Securities Fraud Attorneys Blog
Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from brokers whose firms promote high risk alternative investments and private placements. Did you know that brokerage firms can be held accountable when their brokers sell high-risk, illiquid investments that are unsuitable for their clients? Such was the case with Sanctuary Securities, which was forced to pay more than $530,000 in fines and restitution to investors for “failures to supervise certain product sales,” according to Advisorhub.com.
Sanctuary was fined $160,000 and ordered to pay restitution of $370,161.39 plus interest “for the various supervisory failures dating as far back as 2014 that were uncovered over multiple FINRA examinations, according to a letter of acceptance, waiver and consent finalized on July 1.” Formerly David Noyes and Company, Indianapolis-based Sanctuary has about 190 registered brokers and 35 offices. The company said that no current employees were involved in this action. The FINRA enforcement action involved the firm’s sales of money-losing, risky products called “leveraged exchange-traded funds (ETFs).” These investments multiply gains and losses based on market movements of popular securities indexes. These “non-traditional” or “alternative” investments can lose money for investors if brokers or investors guess wrong on market movements.
According to FINRA, from January 2014 through December 2018, “Sanctuary did not sufficiently address the unique features and risks related to solicited sales of inverse and leveraged ETFs (collectively, non-traditional ETFs) as required by suitability obligations under FINRA Rule 2111. Around 30 brokers recommended customers purchase about $5 million worth of non-traditional ETFs, resulting in significant net losses for those who held their positions for extended periods of time. The firm, meanwhile, generated roughly $60,000 in commissions over the course of about 600 purchases in 150 customer accounts,” FINRA stated.
Investors should be warned about private placement deals their broker may be trying to sell them. In recent years, according to a Wall Street Journal article yesterday, hundreds of billions of dollars in private placements have been sold each year by stockbrokers, and these brokers are more likely than others to have sketchy records. One in eight brokers marketing private placements had three or more red flags on their records, including complaints, regulatory actions, criminal charges, or employment separations. Brokers selling private placements are also six times as likely as the average broker to report at least on regulatory action against them. Private placements are used by businesses to raise money for projects typically in the real estate, or oil and gas development realms. In 2017 alone, private placement using brokers totaled at least $710 billion, almost three times as much as in 2009. Brokers like to market these to seniors, who may not know that they are unsuitable for them. A broker must take into account a customer’s age, net worth, and investment risk tolerance before recommending or selling a security. If he does not, his brokerage firm may be liable for losses. Private placements tend to be high-risk and illiquid investments, not suitable for the elderly.
