Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses as a result of financial advisors who sell investments that are technically “unauthorized” by their firms. These side gigs, while profitable for the broker due to high commissions, are prohibited by FINRA, the industry regulator.
Brokers may pitch clients on a private securities transaction, for example. Of course, the investors rarely have any clue that what they are being asked to invest in is “unauthorized” or a “private securities transaction.” Sometimes these take the form of stock offerings that are unlisted. Broker Henry A. Taylor III, for example, then working for the Cetera brokerage firm, sold $30,000 in private stock that invested in a trucking firm. Taylor did not notify his firm of the sale and had initially deposited his client’s check in his personal account.
After a FINRA arbitration claim was filed, the regulator fined Taylor $7,500 and suspended him for three months earlier this year. Taylor neither admitted nor denied the findings of the FINRA action. The original transaction took place three years ago.
“The trucking company investment was a securities transaction outside the course or scope of Taylor’s employment with Cetera,” the FINRA complaint stated. “Taylor, however, did not notify Cetera about the transaction, his role in it, and whether he had received or expected to receive selling compensation in connection with the transaction.”
Brokers must inform their firms of all client sales. When they don’t, they run afoul of industry rules. Their firms also can be cited for failure to supervise their employees. According to the FINRA complaint, “Taylor’s failure to provide the required notice to Cetera is aggravated by the fact that he concealed the investment from the firm. On February 16, 2017, Cetera warned Taylor that any such investment would constitute a prohibited private securities transaction that could result in his termination. Taylor falsely denied making any investment and falsely disavowed any intent to pursue any investment.”
As with all side transactions, brokers pitch unauthorized investments with the promise of quick riches with little risk. Merrill Lynch broker Christopher Michael Roumayeh was cited by FINRA last year for selling private securities of a sports team. The stock was not approved by his firm, nor did he notify his employer. Roumayeh was fined $15,000 and barred from associating with other FINRA-associated brokers, according to the FINRA complaint.
“The purpose of FINRA rules, which Roumayeh violated,” writes Tobias Seck in The Esports Observer, is to ensure that a financial advisor only offers to sell securities that have been vetted by her or his employer brokerage firm. Moreover, financial advisors have a legal and regulatory obligation to recommend only suitable investments appropriate for their clients’ needs and objectives.”
According to FINRA Rule 2010, brokers are forbidden from selling investments that are not approved by their firms. When these sales occur, investors can file FINRA arbitration complaints against the brokers and their firms. Brokers also can be charged with violating another FINRA rule that requires them to tell their employers about private securities transactions.
FINRA Rule 3280 “prohibits each associated person from participating in a private securities transaction without first notifying his or her firm in writing about the details of the proposed transaction, his or her proposed role, and whether he or she has received or may receive selling compensation in connection with the transaction.”
Stoltmann Law Offices has represented hundreds of investors in claims against securities brokers and their firms involving “selling away” and “private securities transactions.” If you invested with a broker and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!