Jan. 6 (Bloomberg) -- Working out of an Ameriprise Financial Services Inc. branch in Orlando, Florida, Christopher Coulther offered his clients a deal that was hard to resist. Promising a 100 percent return on Costa Rican real estate, he enticed 98 people to invest almost $12 million.

Unknown to customers, Ameriprise, the largest U.S. financial planning company, hadn’t approved the offer, even though Coulther had asked for the firm’s blessing, according to a lawsuit investors filed after they lost money. Coulther still peddled the venture to customers, some of whom dipped into retirement savings.

His alleged sin, marketing an investment his company hadn’t authorized, is known as selling away. It’s the second most frequently cited reason for disciplining brokers and advisers, according to a 2007 American Bar Association task force report. In some cases, selling away involves rogue employees who hide side deals from managers. In others, the company simply fails to supervise workers properly.

“Selling away is obviously very serious,” says Robert Fusfeld, a former U.S. Securities and Exchange Commission attorney who handled selling-away and other complaints while at the SEC.

Among large financial firms including Citigroup Inc.’s Citigroup Global Markets, Bank of America Corp.’s Merrill Lynch & Co., Morgan Stanley and UBS AG, only Ameriprise Financial Inc.’s Ameriprise Financial Services and brokerage unit Securities America Inc. have been disciplined for selling-away violations, unapproved private securities transactions or outside business activities, according to records of the Financial Industry Regulatory Authority, the securities industry watchdog.

More Than a Nuisance

Among other large financial planning companies with extensive branch and independent franchise operations similar to Ameriprise, the Finra records turn up selling-away violations at only one firm.

For investors, the regulatory and legal issues are more than just a nuisance: They can weigh down a company’s results with fines and compliance costs. Since Ameriprise’s spinoff from American Express Co. in September 2005, its shares have fallen 35 percent to $24.14 on Jan. 5 compared with a 24 percent drop for the Standard & Poor’s 500 Index.

“Regulators start asking questions about disclosures and suitability about anything that’s an issue with customers,” says Moody’s Investors Service Inc. analyst Arthur Fliegelman. In a July report, he cited regulatory and compliance issues as among the challenges facing Ameriprise.

Adviser Surveillance Systems

The company has put millions of dollars into new adviser surveillance systems since 2005. That spending is in addition to fines the company pays when regulators find wrongdoing. With Coulther, it took Ameriprise, known as American Express Financial Advisors before it was spun off, at least three months from the time he’d asked for permission in May 2006 until the firm vetoed the deal and then fired him, according to the complaint.

Coulther, who’d raised $5.6 million for the investment while at Ameriprise, kept soliciting investors after he was dismissed, taking in more than $6 million while on his own, the complaint states.

“What Ameriprise should have done is said, ‘This is an out- and-out fraud; we don’t approve,’” says plaintiffs’ attorney Neal Blaher of Orlando-based law firm Allen, Dyer, Doppelt, Milbrath & Gilchrist PA. Blaher, who represents the 98 investors named in the complaint, sued Ameriprise as well as Coulther, his supervisor and Regions Financial Corp.’s Regions Bank, which took over the bank that processed the investments.

Coulther says he’s not represented by a lawyer in the suit and rejected Ameriprise’s offer of legal help. He declined to comment further. Regions Financial spokesman Mel Campbell also declined to comment. Ameriprise spokesman Benjamin Pratt declined to comment on the specifics of this case, as well as others in this article.

‘Don’t Let It Happen’

“We have nearly 12,000 advisers across the country,” Pratt says. “A handful of cases does not indicate systemic problems.”

Regulators say selling away persists among many firms that operate through one- or two-person offices without direct, on-site supervision. In cases that have occurred since Ameriprise was spun off in 2005, Ameriprise advisers in independent offices have been found guilty of stealing client funds and investing in phony real estate deals, among other transgressions.

“The selling away that occurs in remote branch offices usually isn’t happening at Merrill Lynch or Smith Barney,” says Fred Joseph, Colorado’s securities commissioner and president of the North American Securities Administrators Association, the trade group for state securities regulators. “They don’t let it happen.”

Like a McDonald’s

Ameriprise operates like the corporate parent of a McDonald’s or Burger King restaurant. Almost 80 percent of its advisers, or 7,830 out of 9,797, are franchisees. Another 1,636 advisers and stockbrokers work in its Securities America brokerage. The parent, based in Minneapolis, provides its brand name, a menu of products and legal supervision of these otherwise independent advisers, salespeople and stockbrokers in 3,600 branch offices.

Ameriprise advisers keep as much as 91 percent of their commissions, according to the company’s Web site, more than twice as much as at traditional Wall Street firms. In turn, the advisers pay overhead and a $290 monthly fee to Ameriprise.

“Selling away is the No. 1 problem,” says Texas Securities Commissioner Denise Voigt Crawford, president-elect of the NASAA. “The people in charge of compliance are not located in branch offices,” she says, speaking in general about securities firms, not just Ameriprise. “They’re located at the main office. They’re doing it long distance.”

Cracking down on selling away isn’t getting easier, says Joseph Borg, director of the Alabama Securities Commission. That’s because independents are growing as advisers and brokers, along with their customers’ assets, abandon dwindling Wall Street firms.

Growing Independents

Advisers unaffiliated with a securities firm oversaw $1.1 trillion at the end of 2007, up from $768.7 billion in 2004, according to the latest year-end numbers from Boston-based Cerulli Associates. While the independents are growing, the ranks of brokers working for Wall Street investment banks with large retail operations fell almost 8 percent to 59,020 in ‘07 from ‘05, according to Cerulli.

Regulators worry that independent advisers, sometimes working out of a strip mall without a boss or compliance officer nearby, may find it easier to peddle investments their firms haven’t approved.

“I can’t tell you how many times I saw someone in a one-man office who started running a Ponzi scheme,” former SEC litigator Fusfeld says. “The vast majority of supervision cases come out of smaller firms or firms that operate one-man, remote offices.”

Ameriprise and its Securities America brokerage have been troubled by more than a dozen cases of supervisory lapses and selling-away cases affecting hundreds of customers.

‘Make the Client Whole’

Ameriprise Chief Compliance Officer Kurt Lofgren says supervision has improved since he arrived in 2005. The company monitors advisers’ e-mails for words such as guarantee that violate securities regulations against promising investment returns. It also flags transactions, so a supervisor can determine whether the investment is appropriate for customers.

“Given the size of our field force, I don’t think it’s unusual to have some of these cases,” says Lofgren, 44, speaking of fraud and selling away. “When we find these, two things tend to happen: The adviser has a short remaining stay with this firm. And if there is wrongdoing, we make the client whole, even in cases where we think we have a valid basis of defense.”

Ameriprise fired Shane Selewach in 2006. The Hyannis, Massachusetts-based adviser used clients’ money to meet and date Russian women, according to a complaint by state regulators that year. From 2002 to ‘06, Selewach took funds from mostly elderly customers, promising to invest in commodities and real estate.

‘Russian Ladies’

Instead, he traveled to Russia and Ukraine after ringing up charges on Internet dating site Anastasia International, which describes itself as “the fastest way to meet thousands of Russian ladies,” the complaint said.

Finra barred him from the securities industry in February 2008. His attorney didn’t return calls or e-mails. Ameriprise, which was named in the state’s action, had no comment. According to the Finra report, Ameriprise consented in March 2007 to an order with Massachusetts without admitting liability.

Ameriprise was required to pay $25,000 for the cost of the investigation, reimburse an undisclosed amount to Selewach’s former clients and install at least one full-time person in the state to monitor compliance.

Ameriprise settled allegations made in October 2007 that it had failed to report 96 instances of forgeries of customer signatures by six financial advisers in Portsmouth, New Hampshire. Ameriprise paid $3.8 million in fines and investor refunds after entering a consent order with New Hampshire’s Bureau of Securities Regulation in April 2008.

‘Trip to Kennebunkport’

“Agents would state they were ‘taking a 10-minute trip to Kennebunkport’ as code that they were going to forge documents rather than travel to or wait for the client,” according to the state’s consent order, referring to the coastal town about 25 miles (40 kilometers) north of Portsmouth in neighboring Maine.

“This conduct was the direct result of an Ameriprise sales culture more concerned with sales commissions than compliance,” Mark Connolly, director of the state Bureau of Securities Regulation, said in 2007.

Two years earlier, Ameriprise’s predecessor had paid $7.4 million in fines and refunds to the state for pushing “underperforming” in-house mutual funds. In both the 2005 and ‘07 New Hampshire consent orders, the company neither admitted nor denied liability.

‘Gambling Addiction’

In another incident, an Ameriprise adviser dispensed with any pretense of investing for customers. From 2001 to ‘07, Delbert Foster Blount III simply deposited customers’ checks into his own bank account, according to the Tennessee Department of Commerce and Insurance. Ameriprise discovered the deposits when an unnamed client complained they weren’t properly credited. Ameriprise reimbursed customers $2 million.

“His intent was to put the money back,” says Blount’s attorney, R. Deno Cole of Knoxville’s McGehee, Stewart, Cole, Dupree & Roper PA. “Just like anybody else that gets caught up in the high life, he didn’t pay it back as he should have. Once you get away with it, it’s like a gambling addiction.”

Cole says Blount agreed to enter a plea for fraud and tax evasion with the U.S. Attorney’s Office for the Eastern District of Tennessee. Patricia Komoroski, who once managed an office for Citicorp’s former CitiStreet Equities unit, reconstructed Blount’s books for Cole. She says that even with as many as 250-400 clients at any one time, Blount never received in-person audits from Ameriprise as required by SEC regulations.

“His compliance audits were never done face to face,” Komoroski says. “They were always done via e-mails.”

Unannounced Visits

While Ameriprise declined to comment on Blount, Lofgren says the company now makes unannounced visits to look for evidence of unauthorized outside business activities and other signs of potential wrongdoing. He says that as independent business people, most Ameriprise franchisees don’t want to risk their livelihoods by selling unapproved investments.

“A lot of these independents try to do the right thing,” Colorado securities commissioner Joseph says. “A lot of times they just don’t know the rules of the game and do things that are stupid or flat-out illegal.”

Ameriprise has its roots far from traditional securities firms. Born in Minneapolis as Investors Syndicate in 1894, the company sold -- and still sells -- face amount certificates, which paid a preset sum similar to zero-coupon bonds. It survived two world wars, the Great Depression and the ups and downs of economic cycles.

American Express bought the renamed Investors Diversified Services Inc. for $780 million in 1984. Advisers sold financial plans and earned commissions by offering mutual funds, annuities and other approved investments tailored to a customer’s goals.

Dennis Hopper

Today’s financial plans start at $300. In TV commercials, actor Dennis Hopper, star and director of the 1969 counterculture classic Easy Rider, urges baby boomers to redefine retirement to the thumping beat of “Gimme Some Lovin’” by the Spencer Davis Group. The ads have sparked parodies created by John Haritos, who runs Web sites that compile claims of wrongdoing by Ameriprise advisers.

Haritos joined clients who purchased American Express Financial Advisors financial plans in a 2002 lawsuit. They alleged the firm was using the financial assessments to lure people to buy American Express’s in-house mutual funds and others that provided a “kickback” of higher commissions.

“That’s their unique diabolical genius,” says Jon Drucker, a Los Angeles attorney involved in the class action. “Get clients to pay for a sales pitch called a financial plan, and the clients now think it’s very valuable. It’s much easier to swallow advisers’ quote-unquote advice and buy Ameriprise’s often-inappropriate products. It’s their Trojan horse.”

‘Ambulance Chaser’

When American Express spun off Financial Advisors, the renamed Ameriprise landed with $428 billion in assets and units that managed mutual funds, sold insurance and traded securities. It also inherited the class-action litigation. Ameriprise settled for $100 million, and the lawsuit was dismissed in March 2008.

Ameriprise denied wrongdoing and said clients hadn’t suffered any damages.

“Drucker tries to make a living by bringing lawsuits against us,” spokesman Pratt says. “He is essentially the financial services equivalent of an ambulance chaser.”

Today, Ameriprise and other independent advice firms have become lucrative distribution channels for mutual funds and annuity underwriters. Another lawsuit, this one filed in June by a pension fund run by the Burbank, California, branch of the International Alliance of Theatrical Stage Employees union, shows what’s at stake.

Secret Compensation

The fund sued Ameriprise’s Securities America brokerage unit, its broker Michael Bullock and Massachusetts Financial Services Co. for allegedly failing to disclose that Bullock and Securities America received undisclosed payments to promote products from Massachusetts Financial.

Bullock and Securities America had directed $100 million of clients’ money into Massachusetts Financial, a unit of Canada’s Sun Life Financial Inc., according to the lawsuit filed in Los Angeles federal court. In turn, they reaped $525,000 in secret compensation on top of normal commissions, according to the lawsuit.

Massachusetts Financial spokesman John Reilly says the firm was dismissed as a defendant in November. Securities America has filed a motion to dismiss the suit. Bullock’s attorney, Ben Suter of Keesal Young & Logan in San Francisco, says no court or regulatory body has ever concluded that Bullock has done anything wrong.

“He is absolutely innocent,” Suter says.

Failing to Supervise

It wasn’t the first time Securities America got into hot water for the incident. NASD, a predecessor to Finra, fined the brokerage $375,000 in July 2007 for the payments and for allegedly failing to supervise the broker’s communications with the pension fund, according to an NASD announcement. Securities America consented to NASD’s findings without admitting or denying the charges.

Ameriprise also failed to properly supervise Timothy Stabile, says his attorney, Matthew Boles. Stabile stole $514,379 of a client’s money and put it into an Ottumwa, Iowa, restaurant he’d named Nick & Joie’s for his parents, according to an April 2007 federal grand jury indictment filed in U.S. district court in Des Moines.

Stabile, 45, started out in 2004 by convincing E. Lee Barnett, an aging widower suffering from dementia, to invest $875,305 in approved American Express Financial Services annuities, according to the indictment. Stabile then had American Express send cash from the investments to Barnett’s checking account and got Barnett to write blank checks, ostensibly to pay bills.

‘Lack of Oversight’

“That’s where the train starts coming off the track,” says Boles, a partner at Parrish Kruidenier Dunn Boles Gribble Cook Parrish Gentry & Fisher LLP in Des Moines.

Boles acknowledges his client’s misdeeds. He also points a finger at Ameriprise.

“While I don’t believe that Ameriprise knew what was going on, I do believe there was a lack of oversight,” he says. “When considerable numbers of transactions of $10,000, $15,000, $20,000 start rolling through someone’s account on a monthly basis, I would think that would draw concern.”

Stabile was sentenced to 46 months in prison and ordered to refund $484,427 to Ameriprise, which had paid Barnett’s losses, wasn’t a defendant and had no comment.

Ameriprise says in court filings that it was unaware of the moves of Brooklyn, New York, franchisee Jennifer Wilkov. In 2007, clients and New York District Attorney Robert Morgenthau accused her of putting $1.7 million into a fraudulent California house- flipping scheme.

Serving Time

The originators turned out to be Pam Chanla, 35, and Carla Zimbalist, 63, both of the Los Angeles area. The women are serving time in a California prison for stealing the money Wilkov had raised. In January 2008, Wilkov, 40, pleaded guilty to fraud. She served four months in prison.

“She was a victim of the same perpetrators,” says Thomas Campbell of New York-based Smith Campbell LLP, her attorney in one of three civil cases.

Parent Ameriprise Financial is named as a defendant in two of them. The case in which Wilkov’s brother Jeffrey sued Chanla and Zimbalist was dismissed in June 2007 after a default judgment against the defendants. The case against Ameriprise by Wilkov’s father, Howard, is pending. The case by investors against Jennifer Wilkov and Ameriprise was voluntarily dismissed against Ameriprise.

Paris Hilton

At least Ameriprise client Jack Anderson got to visit a Hollywood movie set for his investment. Anderson, 64, and his wife, Linda, 63, say they contributed more than $2 million, or almost half the budget, for a Paris Hilton film called Bottoms Up, whose plot centers on a celebrity caught masturbating on videotape.

Former Ameriprise adviser Daniel Roberts allegedly convinced the couple to cash in bonds, mutual funds and other conservative retirement savings. He assured them they’d get a 15 percent return plus a share of the movie’s profits, according to their January 2007 arbitration claim. Instead, the film went straight to DVD.

“Jack Anderson is the definition of a victim,” says John Gatti, an attorney in the Santa Monica, California, office of Greenberg Traurig LLP who represented the Andersons in a separate 2006 lawsuit against the producers filed in state court in Los Angeles. “This could have been your dad or my dad.”

Ameriprise countered in related court filings that Anderson knew what he was doing, citing an August 2005 e-mail.

“The movie is a dog,” Anderson wrote. “The comedy is not funny, editing and story line are choppy and Paris shows no skin. It will have a very, very small audience.”

Roberts was “terminated,” Ameriprise spokesman Pratt says. “If you have someone committed to engaging in bad acts, that person will carry out those bad acts,” he says. Roberts couldn’t be reached for comment.

As franchises and branch offices flourish in the financial advice industry, it’s a good bet regulators will have their hands full with rogue brokers and spotty supervision. Clients may be wise to investigate whether they’re investing for a secure future or bankrolling their adviser’s fantasies.

To contact the reporter on this story: Seth Lubove at slubove@bloomberg.net

Last Updated: January 6, 2009 00:01 EST