The Financial Industry Regulatory Authority (FINRA), VSR Financial Services, Inc. (“VSR”), and Donald J. Beary (“Beary”) have reached a settlement concerning charges brought by the securities regulator that VSR violated customer concentration guidelines and otherwise failed to reasonably supervise its brokers in the sales of alternative investments. The settlement led to VSR paying a $550,000 fine and Beary being suspended from associating with a FINRA firm for 45 days and a $10,000 fine.
VSR is based in Overland Park, Kansas, has 211 branch offices, and employs approximately 460 registered personnel. Beary is a co-founder of VSR and is its executive vice-president, chairman of the board, and direct participation principal.
According to FINRA, from 2005 until 2010 VSR and Beary failed to adequately implement the firm’s supervisory procedures concerning concentration limits in customer accounts for alternative investments. The settlement details that VSR’s supervisory failures regarding concentration limits occurred because the firm used inaccurate statements reflecting the customer’s true concentration in alternative investments and because the firm used inaccurate risk ratings of products to increase allowable concentration levels.
Alternative investments is a term used to describe investments with characteristics atypical of traditional stocks and bond investments. Alternative investments are usually products or funds that contain a unique type of risk reward exposure. For example, a fund that invests only in one sector or type of product may be considered an alternative investment. Alternative investments include popular products such as Real Estate Investment Trusts (“REIT”), private placements, hedge funds, derivative products, and other leveraged or exotic funds.
Alternative investments sold by VSR include: Atlas Resources Public 18-20 oil and gas, Behringer REIT, CB Richard Ellis Realty Trust, CNL Income, 2nd Offering, Cole Credit Property Trust, ICON 11, Inland American, SBS REIT, Odyssey Diversified, Arciterra Note Fund, MPF Income Fund 22 LLC, DBSI 2008 Notes Corporation, APC 2005-B, Black Diamond Energy, Inc., Waveland Capital.
According to FINRA, VSR’s supervisory procedures provided that no more than 40-50% of a client’s exclusive net worth could be invested in alternative investments. VSR, through Beary, allegedly applied a “discount” factor to certain alternative investments that reduced the value of a customer’s investment in the alternative investments and allowed the customer to purchase a greater concentration in alternative investments without violating the firm’s guidelines. In addition, VSR allegedly assigned a lower risk category to alternative investments in contradiction to the stated risk level identified by the investment in its offering documents. For instance, VSR allegedly changed the risk rating for the Behringer Harvard REIT from “High Risk/Moderate to “Moderate.”
Despite VSR’s attempts to manipulate its procedures in order to increase sales of alternative investments, FINRA alleged that VSR still exceeded the 40% concentration guidelines even when applying the discounts. A review of 24 client accounts during the time period revealed at least 30 investments in alternative investments that exceeded the 40% concentration guidelines.
The attorneys at Gana LLP are experienced in investigating claims concerning alternative investments. 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.