More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The Financial Industry Regulatory Authority (FINRA) announced Monday that a hearing panel fined Brookstone Securities $1 million for fraudulent sales of collateralized mortgage obligations (CMOs) to unsophisticated, elderly and retired investors.
The FINRA panel ordered the Lakeland, Fla.-based firm's owner and CEO, Antony Turbeville, and a broker, Christopher Kline, to also pay restitution of more than $1.6 million to customers.
According to the FINRA panel, from July 2005 through July 2007, Turbeville and Kline intentionally made fraudulent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks associated with investing in CMOs. All of the affected customers were retired investors looking for safer alternatives to equity investments.
According to the decision, Turbeville and Kline “preyed on their elderly customers’ greatest fears,” such as losing their assets to nursing homes and becoming destitute during their retirement and old age, in order to sell them unsuitable CMOs. By 2005, “interest rates were increasing, and the negative effect on CMOs was evident to Turbeville and Kline, yet they did not explain the changing conditions to their customers,” FINRA says.
Instead, they led customers to believe that the CMOs were “government-guaranteed bonds” that preserved capital and generated 10% to 15% returns. During the two-year period, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers named in the December 2009 complaint, while those same customers lost $1.6 million.
The panel’s order says that two of Kline’s customers were “elderly widows with very limited investment knowledge, who, vulnerable after their husbands’ deaths, were convinced to invest their retirement savings in risky CMOs.” Kline told the widows that they could not lose money in CMOs because they were government-guaranteed bonds, and Kline further increased their risk by trading on margin.
Also, the panel noted that chief compliance officer David Locy completely ignored his responsibility and “should have been a line of defense against Turbeville’s and Kline’s egregious conduct.” but instead “he looked the other way while Turbeville and Kline traded CMO accounts that were unsuitable for their customers.” It barred Locy from acting in any supervisory or principal capacity, suspended him in all capacities for two years and fined him $25,000.
The hearing panel concluded that Brookstone was responsible for Turbeville’s and Kline’s action. According to the decision, “the firm neither acknowledged nor accepted responsibility for the misconduct at issue in this matter. Instead, through Turbeville and Kline, it attempted to blame the customers for their own losses.”
The FINRA panel also barred Turbeville and Kline from the securities industry. Turbeville must pay $440,600 in restitution, and Kline will pay the remaining $1.2 million.
The ruling resolves charges brought by FINRA in December 2009.