On June 12, 2024, the Securities and Exchange Commission (SEC) filed a cease-and-desist order against former investment advisor Kerry Lee Broderick. The order bars Broderick from any association with broker-dealers, investment advisers, and from participating in any offering of penny stocks. This severe sanction is the result of her involvement in a “free riding” scheme, primarily orchestrated by her then-employer, Andrew Komarow, starting in October 2022.

What is Free Riding?

Free riding is an illegal practice where securities are purchased or traded in a brokerage account and sold before the initial purchase is fully processed. This Free riding scheme exploits the “immediate access” credit some brokerage firms provide to customers, allowing them to start trading as soon as the transfer is initiated.

Details of the Free Riding Scheme

The SEC’s initial complaint against Komarow revealed that from October 13, 2022, to January 30, 2023, Andrew Komarow made 23 Automated Clearing House (ACH) transfers totaling $6.9 million to several personal accounts across four brokerage firms. The bank accounts used for these transactions had insufficient funds to cover the transfers. For instance, the first transaction was for $200,000 from a bank account with less than $60,000. Komarow initiated another $400,000 ACH transfer from an account with only $100. Neither the brokerage firms nor the banks involved were named, referred to simply as “Broker-Dealer” 1-4 and “Bank” A-B.

At the time, Komarow was a Certified Financial Planner at LPL Financial. Broker-Dealer 1 alerted LPL to suspicious transactions in Komarow’s personal account and restricted his access in late October 2022. However, Komarow persuaded Broker-Dealer 1 to reinstate his access and subsequently opened six more accounts with the firm to continue his scheme.

Kerry Broderick became involved when Komarow used her login credentials at Broker-Dealer 1 to make three transactions between December 1-2, 2022. All three transactions were canceled due to insufficient funds. When contacted by the brokerage firm, Komarow instructed Broderick via chat to “lie, whatever you have to do to get those trades placed,” even offering her a bonus for her assistance.

On November 17, 2022, LPL Financial terminated Komarow for the fraudulent activities in his personal accounts at Broker-Dealer 1. He continued his free-riding activities at three more brokerage firms, but with little success. Ultimately, the four brokerage firms were left with negative account balances totaling $3,352,407, while Komarow withdrew $615,031 in trading profits.

SEC Sanctions and Broderick’s Role

Both Komarow and Broderick were sanctioned and barred from working in the securities field by the SEC, citing violations of Section 10(b) of the Exchange Act and Rule 10b-5. While Broderick willfully participated in the illegal activity, she was largely a pawn in Komarow’s scheme. The primary responsibility lies with Komarow, who has been ostensibly punished for his actions.

Komarow’s Advocacy Work

The case is particularly troubling given Komarow’s background as an advocate for individuals with special needs. Diagnosed with autism as an adult, Komarow built a reputation as a financial planning champion for neurodivergent individuals. He authored articles in Spectrum Life Magazine, hosted podcasts, and founded Planning Across the Spectrum, a financial planning firm dedicated to helping individuals with autism and other disabilities. Despite his advocacy, his actions from October 2022 cast a shadow over his previous work.

The impact of Komarow’s fraudulent activities extended to his advisory clients at LPL Financial. According to the SEC’s complaint, Broker-Dealer 1’s restriction on Komarow’s access adversely affected his advisory clients. To date, there have been no updates on the status of his clients’ accounts or their funds.

While Komarow’s motivations remain unclear, the focus must be on ensuring that those who trusted him do not suffer for his actions. It is crucial for investment fraud law firms, securities fraud attorneys, and lawyers for investment fraud to step in and protect the interests of affected clients.

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