On July 12, 2013, Sunset Financial Services, Inc. (Sunset) reached a settlement with the Financial Industry Regulatory Authority (FINRA) concerning allegations that Sunset failed to supervise the sale of certain private placement securities. FINRA accused Sunset of failing to establish and maintain appropriate supervisory systems in compliance with FINRA rules regarding the sale of private placements.
The FINRA complaint alleges that the improper activity took place between January 2008 and March 2011. Sunset began private placement investment sales in 2001 and in 2004 the fund at issue was approved for sale to customers by Sunset. The private placement provided bridge loans for short-term mortgages for properties in California and Arizona. Sunset was paid 2% of sales plus trail concessions from the fund. In 2008, Sunset made $1.14 million form the total $57 million raised for the private placement.
According to FINRA, the first red flag indicating that the private placements were not as safe as the firm was advertising to customers occurred in 2008. At that time, a third party published a report on that highlighted that the mortgages the fund invested in had experienced a 20% increase in the rate of default. Sunset failed to follow up on the report such as re-evaluating the adequacy of keeping the fund on an approved sales list. The second red flag occurred from 2008-2009 when the private placement no longer allowed fund redemptions due to financial difficulties. It was also later discovered that the CEO of the private placement was also the son of a registered representative of Sunset.
By 2009, even after receiving these red flags, Sunset decided to sell a second private placement by the same sponsor as the first fund. FINRA alleged that Sunset agreed to sell the second fund without performing any due diligence. Sunset is said to have been aware that a third party was in the process of researching and drafting a research report for Fund II but decided to accept the fund for sale before it was completed.
The charges FINRA brought against Sunset were for inadequate: 1) supervision of due diligence on private placements; 2) supervision of suitability; 3) supervision of sales materials; and 4) supervision of internal use materials. By agreeing to the settlement, Sunset accepted a fine of $200,000, and was compelled to disgorge approximately $84,000 as a partial restitution to its customers.
The attorneys at Gana Weinstein LLP are experienced in investigating claims concerning misrepresentation of securities. Our attorneys can help you detect and uncover suspicious activity in your accounts. Our consultations are free of charge and the firm is only compensated if you recover. Call (800) 810-4262 to speak with an attorney.