The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm WFG Investments, Inc. (WFG) alleging a host of supervisory failures from March 2007, through January 2014. FINRA alleged that WFG failed to commit the necessary time, attention, and resources to critical regulatory obligations in supervising registered representatives including: (1) failure to conduct appropriate due diligence on a private placement offering that was sold by a broker away from the firm; (2) failure to supervise the private securities transactions of one of its brokers that were executed through the representative’s investment advisory firm; (3) failure to maintain a supervisory system to ensure customer transactions were suitable; (4) failure to enforce its written supervisory procedures regarding the sale of alternative investments; (5) failure to supervise statements made by one broker on his weekly radio broadcast; and (6) failure to timely report customer complaints and update the Forms U4 and U5 of its brokers.
WFG has been a FINRA member since 1988, conducts a general securities business, and is headquartered in Dallas, Texas. WFG currently has about 280 brokers operating out of 102 branch offices.
FINRA alleged that in 2007, a WFG broker by the initials “SGD” provided notice to the firm that he intended to sell a private placement offering FINRA called “ATMA” to his customers. ATMA was designed to offer an income stream to investors based revenues form automated teller machines (ATMs). In evaluating a selling agreement with SGD, FINRA alleged that WFG assigned its compliance officer known by the initials “TS” to conduct due diligence on ATMA. TS owned a 5% interest in ATMA and SGD was the 90% owner and the operator of ATMA, had no prior experience in structuring and offering private placement investments. FINRA found that the entity that was to provide the ATM machines to ATMA was engaged in fraudulent business practices and most of the ATMs were fictional. FINRA found that WFG declined to enter into a selling agreement with SGD, but permitted him SGD to sell interests in ATMA as private securities transactions.
Between October 2007, and December 2007, FINRA found that SGD sold $ 1,024,000 in interests to ATMA to seven investors. Due to the fraudulent business activities these WFG customers lost 100% of their investments. FINRA found that WFG was required to supervise these private securities transactions as if they were executed on behalf of WFG. FINRA found that WFG failed to supervise this activity or conduct adequate due diligence into ATMA and thus failed to detect and follow up on red flags.
In another example of supervisory failures FINRA alleged that in 2009, WFG permitted one of its brokers by the initials “RB” to continue operating his investment advisory firm by the initials “EC.” Through the advisory firm, FINRA alleged that RB was involved in the structuring and sales of two private equity funds, the HO Fund, and the HD Fund. Both of these funds were heavily invested in BFC, a now-defunct entity that was operated out of EC’s office space. FINRA found that both funds’ holdings in BFC exceeded the 50% limit set forth in their respective offering documents. FINRA alleged that the funds’ investors were kept unaware of the substantial declines in their investments over a six-month period in 2013 because the valuations in the funds were unchanged on the account statements prepared by EC.
In this way, FINRA found that WFG failed to conduct due diligence into the funds and failed to detect that the funds’ positions in BFC substantially exceeded the 50% threshold set forth in the offering documents. Moreover, FINRA found that the Firm failed to monitor the customers’ EC account statements, and thus was unaware that the private equity valuations were not being updated on a timely basis.
Investors who have suffered losses through their brokerage firm’s recommendations may be able recover their losses through securities arbitration. The attorneys at Gana LLP are experienced in representing investors in cases of unsuitable investments and failure to supervise their representatives. Our consultations are free of charge and the firm is only compensated if you recover.