Former Louisiana Broker Sentenced To Five Years In Jail

David McFadden, a former broker, was sentenced in New Orleans to five years in jail Thursday, the maximum amount of time he could serve, for conspiracy to commit securities fraud against elderly investors.

McFadden, 62, was also fined $250,000, by U.S. District Court Judge Carl Barbier.

The case is highly unusual because brokers accused of misleading clients, as McFadden was, rarely end up in jail. Such brokers usually end up paying a fine and losing their securities licenses. It usually takes outright theft of clients' money or running Ponzi schemes to land a broker (or a money manager like Bernie Madoff) in jail.

"The fact that this is a criminal case is unprecedented and sends a message to brokers that they could end up in jail if they give clients reckless advice," said lawyer Joseph Fogel of Fogel & Associates, who isn't involved in the case.

McFadden pleaded guilty in May, and entered a plea to serve 18 to 24 months in jail.

According to a May 2009 court filing from the U.S. Attorney for the Eastern District of Louisiana, McFadden, a former Securities America Inc. broker, put himself in the position to sell high-commission variable annuities and mutual funds to clients, made material misrepresentations and omissions related to his qualifications, the diversification of stocks, and the investment returns he would achieve." As a result, prosecutors said, the clients didn't have enough money to retire. The conspiracy began sometime before January 1999 and continued to September 2006, according to the court filing.

In September 2006, Securities America, a unit of Ameriprise Financial Inc. (AMP), settled with the National Association of Securities Dealers, the predecessor of the Financial Industry Regulatory Authority, without admitting or denying the allegations. It agreed to pay a $2.5 million fine for failing to adequately supervise McFadden, and $13.8 million in restitution to Exxon retirees who were McFadden's clients. McFadden agreed to give up his securities license late in 2006.

"I hope this sends a clear message to all who sponsor or transact business with employee benefit plans that the federal government will aggressively pursue those who commit crimes against employees and retirees of private-sector pension and health plans," said Roger Hilburn, Dallas Regional Director of the Department of Labor, Employee Benefits Security Administration, in a U.S. attorney's press release.

-By Jessica Papini, Dow Jones Newswires; 212-416-2172; jessica.papini@dowjones.com

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