Essex Financial founder fined, suspended
The founder and former president of Essex Financial Services has been fired from the company after the state Department of Banking determined he had engaged in "dishonest and unethical" practices by paying a referral fee in violation of regulations and then trying to mischaracterize the fee as a legitimate expense.
John W. Rafal of Old Lyme, named one of the nation's top independent financial advisers last year, had his registration as an investment adviser suspended for 15 days and faces a $25,000 fine, according to a consent order dated Nov. 23.
In a separate consent order, Essex Financial, wholly owned by Essex Savings Bank, was ordered to pay a $25,000 fine because of its lack of supervision over Rafal, who stepped down to the rank of vice chair of the company after the violations were reported in 2013.
In a letter to clients sent out this week and obtained by The Day, Essex Financial also stated that Rafal is under investigation by the Securities and Exchange Commission related to the same case.
According to online records, the state fined the attorney who accepted the referral fee, Peter D. Hershman of Branford, $3,500 for receiving the money despite not being a registered investment advisor.
"The matter did not involve the loss of any client funds," said Charles R. Cumello Jr., president and chief executive of Essex Financial, in the letter to clients.
Rafal, reached by telephone Friday, said he agreed to the consent order to avoid litigation. He already had spent about $500,000 on legal fees, he said.
"At some point, you have to move on, and that's when I got to that point," Rafal said. "It was blown way out of proportion."
Rafal's spokesman, Terry Rooney, said in a statement that "John Rafal is gratified to put this matter with the State of Connecticut to rest" after an "unblemished, indeed stellar record" during a 40-year career.
He called the incident for which Rafal was disciplined a "single, limited violation" in which "the investor in question did not realize any loss on the value of the account."
"John cooperated fully with the state authorities during the investigation," Rooney added.
According to one of the consent orders, Rafal "wielded tremendous influence and control" over the financial services company that he founded and later sold to Essex Savings.
Employees "were expected to comply" with orders given by Rafal, the consent order said, and he managed to "circumvent" efforts by Essex Financial personnel who were concerned about the referral fee.
The annual $50,000 fee, according to online documents, was agreed to after Hershman referred a "multimillion-dollar investment advisory account" to Essex Financial in 2010.
By 2011, Rafal had put in place plans for a quarterly fee to Hershman of $12,500, despite knowing that the attorney was not a registered financial advisor, according to documents.
In all, $25,190 was paid out to the attorney "based on inaccurate and misleading invoices," the consent order against Essex Financial said. The money was later returned, according to documents.
"The attorney never provided any actual legal services," the consent order said.
Doug Paul, chairman of the board of Essex Financial, said in a phone interview and follow-up email Friday that Rafal's employment was "terminated" in the wake of the state's punishment and that at the same time his position as a member of the board of the company "ceased."
“When the Board of Essex Financial Services first learned of the potential violations outlined in the consent order negotiated between John Rafal and the State of Connecticut, we immediately retained outside counsel to conduct a thorough, independent review and we apprised our regulators of the situation," Paul said in a statement. "We have fully cooperated with our regulators throughout this process and will continue to do so."
Paul added that Essex Financial, with more than $3.5 billion in assets under management, has taken steps to "ensure that nothing like this happens again."
Rafal had consistently been named one of the top 100 independent financial advisors in the country over the past decade, and the business publication Barron's honored him last year as one of only 15 people nationwide to attain this distinction.
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