Securities Lawyers Blog
Previously financial advisor Blake Levy (Levy), previously employed by brokerage firm Joseph Gunnar & CO. LLC has been subject to at least one disclosable event. These events include one regulatory event. According to a BrokerCheck reports most of the recent customer complaints concern either corporate debt securities or alternative investments such as direct participation products (DPPs) like business development companies (BDCs), non-traded real estate investment trusts (REITs), oil & gas programs, annuities, and private placements. The attorneys at Gana Weinstein LLP have represented hundreds of investors who suffered losses caused by these types of high risk, low reward products.
FINRA BrokerCheck shows a final customer complaint on June 20, 2023.
Without admitting or denying the findings, Levy consented to the sanctions and to the entry of findings that he recommended that customers purchase membership interests in two funds for $2,260,299 through two private placement offerings, without having a reasonable basis to make those recommendations. The findings stated that Levy did not perform reasonable diligence on the funds before recommending them to customers and failed to understand the risks related to the investments. This failure stemmed, in part, from Levy’s negligent review of the offering materials, which was cursory and only aimed at giving himself a high-level understanding of the offering terms. The findings also stated that Levy made negligent omissions in connection with the sale of membership interests in the funds, in violation of FINRA Rule 2010, both independently and in contravention of Section 17(a)(2) of the Securities Act of 1933. When he sold membership interests in the funds to customers, Levy negligently failed to inform them about his role in the management company that managed the funds and the sources of his potential compensation. Levy also used offering materials that did not disclose these material facts. Levy was one of two equal owners in the management company that managed the funds and, in that capacity, was entitled to compensation from three sources: the management fees, the placement agent fees, and the performance fees. Neither the offering materials nor Levy disclosed that these fees would not be paid entirely to the placement agent, but instead would be divided among the placement agent, the management company, and the selling broker. Levy, by virtue of his role in the management company and as a selling broker, was entitled to receive a portion of the placement agent fees. Because Levy never fully reviewed the offering materials, he was incapable of correcting the omissions therein.
Alternative investments, including nontraded REITs, oil and gas offerings, and equipment leasing products, are examples of DDPs. Due to their steep costs and fee structures, these alternative investments are nearly always unsuitable and seldom yield profits for investors. To push these subpar investments, brokers are given additional commissions, leading to perverse incentives that manipulate the market.
Several studies have confirmed that Non-traded REITs underperform publicly traded REITs with some showing that Non-Traded REITs cannot even beat safe benchmarks, like U.S. treasury bonds. Those selling these products must disclose to investors that non-traded REITs yield lower returns than treasuries and carry significant risk and illiquidity—yet they almost never comply. Since there is no additional return to justify the higher risk and illiquidity, these alternative investment products are typically unsuitable for investors.
Brokers have a responsibility treat investors fairly which includes obligations such as making only suitable investments for the client after conducting due diligence. Due diligence includes an investigation into the investment’s properties including its benefits, risks, tax consequences, issuer, history, and other relevant factors. Appropriate due diligence would identify that an alternative investment’s high costs, illiquidity, and conflicts of interests that would make the investment not suitable for investors. Investors often fail to understand that they have lost money until many years after agreeing to the investment. In sum, for all of their costs and risks, investors in these programs are in no way additionally compensated for the loss of liquidity, risks, or cost.
Unfortunately, these types of alternative investment products continue to popular among brokers due to their high commissions. In order to counter the perverse incentives to sell these flawed product many states now limit investors from investing more than 10% of their liquid assets in Non-Traded REITs and BDCs. Many states impose these limitations because these investments do not benefit investors.
Levy has been in the securities industry for more than 17 years. Levy has been registered as a Broker with Joseph Gunnar & CO. LLC since 2019.
Investors who have suffered losses are encouraged to contact us at (800) 810-4262 for consultation. At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts. Claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.