Four of Advisor Group's brokerages settled FINRA charges that the firms negligently sold clients $16 million worth of alternative investments without informing them of the risks.
FSC Securities, Royal Alliance Associates, SagePoint Financial and Woodbury Financial Services agreed to pay $1.27 million in fines and restitution to nearly 200 clients who purchased stakes in limited partnerships called GPB Automotive Portfolio. The brokerages sold the investments even after the products' issuer notified them of delays in filing its required audited financial statements to the Securities and Exchange Commission,
The four firms must pay "most or substantially all of the commissions they earned on the sales they made after they should have stopped making sales," said Hugh Berkson, a securities lawyer with McCarthy Lebit Crystal Liffman who is the president of the Public Investors Advocate Bar Association. Berkson hasn't represented any clients who have filed
"This is a nice shift from a regulator," he added. "It's the regulator's job to keep this from happening ever again."
Phoenix-based Advisor Group didn't admit or deny the allegations as part of settling the case;
At least 16 other pending client claims involving about $3.8 million worth of investments in GPB products have named Advisor Group brokerages as a defendant, a spokesperson for the firm told the industry publication
"We wish to note that suggestions of a lack of value within the GPB Automotive Fund are very much contradicted by the recent 10-Q and the Monitor's Update," the spokesperson was quoted as saying. "We strongly suggest that these sources be reviewed and considered in light of recent misstatements in the press."
GPB Capital sent letters in April 2018 to representatives of FSC, Royal Alliance, SagePoint and Woodbury telling them about the delayed SEC filings and a forensic audit tied to a separate lawsuit the company had filed against a former operating partner a year earlier, according to FINRA. Without disclosing this information to investors, the four companies sold $16.31 million worth of investments in GPB Automotive through more than 200 transactions over the next two months, investigators said.
"The delay in filing audited financial statements was material information that should have been disclosed," the settlement order said. The brokerages violated FINRA Rule 2010, the regulator's guidelines for just and equitable principles of trade, by "negligently omitting material facts," the document added. The regulator ordered the companies to pay $1.07 million plus interest in combined restitution to 196 investors and $200,000 in fines.
The four brokerages generated $1.14 million in commissions in the sales, which is 6.9% of the amount clients invested into GPB Automotive, according to FINRA. Those high rates actually came in lower than the 10.6% average commissions that the SEC alleged more than 60 "
"They get a lot more to sell this than they would a Vanguard mutual fund," Berkson said of the brokers' hefty commissions. He noted that the wealth management industry is increasingly pitching alternative investments as "safe, income-producing" products amid low yields on bonds. But "all too often, those representations about safety and income are just false," he said. "We're going to see an awful lot of shakeouts with alternatives."
