The Financial Industry Regulatory Authority is fining eight brokerage firms $6.2M for not supervising the sale of L-share variable annuities to customers. Five of the firms must pay another $6.3M to customers because the variable annuities that they were purchased were potentially not compatible with the latter’s investment goals and accounts.The firms, and their sanctions, include: Voya Financial Advisors Inc., for $2.75M fine, First Allied Securities, Inc., for $950K fine, VSR Financial Services, for $400K fine, Cetera Financial Specialists LLC, for $350K fine, Cetera Advisors Networks LLC, for $750K fine, Summit Brokerage Services, Inc., for $500K fine, Kestra Investments, for $475K fine, and FTB Advisors, for $250K fine. The firms that have to pay restitution are: Voya, for $1.8M, while first Allied, Cetera Advisors Networks, VSR, and Summit Brokerage Services will collectively pay $4.5M. All the firms are settling, but they are not denying or admitting to any of the alleged claims.At issue was the sale of the L-share annuities, which are “potentially incompatible, complex and expensive long-term minimum-income and withdrawal riders.” L-share annuities are more likely to pay registered representatives and their firms higher compensation than more traditional instruments.
The Financial Industry Regulatory Authority is fining VSR Financial Services Inc. $550,000 over claims that the firm did not set up, keep up, and enforce a supervisory system that was reasonable over its sale of non-conventional investments. The SRO says that the firm did not properly monitor concentrated client positions of alternative investments. Also fined was VSR owner Donald Joseph Beary, who also received a suspension from associating with other FINRA members for 45 days.
According to the SRO, the firm’s written supervisory procedures stipulated that just up to 40-50% of a client’s exclusive net worth could be cumulatively invested in alternative investments-that is, except for when there was a reason that justified going beyond the guidelines. VSR, through Beary, also set up procedures that gave a discount to certain instruments that were non-conventional, lowering the percentage of how much liquid net worth a customer had invested. It was Beary’s job to implement and oversee the discount program.
However, in a letter to the financial firm, the SEC said that it found that the SRO did not have proper written procedures for the program and that this same deficiency remained even two years after the regulator notified VSR about the problem. The Commission said that Beaury failed to take reasonable action to make sure the WSPs were implemented or to shut down the discount program if not.
Investment News is reporting that in the wake of pressure from regulators, Berthel Fisher & Co. Financial Services Inc., Cetera Financial Group Inc. and VSR Financial Services Inc., are modifying the way they sell specific alternative investments, including nontraded real estate investment trusts, by revising current policy or including no procedures and guidelines. According to executives at the three brokerage firms, they want add liquid alternative choices to their platforms while staying mindful of the issues that regulators recently addressed.
These types of financial instruments are in demand due to their higher yields, especially as traditional investment interest rates for retirees stay low due to the Federal Reserve’s policy. According to VSR chairman Don Beary, Following recent FINRA’s ‘senior sweep,’ his brokerage firm is now more careful about what senior citizens can invest in. VRS’s registered representatives have just been notified about the new illiquid alternative investment sale guidelines, which include a 35% of illiquid investment limit for older clients’ accounts-down from 40-50% previously. Also, for clients in the 70 to 75 age group, they will be allowed to possess no more than 25% of illiquid investments in their portfolio. Clients in the 75 to 84 age group have a 15% limit, while customers older than that will not be allowed to make own any illiquid investments.
Meantime, Centera hasn’t modified customer allocations percentages , but it has enhanced its representative training requirements for representatives that sell illiquid investments and brought in more employees to conduct product due diligence.
A new judge will preside over the case against two former brokers accused of defrauding over 130 Nebraska investors of over $20 million. Gage County District Judge Paul Korslund takes over for Sarpy County District Judge David Arterbur, who recused himself over possible conflicts.
Prosecutors are accusing Brian Schuster and Rebecca Engle, previously affiliated with Wachovia Securities LLC, Capital Growth Financial LLC, and VSR Financial Services Inc., of improperly selling risky investments to former clients when they worked together between 2000 and 2007. The two of them entered not guilty pleas to eight felony counts of securities fraud.
The investments under dispute were sold to investors while Capital Growth employed the two brokers. Investors say they bought securities in American Capital Corp. and Royal Palm. PrimEdge Inc. eventually bought both companies and Schuster became PrimEdge chief executive and president.
Over 200 investors will share a settlement of approximately $900,000 to be paid by the brokers’ ex-employers. Quanta Specialty Lines Insurance Co. will pay for most of it on behalf of Capital Growth. However this recovery is just a small portion of the over $20 million dollars in broker fraud losses that investors are claiming.
The majority of investors that have filed securities fraud lawsuits and arbitration claims were either nearing retirement or already retired when they were defrauded. They had wanted to make stable, low risk, conservative investments and they claim that the former brokers made investments for them in risky ventures without fully explaining what was involved. Engle and Schuster, however, say they shouldn’t be prosecuted for securities fraud because investors acknowledged the risks in writing.
Related Web Resources:
Judge appointed in fraud cases of ex Neb. Brokers, AP, December 22, 2009 Insurer to Pay Bulk of $900K Settlement in Nebraska Fraud Case, Insurance Journal, July 23, 2009 Continue reading
VSR Financial Services, an investment firm, has agreed to pay $10.3 million to settle a FINRA claim that it failed to properly supervise two ex-brokers accused of improperly selling risky investments to 249 customers. The agreement ends the litigation brought by the investors, many of them retirees, against VSR and its two ex-brokers, Rebecca Engle and Brian Schuster.
Although a number of securities fraud lawsuits have been filed against Schuster, Engle, and VSR, most of the investment fraud victims opted to pursue their cases through arbitration because the terms of their investment agreements prevented them from filing lawsuits. The claimants have accused the former VSR brokers of selling them investments that were inappropriate and high-risk.
The majority of investors who were defrauded say that because they were already either retired or about to retire, they had wanted to place their money in investments that were conservative and low risk. Instead, they claim that Schuster and Engle made high-risk investments for them, selling them securities in Royal Palm Capital Group and American Capital Corp while failing to explain the risks involved. Schuster and Engle allegedly promoted these investments as “mini Berkshire Hathaways” and “can’t miss” opportunities when the companies were actually startups that had limited operating histories. According to criminal complaints and court documents, the investment fraud victims lost at least $20 million.
Engle and Schuster have been charged with eight felony counts of securities fraud. They worked together a number of times between 2000 and 2007 and have also been affiliated with Wachovia Securities LLC and Capital Growth Financial LLC. More arbitration claims against the other companies they’ve been associated with are pending.