About four years after its alleged supervisory breaches and negligent omissions, a midsize wealth manager resolved a FINRA case involving sales of risky and costly alternative products.
On March 18, Geneos Wealth Management became likely the first brokerage to
“We know that FINRA actions take a long time from start to finish,” Courtney Werning, an attorney with Meyer Wilson who represents GPB Capital investors in lawsuits and arbitration claims, said in an email. “It would be foolish for firms to assume they’re not going to get hit with a FINRA action relating to their GPB sales. This is the first of what I expect to be many.”
The case against Centennial, Colorado-based Geneos also added it to the group of firms — including fellow independent brokerages
Geneos “permitted the sale of LJM on its platform without having procedures reasonably designed to ensure that the firm and its representatives had a sufficient understanding of its risks and features, including the fact that the fund pursued a risky strategy that relied, in part, on purchasing uncovered options,” according to the FINRA order. “Geneos also lacked a reasonable supervisory system to review representatives’ LJM recommendations.”
Firm’s explanation
In settling the case, Geneos didn’t admit or deny the regulator’s allegations while agreeing to a censure, a fine of $150,000 fine and restitution of $250,000 for any clients who invested in the LJM Fund. In addition, according to the settlement order, Geneos purchased the $165,000 worth of GPB Capital LPs tied to a portfolio of car dealerships from the clients who had invested in them between April 2018 and June 2018. The clients had purchased the LPs without any disclosures from Geneos that the issuer had not filed its audited financial statements with the SEC, according to investigators.
“Geneos takes its regulatory responsibilities very seriously and has always strived to meet and exceed any FINRA rules, regulations and guidance,” CEO Ryan Diachok said in an emailed statement. “Geneos is happy to have this matter with FINRA behind us.”
“The unfortunate events that triggered the downfall of LJM Preservation and Growth Fund (a registered ’40 Act mutual fund and formerly highly rated by Morningstar) were not related to Geneos in any way,” Diachok continued. “However, like a number of other firms, Geneos agreed to the [settlement] to provide a benefit to its customers. Likewise, despite the recent positive developments relating to GPB, including the
The ‘Volmageddon’ of 2018
The value of LJM’s funds dropped by more than 80% and wiped out more than $1 billion from investors’ portfolios during the volatility spike in February 2018 known as the “Volmageddon,”
“In July 2017, Morningstar issued a fund report for LJM that described the fund as ‘an aggressive option seller with above-average returns and low correlation with equity markets, but high risk,’” the document states. “The report further stated that ‘the strategy is structured to generate high income but is relatively aggressive and exposed to a steep rise in equity volatility. Even though these volatility spikes and periods of heightened uncertainty are infrequent, they could have significant, negative impact on this fund’s future performance.’”
Geneos sold the product to 80 clients between November 2016 and February 2018, with one registered representative completing more than 60% of the sales, the document states. Geneos used the same review standards for the alternative mutual fund as it does for traditional mutual funds, according to FINRA. Furthermore, it had no written supervisory procedures to advise the firm’s principals about the sales and no particular trade review system designed specifically for alternative mutual funds, according to investigators.
GPB Capital cases in context
The regulator didn’t assess any restitution against Geneos relating to GPB Capital based on it buying back the Automotive Portfolio LPs from the three clients who purchased them, the settlement states. With 340 registered representatives and 180 branch offices, Geneos is much larger than the other two firms settling GPB Capital-related cases in the past week. Dempsey Lord Smith, a Rome, Georgia-based firm with 100 reps and 28 branches,
Out of the three brokerages, FINRA alleged that only Dempsey Lord made unsuitable recommendations of GPB Capital products that extended to other products issued by the firm, such as interests in cold storage facilities, a New York commercial and residential building, and waste management companies. Each of the other two firms, like Geneos, failed to disclose the fact that the issuer hadn’t made timely required SEC filings in April 2018, according to FINRA.
“This matter originated from FINRA’s investigations of firms that sold LJM and GPB Capital to retail customers,” according to the settlement order.
Regulators have alleged that about 17,000 retail clients, including 4,000 seniors, purchased LPs issued by GPB Capital. Settlements and
Werning’s firm has worked with about 200 investors in several dozen cases it has filed on their behalf, although it continues to receive calls and lodge new actions, she said.
“The fact that the securities they were selling were not registered and not exempt from registration should have precluded Geneos and the other firms from selling GPB at all,” Werning said. “No amount of disclosure to clients would be enough to validate the brokerage firms’ actions. But if the facts had been disclosed to potential investors, who would have readily agreed to invest in a security that was clearly in violation of securities laws? No one. It was critically important.”
