Advisor Group’s largest IBD rebuked over supervision in arbitration, state case
Advisor Group’s largest independent broker-dealer is not out of the woods after losing a FINRA arbitration case involving an ex-advisor who admitted to stealing millions of dollars from clients.
Royal Alliance Associates is also facing compliance matters regarding another former representative brought by an aggressive state regulator that again call the firm’s supervisory practices into question.
Massachusetts Secretary of the Commonwealth William Galvin’s office accused the firm of failing to supervise ex-Royal Alliance advisor Stephen F. Davis in a 1035 exchange of annuity contracts. The transaction wound up costing two clients nearly $60,000, Galvin said this week.
Davis later said he mistakenly believed the new contract offered a better interest rate for the clients, who had submitted a complaint in 2015 only to be told the fixed products “were not purchased through Royal Alliance” and therefore not supervised by the firm, according to the administrative complaint.
Last week, a former client of barred advisor Gary J. Basralian won cumulative awards of $5.4 million from Basralian and Royal Alliance in FINRA arbitration decisions handed down this month. Six other clients have pending claims, according to their attorney.
Basralian pleaded guilty to fraud after Royal Alliance permitted him to resign. He had been with the firm for 28 years.
The two arbitration decisions held Basralian and Royal Alliance liable for about $2.6 million each in compensatory damages and attorney fees.
Jersey City, New Jersey-based Royal Alliance generated more than $483.8 million in revenue in 2017, which is 45% of Advisor Group’s $1.07 billion in annual revenue and No. 12 in the sector. The firm doubled its headcount of advisors to 3,600 last year after acquiring John Hancock’s Signator Investors.
Basralian, 71, spent his clients’ investment money on personal expenses like a BMW and credit card payments, investigators say. He left Royal Alliance after Cathy Carter, the first former client to win an arbitration award, alerted them she had “millions of dollars missing,” says her attorney, Jonathan Kurta.
“He really just preyed on the most vulnerable victims, which makes these cases extremely sad,” says Kurta, who notes that most of the defrauded clients are elderly women, including at least one who has brain damage.
He believes Basralian’s thefts date as far back as 2003 and amount to nearly $5 million.
“We feel strongly that there was a failure to supervise here,” Kurta adds, calling the business model used by Royal Alliance and other IBDs “ripe ground for fraud like this to occur.”
Royal Alliance and Advisor Group, which is owned by PE firm Lightyear Capital and Canadian pension manager PSP Investments, declined to discuss either case. Royal Alliance denied Carter’s allegations in the arbitration and asserted its own claim of contractual indemnity, the award document states.
Sam Braverman, an attorney for Basralian, declined to comment on the case prior to his client receiving his prison sentence in the U.S. District Court in New Jersey. Basralian pleaded guilty in August to one count of wire fraud and one count of investment adviser fraud, and his sentencing is scheduled for April.
Basralian admitted to stealing at least $2 million over a 10-year span after investigators said he instructed clients to write checks to entities such as “Masters Financial” and “Practical Guidance.” The money went into accounts he controlled instead of being invested, according to federal prosecutors.
The advisor told victims that he would invest their money in Royal Alliance brokerage accounts but instead used the funds to make BMW car payments and pay for personal expenses, prosecutors claimed.May 29
The regulator accused the four firms and the Advisor Group network of supervisory failures in sales of L-share VAs in separate but near-identical cases.July 30
Allegations of undisclosed private securities transactions by a former advisor followed two significant mutual fund cases involving the IBD network’s practices.May 1
Carter had filed the arbitration case in December 2017 with claims including common law fraud, negligent supervision, breach of contract and violations of federal racketeering laws. She later separated her case against Basralian from the one against the firm after he failed to file an answer, the award shows.
The ex-client ultimately requested more than $14.8 million in damages and attorney fees. In two Jan. 15 decisions, arbitrators awarded Carter compensatory damages of $2.1 million and attorney fees of $500,000 each from Basralian and Royal Alliance, plus payment of $16,000 in costs by Royal Alliance.
FINRA had already barred Basralian last March for not responding to its requests for information at the end of his long tenure at Royal Alliance. The firm cited a client’s allegations of misappropriated money, an undisclosed tax lien and “suspect investments” in letting him go, according to BrokerCheck.
Royal Alliance did not dismiss Davis, the advisor involved in the Massachusetts case, BrokerCheck shows. He left the firm last March to join J.P. Morgan Chase. Davis did not respond to phone messages left at his current Fairfield, Connecticut branch.
Davis had taken over the annuity holders’ account at a Royal Alliance office in late 2014, after their previous representative had retired, the complaint shows. Davis later recommended they exchange their then current contract three years before it expired for one with a much lower interest rate, Galvin’s office says.
His failure to file the paperwork on time cost the clients more than $15,600 in surrender penalties, and the lower rate led to them losing $43,000 in interest, investigators say. Davis also received a commission of $17,500, based on the initial contract value of $583,300, according to the complaint.
The clients’ fixed annuity from American General Life Insurance carried an interest rate of 4.75% for three additional years in June 2015, but Davis moved them into a Delaware Life Insurance product with locked-in rates of 2.4% during the next five years, the complaint states.
When asked about the transaction, Davis said he “believed 100% that I was offering them a higher rate, completely suitable,” according to the complaint. He attributed his action to “the interest rate environment that was prevalent” and admitted that “facts obviously have, you know, come to light” showing “that wasn’t true,” the document shows.
The complaint, however, notes that Davis had access to documents sent by the original issuer that included the actual interest rate on the contract and also included a warning from Delaware Life urging the clients to review the exchange since the issuer still believed its annuity was in their best interest.
For its part, Galvin’s office says, Royal Alliance failed to maintain and enforce its own policies and procedures around such products.
Months after the transaction, the clients sent a written complaint to the IBD alleging unsuitability and dishonest conduct by Davis in the exchange, the complaint shows. In a January 2016 response, the firm noted that the products aren’t considered securities and asserted they weren’t purchased through Royal Alliance.
“Unfortunately,” Royal Alliance concluded, the firm “cannot speak to the issues you may have encountered with the purchase or surrender of these products.”
Galvin’s office pointed to two areas in which the firm’s policies that contradicted that response. One policy requires a “reasonable basis” for replacing one insurance product with another, and another guideline mandates that advisors “have thorough knowledge” of all insurance or securities products they sell.
Royal Alliance also didn’t file the necessary disclosure forms about the clients’ complaint against Davis, Galvin’s office says. Regulators charged Davis with breach of fiduciary duty and Royal Alliance with failure to supervise while seeking sanctions, censure, restitution and disgorgement of profits.