lnvestor One’s Pebblekick investment,” Dinell alleged.
In a response filed with the Corporation Commission by his attorney, Reed denied he broke any Arizona laws regulating securities and argued the Pebblekick securities were exempt from registration under the Arizona Securities Act.
According to that investigation, the investors were unaware Reed was selling Pebblekick investments without the knowledge of his superiors at Wells Fargo.
That investor eventually contacted Wells Fargo about the investments after asking Reed if the investments were approved by the company.
“Hell no. Not at all. This has nothing to do with Wells,” Reed allegedly replied in March, two months after the first individual made the investment.
Reed also allegedly told the investor if he informed Wells Fargo “…I’m fired and my career is over….”
Wells Fargo began an investigation in March and put Reed on administrative leave. He resigned in April to join another firm, First Financial Equity Corporation, but allegedly concealed the nature of the Wells Fargo and FINRA investigations to his new employer, according to the Dinell report.
White said it is rare to see an advisor with such a large company accused of “selling away” millions of dollars in investments because a company like Wells Fargo typically has many compliance officers and managers overseeing advisors.
“It’s a red flag just because usually when we see it, it’s going to be smaller firms, not Wells Fargo,” he said.
Investigators also alleged Reed violated state law by failing to disclose a handful of IRS tax liens in 2009, 2013, 2014 and 2015 when he registered as a securities salesman with state.
Investigators are asking the commission to revoke or suspend Reed’s investment advisor license and his registration to sell securities. Reed could also face fines of up to $5,000 and other administrative penalties and potentially be subject to requests for restitution.
According to the Dinell report, the first investor got his $200,000 investment back from Pebblekick without interest.
White said there are warning signs investors can look for to avoid working with an advisor who may be selling away.
“It is an industry where you do develop close connection with your advisor,” he said. “There’s usually an implicit trust level where you just assume they’re looking out for you, and sometimes people just miss the warning flags.”
He said investors should be wary if an advisor stops using his business email or phone and is only communicating through a personal account or cell phone.
White said investors should also make sure their investments are showing up on official statements from the brokerage firm.
“If you made a $200,000 investment and suddenly money comes out of your account and in the next statement, it doesn’t show up as an investment in your portfolio, that’s a red flag,” he said.