State accuses Spokane adviser of bilking clients of $2.9M-plus
Findings follow ban of Hannes by federal regulatory groupApril 8th, 2020
The Washington State Department of Financial Institutions has accused a former Spokane financial planner of swindling millions from at least 19 clients over a 16-year period, starting in 2003.
Last month, state investigators began contacting former clients of Ronald W. Hannes, owner and operator of Hannes Financial Services Inc. The state inquiry follows the Federal Industry Regulatory Authority’s decision to ban Hannes from performing in the capacity of a financial adviser for the alleged misuse of client money.
The state financial institutions department also has moved to ban the 70-year-old Hannes from practicing as a financial adviser and has imposed a $100,000 fine against him.
Suzanne Sarason, an enforcement unit manager with the Olympia-based financial institutions department, says Hannes has 20 days from the time he’s notified of the findings against him to respond to the allegations.
“This process is in the very early stages,” Sarason says. “It could take weeks, even months, for this case to be resolved.”
She says the agency has the ability to notify law enforcement of such cases for the pursuit of criminal charges.
Hannes’ Seattle-based attorney, Joshua Ferrentino, of Corr Cronin LLP, couldn’t be reached immediately for comment. He has said previously, however, neither he nor his client will be commenting accusations.
Hannes and his company had been affiliated with Woodbury Financial of Oakdale, Minnesota, until that company terminated their relationship in December. Hannes had a relationship with Woodbury dating back to 1994, investigators say.
“From approximately 2003 to 2019, Hannes engaged in an extensive, long-term fraud against his Woodbury clients by convincing them to write checks to Hannes Financial Services Inc. for off-the-books investments, then using the money for unknown purposes,” alleges the state Department of Financial Institutions.
“In total, Hannes defrauded at least 19 clients, with total losses exceeding $2.9 million,” investigators say in their eight-page report released late Tuesday.
Woodbury has made payments to many of the clients who wrote checks to Hannes Financial Services, they write.
“But due to the length of Hannes’ scheme, many clients haven’t been able to obtain complete records of the payments they made to Hannes,” the report says. “Hannes’ use of client funds is currently unknown.”
Investigators say Hannes told the alleged victims that he had an opportunity for a fixed-rate investment in either a bond or in a unit investment trust, which functions similarly to a bond.
“Hannes did not provide investors with any offering documents to the investments, such as a prospectus, a contract, or financial statements for the companies, and in some cases did not even identify the company in which the client would be investing,” investigators write.
He commonly stated the investments offered a return of 5% to 7% and could be rolled over into new investments at the end of their fixed terms, which varied but were generally in the two- to five-year range. Most of the investors said they rolled over their investments instead of taking withdrawals, the report says.
“Hannes did not execute the transactions through Woodbury, did not record them on Woodbury’s books and records, and did not otherwise inform Woodbury of the transactions,” the report says. “Rather than having the clients make out the checks to the company in which they were investing (as is standard industry practice), Hannes had the clients write the checks to Hannes Financial Services, whose bank accounts he controlled as the owner of the company.”
In November, a married couple that had been longtime Hannes clients moved their investment portfolios to a new adviser and realized that the checks they had written to HFS were not reflected anywhere on their official Woodbury statements, the report says.
After inquiring with Woodbury about the checks, Woodbury asked Hannes to provide evidence of how the money had been used.
“In response, Hannes falsely told Woodbury that the couple had written checks to HFS to purchase additional life insurance from The Hartford, a Connecticut-based insurance company, and that he had subsequently written the checks to Hartford from HFS’s bank account. Hannes provided Woodbury with copies of checks from 2012 to 2019 and a life insurance application, both of which he claimed had been sent to Hartford,” the report says. “For multiple reasons, it appears likely that Hannes falsified these checks.”
Investigators cite the fact that the numbers on the checks which Hannes provided to Woodbury—and had supposedly been sending to Hartford during the seven-year span—correspond to two batches of checks which Hannes had ordered from a Spokane-based printer within the preceding several weeks.
“Hannes provided only the front of the checks, not the back. Payment information, such as the number of the bank into which a check was deposited, appears on the back of the check,” investigators write. “Hannes could not provide any information which would show that the checks were actually deposited.”
Woodbury subsequently inquired with Hartford and learned that they had no record of receiving either the checks or the life insurance application, the report adds.
“The couple have also indicated in interviews with the Division that they had no need for additional life insurance, had never received the relevant paperwork from Hartford, and had understood that they were writing checks to HFS to invest in … bonds,” the report says.
Several of Hannes’ former clients have told investigators they never received account statements from the companies for the bonds they believed they were investing in, investigators say.
“To the Securities Division’s knowledge, no Hannes client ever received these statements from the companies, only from Hannes himself. Some of the account names include company names, most of which are generic and difficult-to-research names such as ‘Alliance Capital’ or ‘First Principal,’” the report says.
The Securities Division says it’s been unable to locate any regulatory filings or internet or corporate presence by any companies with those names.