Spokane Journal of Business

Former Northwestern Mutual adviser pleads guilty to wire fraud

John Charles Hanson said to have taken millions

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A former Spokane-based financial adviser with Northwestern Mutual Investment Services pleaded guilty last month to operating a Ponzi scheme and stealing nearly $2.5 million from his clients.

John Charles Hanson pleaded guilty to wire fraud before a U.S. District Court judge here and is scheduled to be sentenced next April 12. He currently is free, and under the terms of his release from custody has been ordered by the judge to maintain or actively seek lawful employment in an attempt to begin paying restitution to his victims.

Federal prosecutors brought criminal charges against Hanson while the Washington state Department of Financial Institutions’ Securities Division took steps to bar him from ever serving as a financial adviser again.

“Our investigation concluded that he was able to hide what he was doing from the firm,” says Huong Lam, the financial legal examiner for the state’s securities division in Olympia. “He was using personal email accounts and doing things outside the scope of Northwestern Mutual.”

Assistant U.S. attorney Joe Harrington says the U.S. Attorney’s Office is working with federal probation officials to calculate an appropriate sentencing range for Hanson. Hanson faces a maximum sentence up to 30 years in prison and a $1 million fine.

Hanson, who had worked for 10 years in Northwestern Mutual’s office in the Marycliff Center, at 705 W. Seventh, has been ordered to pay restitution to his victims, but Lam says, “It’s very likely that money won’t be recovered.”

Betsy Hoylman, a Milwaukee-based spokeswoman for Northwestern Mutual, said in an email statement to the Journal, “We take very seriously the trust that our clients place in us. That’s why we brought information to law enforcement when we found discrepancies involving Mr. Hanson’s clients. The standards we set as an organization are not reflected in the behavior of this individual.”

“We conducted an in-depth review of all of Mr. Hanson’s accounts in 2014. We promptly contacted the clients who were impacted and have worked with them to address each of their situations. We do not believe any other clients are affected,” Hoylman says in the email.

Hanson resigned during the course of Northwestern Mutual’s internal review. Hoylman said the company continues to refine its monitoring processes in an effort to detect potential fraud, but declines to say what internal safeguards the company may have implemented since completing its investigation of Hanson. She also declined to say whether Northwestern Mutual has reimbursed those who lost money.

Attempts by the Journal to reach Hanson were unsuccessful.

The law firm of Klayman & Toskes PA says on its website that it’s investigating Northwestern Mutual Investment Services in connection with the supervision of Hanson. A national firm based in Boca Raton, Fla., with offices in California, New York and Puerto Rico, Klayman & Toskes practices exclusively in securities and arbitration and litigation matters.

A representative from Klayman & Toskes declined to comment. On its website, the law firm asks anyone who invested with Hanson to call the firm’s toll free number. Five of Hanson’s victims live in Spokane, one is in Ellensburg, Wash., and two more have a residence in Portugal, court documents say.

Hoylman said Northwestern Mutual isn’t aware of any investigation by Klayman & Toskes.

A report by the Washington Department of Financial Institutions says one of Hanson’s victims was a family member whose husband had just died. She trusted him to financially protect her assets because the deceased husband managed their money, the report said.

Federal prosecutors say Hanson used the money for his own personal benefit, including gambling.

Hanson pleaded guilty to making unauthorized withdrawals from his clients’ accounts, taking out unauthorized loans against those clients’ life insurance policies, and selling fictitious investments to several clients and a personal acquaintance.

The Financial Industry Regulatory Authority (FINRA) also began investigating Hanson in September 2014. The state’s report says Hanson refused to cooperate with the investigation by failing to provide requested documents or testimony.

In November 2014, Hanson entered into a Letter of Acceptance, Waiver and Consent with FINRA in which he neither admitted nor denied the allegations against him. He was permanently barred from associating with any FINRA broker-dealer in any and all capacities, including as a security salesperson. The state pulled his license on Aug. 7 this year and released its findings at the end of August, the report says.

Hanson was registered with the securities division as a securities salesperson from February 1996 to May 2004 and again from June 2004 to September 2014, the state’s report says.

“Beginning in 2006, Hanson made multiple unauthorized withdrawals from several investment accounts held by two of his clients at NWMIS,” the report says. “These clients are also his family members. As their investment adviser, Hanson managed their accounts on their behalf, and they completely trusted him to do so for their benefit.”

Client A, as described by the state’s report, was a family member with an individual retirement account, a retail brokerage account, and three life insurance policies as part of her portfolio. Hanson withdrew at least $270,000 from the retail brokerage and IRA accounts without her authorization and nearly depleted them all, the report says.

Hanson forged her signature and wired the money into her checking account, which she willingly turned over to him, the report says. “From there, Hanson accessed the funds by writing checks to himself,” it says.

Hanson also is accused of taking out $39,000 in loans against the life insurance policies without her authorization, the report says.

Client B, also a family member, had two IRA accounts and a retail brokerage account. The report says he began managing her portfolio after her husband died.

The report says Hanson solicited the family member to purchase $365,000 in certificates of deposit using money from her investment accounts. From 2008 to 2009, and again in 2012, Hanson diverted the money into his bank account and never purchased a CD, the report says.

Hanson’s unauthorized withdrawals were considered early distributions under the U.S. tax code, and the woman incurred large tax penalties. She had to withdraw $41,000 from her IRA and take out a home equity loan of $110,000 to pay the penalties, the report says.

In the case of Client C, Hanson had been her investment adviser since 2008. She was an accredited investor herself based on her net worth, but lacked investing knowledge and relied heavily on Hanson to manage her retail brokerage account. She told Hanson she wanted to get out of the stock market after the 2008 financial crisis, and Hanson helped her sell much of her stock portfolio, the report says.

Soon after, Hanson approached her and told her that he wanted to buy an advisory business of one of his colleagues. Hanson asked her to invest $150,000. He said he’d make enough revenue from the acquired business to pay her back. He didn’t provide her with any other details about the proposed acquisition, including the financial state of the business or the risks of investing, the report says.

“In September 2010, Investor C invested $150,000 with Hanson. Hanson issued her a promissory note that matured in five years and required him to make monthly interest-only payments until maturity, at an interest rate of 15 percent per annum. Almost immediately, Hanson was late in making interest payments,” the report says.

Despite being tardy in his payments, Hanson still managed to persuade the woman to invest several more times in 2011 and again in November 2013. He ultimately sold her 11 more promissory notes in the amount of $910,000. She made what she believed to be investment payments with cashier’s checks or personal checks always made payable to Hanson, the report says.

“Hanson never had any agreements to purchase his colleague’s books of business. All of Client C’s investment funds are unaccounted for. Around spring 2014, Hanson informed Client C that he was experiencing financial and legal issues, and would no longer be making any payments to her,” the report says.

Client D was similar to the other investors. A retired school guidance counselor, she lacked investing experience and eventually forked over $292,500 to Hanson for a fictitious real estate investment trust he pitched to her.

Additionally, investigators say from approximately February 2013 to July 2014, Hanson solicited investments from other clients, including his relatives, Clients A and B. Hanson was the financial adviser for most of them, and the additional investments totaled at least $527,000. Hanson told them he was buying out a colleague’s book of business, the report says.

“Hanson never had an agreement with any colleague to purchase their book of business. Hanson is believed to have used all of the investors’ funds for his personal expenses,” the report says.

The investigation revealed that Hanson filed a Chapter 13 bankruptcy petition in March 2010 that was later converted to a Chapter 7 bankruptcy and then discharged in August the same year. The report says he didn’t reveal the bankruptcy to any investors.

Hanson filed another Chapter 13 petition in August 2012. However, the bankruptcy court dismissed the proceeding in November 2012 because Hanson failed to comply with filing and meeting requirements.

Huong Lam’s supervisor, Jack McClellan, says citizens need to be astute and pay specific attention to details when investing. “An immediate red flag was his use of personal email addresses. When that happens, there’s no way for the company to know what their employee is doing.”

Northwestern Mutual Investment Services, a member of the Northwestern Mutual Family of Companies since 1968, is a wholly owned company offering investment services in more than 60 cities nationwide and managing more than $29 billion in assets, the company’s website says.

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