Whelan’s Alleged “Selling Away” at Merrill Lynch Draws $3.5M Settlement

When Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked,” he might well have been referring to cases like the one involving Gregory DePaul Whelan, a former Merrill Lynch financial advisor who allegedly engaged in “selling away” practices that resulted in significant investor losses.

The financial world was shaken last year when Whelan resigned from Merrill Lynch following serious allegations of selling away and conflicts of interest. For those unfamiliar with the term, “selling away” occurs when a financial advisor sells investments to clients that haven’t been approved by their employing brokerage firm—essentially operating outside the supervision and compliance framework meant to protect investors.

According to regulatory filings, at least one customer dispute against Whelan has already resulted in a $3.5 million settlement. The allegations included selling away, unsuitable investment recommendations, and misrepresentations—a concerning trifecta of questionable practices. Though Whelan has denied any wrongdoing, the substantial settlement speaks volumes in the industry. In fact, a study by the University of Chicago found that 7% of financial advisors have been disciplined for misconduct that ranges from putting clients in unsuitable investments to trading on client accounts without permission.

The impact on investors can be devastating. Many of Whelan’s clients reportedly experienced significant portfolio losses from investments they believed were vetted and approved by Merrill Lynch. When advisors sell away, investors lose crucial protections:

• Due diligence processes typically conducted by the brokerage firm
• Compliance oversight that might catch unsuitable investments
• Securities that would otherwise be registered and regulated

For affected investors, this isn’t merely about financial loss—it’s about broken trust. Many had established long-term relationships with Whelan, believing their financial future was in capable hands. Instead, they’ve found themselves navigating complex legal waters to recoup their losses. If you believe you have been the victim of investment fraud or received bad advice from your financial advisor, it’s crucial to seek help from experienced securities attorneys like Haselkorn & Thibaut who can guide you through the recovery what happens after you file a FINRA complaint. Contact them at 1-888-885-7162 for a free consultation.

Whelan’s background: Red flags and regulatory history

Before joining Kovack Securities, his current employer, Whelan had built a career at Merrill Lynch, Pierce, Fenner & Smith, where he managed significant client assets. His industry experience spans decades, making the allegations particularly troubling—this wasn’t a rookie mistake but potentially a calculated circumvention of regulations.

A review of Whelan’s record on the Financial Industry Regulatory Authority (FINRA) database (accessible via his CRD #5247677) reveals concerning patterns. Beyond the recent $3.5 million settlement, there are indications of potential earlier issues that might have been warning signs.

Financial industry data shows that advisors with one file a FINRA complaint are statistically more likely to have additional complaints filed against them in the future. In fact, a striking financial fact: approximately 9% of financial advisors with misconduct records are repeat offenders, responsible for 38% of all reported misconduct cases in the industry.

Whelan’s transition to Kovack Securities following his resignation from Merrill Lynch represents what industry experts call a “regulatory arbitrage”—moving between firms to potentially escape the reputational damage and heightened scrutiny that follows misconduct allegations.

Selling away explained: Understanding FINRA Rule 3280

In plain English, “selling away” means a broker is selling investments that their firm hasn’t approved, reviewed, or even knows about. It’s like a restaurant chef serving dishes that aren’t on the menu and the restaurant management has never tasted.

FINRA Rule 3280 explicitly prohibits this practice. The rule requires registered representatives to provide written notice to their firms before participating in any private securities transaction. This allows firms to approve, deny, or supervise such activities—creating a crucial checkpoint for investor protection.

Why does this matter? When your advisor sells you investments outside their firm’s knowledge:

• The investments haven’t been vetted for legitimacy or suitability
• Your advisor may have conflicts of interest (like higher commissions)
• The brokerage firm’s insurance might not cover your losses

These investments often promise higher returns than traditional options—making them temptingly attractive. However, as the Whelan case demonstrates, they frequently carry substantially higher risks that aren’t adequately disclosed.

Consequences and lessons learned

The fallout from alleged selling away practices extends beyond immediate financial losses. For investors caught in these situations, the consequences can include:

• Illiquid investments that can’t be easily sold
• Tax complications from unregistered securities
• Lengthy legal battles to recover losses
• Permanent damage to retirement plans and financial goals

For financial advisors like Whelan, the consequences can include regulatory sanctions, termination, fines, and permanent damage to their professional reputation. Even if they continue in the industry, heightened supervision requirements often follow.

The most important lessons for investors are vigilance and verification. Always:

• Verify that any recommended investment is approved by your advisor’s firm
• Request prospectuses directly from the brokerage firm, not just your advisor
• Be wary of investments promising unusually high returns with minimal risk
• Check your advisor’s background through FINRA’s BrokerCheck before investing

The Whelan case serves as a sobering reminder that even experienced advisors at prestigious firms can sometimes put their interests above their clients’. In investing, as in life, trust should always be accompanied by verification.