Major Fraud: SEC, FINRA, and NJ US Attorney Charge Adviser With Theft From Military Families
It all began in 1917, when President Wilson led the United States into World War I. Captain Robert L. Queisser of Zanesville, Ohio, a member of the 5th Ohio Infantry, saw his two sons called to serve in the United States Army. Wishing to mark their service and the commitment of his family, Captain Queisser created a small flag with two blue stars (akin to the 48 blue stars then on the national flag). As noted in a history published by the Blue Star Mothers organization, “the flag quickly became the unofficial symbol of a child in service.”
In 1918 President Wilson responded to a suggestion from the Women’s Committee of the Council of National Defenses that mothers who had lost a child serving in the war wear a gold star, which in turn led to the practice of covering a blue star with a smaller gold star to announce the death. In the ensuing years, both Blue Star Mothers and Gold Star Mothers have received special Congressional recognition as Veterans Service Organizations. Similarly, as a token of national gratitude for service in the U.S. armed forces, and in an effort to provide economic support for the survivors of wartime casualties, survivor families receive a death gratuity (now $100,000) and funds from a policy issued by Servicemen’s Group Life Insurance (typically around $400,000).
To further assist survivors dealing with both their grief and the receipt of half a million dollars (as stated in the Complaint filed against Caz L. Craffy on July 7, 2023, by the U.S. Securities and Exchange Commission [“SEC”] in the Federal Court for the District of New Jersey), a“[b]ecause Gold Star families have experienced traumatic losses and may be relatively financially unsophisticated, the U.S. military provides them with Financial Counselors to furnish guidance and assistance concerning their survivor benefits.” These Financial Counselors, whose services are provided without charge, are part of the Armed Forces’ Survivor Outreach Services program overseen by the Casualty Assistance Office on a military base, in the case here Joint Base McGuire-Dix-Lakehurst (“Joint Base”) in Central New Jersey. Financial Counselors, who are civilian employees of a military branch, must meet qualifications including a bachelor’s degree or higher and some evidence of professional experience.
Craffy, a 41-year-old living in Colts Neck, New Jersey, has a B.A. in finance from St. John’s University in New York City and an M.A. from the Business School of New Jersey’s Rutgers University. Craffy had been employed as a registered representative of stock brokerage firms since 2011. In addition, he is a Major in the U.S. Army Reserves.
Once employed as a Financial Counselor, an individual is prohibited from offering specific recommendations concerning investments or effecting any transactions on behalf of a person being counseled. The Counselor is also subject to substantial restrictions on any kind of conflict of interest, including a requirement to regularly disclose to the Army any outside assets, income, and any other business relationships. As part of Major Craffy’s employment with stock brokerage firms he had taken and passed examinations administered by the Financial Institution Regulatory Authority (“FINRA”) to obtain both a Series 7 and a Series 63 securities license. Those licenses require an understanding of the securities markets and knowledge of both the securities laws and the legal obligations of serving as a registered representative. Among other points, a registered representative is required to consider whether an investment is appropriate for a given investor, and since June 30, 2020, under an SEC regulation, whether an investment is in the “best interest” of that investor.
In 2017, Major Craffy applied to become a Financial Counselor employed at Joint Base. Neither in his application nor subsequently did Craffy disclose that he was a registered representative employed by a Boca Raton, Florida, brokerage firm. Under the terms of his employment with that firm, he was not to have discretionary authority to trade the securities in the account of any client. After becoming a Financial Counselor, Craffy was introduced by the Casualty Assistance Office at Joint Base to at least 29 Gold Star family members, implying the Army had a certain level of trust in him.. He also acquired at least two other clients with military ties.
In March 2021, Craffy left the employ of the Boca Raton brokerage and joined Monmouth Capital Management, LLC, of Point Pleasant Beach, New Jersey. There, as at the Boca Raton firm, Craffy was prohibited from operating discretionary accounts on behalf of clients. Once again, the Major failed to disclose to the Army that he was a full-time employee of a brokerage firm. On Veterans’ Day, Nov. 11, 2022, Monmouth Capital Management terminated Craffy for failing to disclose his outside employment as a U.S. Army Financial Counselor.
How did Major Craffy deal with the Gold Star family members and other military personnel? According to the Complaint, he “instructed at least 31 customers, all of whom had military ties and 29 of whom were Gold Star family members, to open accounts with him at either the Boca Raton firm [until March 2021], or thereafter at Monmouth Capital Management.” Those accounts included an aggregate of some $9.9 million of survivor benefits. The Complaint further states that Craffy “knew that these [Gold Star] customers were grieving” and that he “exploited [their] trust by recommending that they invest…with him personally, sometimes… implying…that they were required to do so to take advantage of certain benefits.”
Nevertheless, Craffy ignored the prohibitions against Financial Counselors making investment recommendations or trading on behalf of clients, as well as the prohibition that each of the relevant brokerage firms imposed on him against exercising discretionary authority over client accounts. Rather, he purchased and sold securities without either permission from the Army or express permission from the customers. He executed over 1,000 trades in those accounts, many of which were Individual Retirement Accounts, including highly concentrated, risky investments with high commission rates.
As part of its supervisory obligations, the Boca Raton firm required Craffy to submit a signed “Monthly Heightened Supervision Agreement and Attestation,” a step typically imposed when a registered representative seems to be handling an unusual number of trades. In it, Craffy stated, “I have not exercised any discretionary authority over any of my client’s accounts.” Similarly, Monmouth Capital Management had Craffy submit an annual compliance questionnaire on Dec. 21 2021, in which he answered the question “Do you handle any accounts on a discretionary basis?” with “NO.” The Complaint avers that Craffy regularly misled his customers about their investments and the marketplace, citing COVID-19 and the Ukraine invasion as reasons for declines in their account balances. In total, Craffy’s unauthorized trading resulted in about $1.79 million in realized losses and another $1.8 million in as yet unrealized losses; all of which in turn generated $1.64 million in fees and commissions, most of which were paid to Craffy. The Complaint lays out a sample of Craffy’s cruel and criminal trading using the funds of the bereaved. In one case, he even talked a 13-year-old survivor and her mother into lending him $50,000 from the teenager’s Roth IRA account. None of that money was ever repaid.
All of this led the SEC to bring civil charges against Craffy on July 7, 2023, for violating:
- Section 17(a) of the Securities Act of 1933, as amended, for securities fraud;
- Section 10(b) of the Securities Exchange Act of 1934, as amended, and of Rule 10b-5 thereunder for fraudulent trading; and
- for violating the obligations of Regulation Best Interest.
The Commission seeks a permanent injunction, disgorgement of Craffy’s ill-gotten gains, and civil penalties. One day earlier, on June 6, 2023 (the 79th anniversary of the D-Day landings on Normandy Beach), the U.S. Attorney for the District of New Jersey filed a 10-count indictment against Craffy in the Federal Court for the District of New Jersey. The indictment charged him with six counts of wire fraud, one count of securities fraud, one count of filing a false loan application for the mortgage on his Colts Neck residence, and a final count of lying to a federal agency, specifically the U.S. Army.
Major Craffy came to the attention of FINRA because of his termination by Monmouth Capital Management. During the FINRA investigation, Craffy declined to answer questions and asserted his 5th amendment rights. The SEC and U.S. Attorney investigations followed, assisted by the Criminal Investigation Division of the Department of the Army (as noted in the SEC’s July 7 Press Release and in public statements by persons in the U.S. Justice Department). It is not clear whether Major Craffy will face additional punishment by the U.S. Army pursuant to the Uniform Code of Military Justice.
In addition to taking steps to hold Craffy accountable, FINRA, also on July 7, 2023, expelled Monmouth Capital Management for churning of and excessive trading in customer accounts in violation of Regulation Best Interest. FINRA’s action was driven not only by Craffy’s offenses, but also by the misdeeds of five other registered representatives. These violations involved 110 customer accounts where the trading activity generated $3.9 million in commissions. FINRA found that Monmouth Capital Management had failed to meet its supervisory obligations and had provided customers with false and misleading Form CRSs that asserted the firm used a daily exception report to identify inappropriate trading activity, when in fact the firm had no such compliance protocol.
Whatever one may think of Monmouth Capital Management, LLC, and its failures, one must wonder why the Army did not do a more thorough background check of an applicant for the position of Financial Counselor. Essentially all registered representatives are licensed by FINRA, and a list of registered representatives, along with any disciplinary history, is readily available. Moreover, it seems there is no quality control or compliance function in place for Financial Counselors as part of the “help” provided by the Survivor Outreach Services program. Considering that the U.S. Attorney General, Merrick Garland, stated on June 6, 2023, “[s]tealing from Gold Star families whose loved ones made the ultimate sacrifice in service to our nation is a shameful crime,” and that the Director of the SEC’s New York Regional Office observed, “Craffy repeatedly defrauded families whose loved ones gave the ultimate sacrifice their country,” perhaps it is not too much to hope that some effort will be made to restore their losses.
If you have concerns that you may have been a part of broker fraud, feel free to reach out to me, Peter D. Hutcheon, Captain, USAF (Judge Advocate General Corp.) 1970-74, at pdhutcheon@norris-law.com.