A San Diego, Calif.-based broker-dealer will pay $1.95 million to settle allegations by the U.S. Securities and Exchange Commission that it failed to reasonably supervise a former employee charged with fraud.

First Allied Securities will make the payment regarding former broker Harold H. Jaschke, charged by the federal agency last year with engaging in unauthorized fraudulent trading in the accounts of two Florida municipalities.

According to a statement issued to the San Diego Union Tribune, First Allied said, “After considering the surrounding circumstances, the current regulatory environment and the expense and uncertainty associated with litigation, the firm determined that it was in its best interest to settle this matter.”

The administrative order by the SEC on the settlement notes that between May 2006 and March 2008, Jaschke executed numerous unauthorized transactions, made unsuitable recommendations and churned the accounts of Kissimmee, Fla., and the Tohopekaliga Water Authority. The SEC deemed that First Allied failed reasonably to supervise Jaschke, as it did not establish reasonable systems to direct follow-up action to respond to what the agency called “red flags” regarding churning and suitability.

Specifically, according to the SEC, First Allied waited nine months before contacting the affected municipalities through “annual review” letters that did not actually relate to annual reviews. Those letters failed to alert officials to the suspicious trading activity in their accounts.

First Allied also had no system in place to monitor compliance with its own rule prohibiting its brokers from using personal e-mail accounts to conduct business, the SEC said, enabling Jaschke to do just that to perpetrate his activities. The SEC found that First Allied failed to retain certain business-related e-mails sent to and from its employees, as required under law.

“Supervising registered representatives is a job that must be taken seriously by broker-dealers,” said Rosalind Tyson, director of the SEC’s Los Angeles Office, in a statement. “By failing to establish reasonable systems to prevent Jaschke’s misconduct, First Allied did not fulfill its obligation to reasonably supervise its registered representatives.”

In addition to the monetary payment, the SEC order censures First Allied and requires the company to cease and desist from committing or causing any future violations of certain books and record provisions. The San Diego firm also must hire an independent consultant to review its policies and procedures as well as its system of implementing policies and procedures.