All brokers and broker-dealers have an obligation to ensure that their investment or investment strategy recommendation is suitable for the customer. All sales efforts must be reasonable and appropriate for the investor based upon the investor’s risk tolerance, investment objectives, age, financial circumstances, other investment holdings, experience, and other facts or information disclosed by the investor.
With respect to the sale of private placements, regulators have found significant problems in the due diligence and sales efforts of some brokerage firms when selling private placements to investors. These problems include fraud, misrepresentations and omissions in sales materials and offering documents, conflicts of interest, and suitability abuses.
In order for a brokerage firm to meet its due diligence obligation, the brokerage firm must make reasonable efforts to gather and analyze information both about the private placement and the customer the security is being sold to. Private Placements are considered “alternative investments” and are inherently speculative. Consequently, a broker must also ensure that an investment recommendation in a private placement is suitable for the particular customer. The broker must ensure that the client can withstand the risk taken and not imperil the client’s account by concentrating their assets in speculative investments.
Recently, FINRA sanctioned broker Karen Geiger (Geiger) over allegations that she sold unsuitable private placements to one couple and provided misleading advertisements to four customers. Geiger currently works as a registered representative at Wall Street Strategies, Incorporated (WSSI).
Geiger sold GWG Renewable Secured Debentures (GWG Debentures), a private placement security. GWG Holdings, Inc., (GWG) GWG Debenture’s underlining company, purchases life insurance policies on the secondary market at a discount to the face value of the policy. Once purchased, GWG pays the policy premium until the insured dies and then collects the face value of the insurance. The policies purchased by GWG, according to the prospectus, are not collateral for the GWG Debentures obligation. The prospectus also states that the GWG Debentures are speculative investments and involve a high degree of risk. Further, the GWG Debentures are illiquid and investors do not have access to their principal prior to maturity under most circumstances unless a 6% prepayment fee is paid.
FINRA alleged that Geiger recommended an unsuitable concentration in the GWG Debentures to a retired couple. The couple stated that their sources of income were a pension and social security. The couple has a moderate risk tolerance and an investment objective of long-term growth while neither investor had extensive financial experience or knowledge. The couple’s objective was to invest to generate income to reduce their mortgage balance.
According to FINRA, Geiger recommended that the couple purchase a seven-year GWG Debenture by withdrawing cash in their IRA account and using other funds. The couple invested $206,000 in the GWG Debentures representing approximately 20% of their liquid net worth and 14% of their total net worth. FINRA found that the recommendation to purchase more than $200,000 in a high-risk, illiquid, alternative investment for seven years was unsuitable based on the customer’s investment profile and that the broker lacked a reasonable basis to make the recommendation.
In addition, FINRA alleged that Geiger distributed GWG Debentures brochures to four customers. The brochures wrongly stated that the debentures were secured by all the corporate assets of GWG. However, the prospectus for the GWG Debentures stated that the policies were not collateral for the debentures.
FINRA suspended Geiger for 30 days and ordered the broker to pay a $15,000 fine and disgorgement of $2,000 in commissions. The attorneys at Gana LLP are experienced in investigating claims concerning misrepresentation of private placement 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.