The Financial Industry Regulatory Authority (FINRA) recently sanctioned supervisor Gregory Bray (Bray) concerning allegations that Bray failed to adequately supervise the firm’s chief executive officer and compliance officer Matt Maberry (Maberry), who FINRA refers to by the initials “MM”, concerning sales of certain complex products and recommendations of Class A mutual fund shares. In September 1996, Bray became registered with Alton Securities Group, Inc. (Alton Securities) where the alleged misconduct took place.
FINRA alleged that Bray was responsible for supervising the sales activity of Maberry. Maberry was responsible for all other supervisory functions at the Alton Securities. FINRA found that Bray’s supervision of Maberry’s sales activity consisted of a daily review of a trade blotter reflecting trades made by Maberry to customers together with conversations with Maberry regarding trading activity.
FINRA found that Maberry recommended and sold certain complex products to his customers. For example, FINRA found that Maberry recommended and sold leveraged or inverse exchange traded funds and leveraged/inverse mutual funds. In addition, Maberry is alleged to have recommended and sold a steepener note designed to increase in value as the gap between short and long term interest rates increased. FINRA found that Maberry’s sales were unsuitable because he lacked a reasonable basis to recommend these products to his customers because he did not fully understand the potential risks associated with these securities.
FINRA also found that Maberry also recommended and executed 50 unsuitable purchases of Class A shares of leveraged/inverse mutual funds. As a background, Class A mutual fund shares are generally more expensive than Class B or C shares if used only for short-term trading. If held for long-term Class A shares tend to be cheaper for the investor. However, FINRA found that Maberry’s customers who purchased the Class A shares typically held them for less than a year and in some cases only for several months. Such conduct is a species of churning called mutual fund switching.
FINRA alleged that Bray failed to take reasonable steps to supervise Maberry’s sales of complex products by failing to ensure that Maberry understood the products. FINRA found that Bray himself was not familiar with the risks associated with some of the complex products and thus he had no basis for concluding that Maberry understood them. FINRA also concluded that Bray’s supervision with respect to Maberry’s recommendations of Class A shares of leveraged/inverse mutual funds was also inadequate. FINRA found that the fact that the Class A shares sold were not intended to be held long term should have been a red flag but that Bray failed to detect this red flag and also failed to detect Maberry’s short term trading of the Class A shares.
Investors who have suffered losses may be able recover their losses through securities arbitration. The attorneys at Gana LLP are experienced in representing investors in cases of selling away and brokerage firms failure to supervise their representatives. Our consultations are free of charge and the firm is only compensated if you recover.