The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Center Street Securities, Inc. (Center Street) concerning allegations that: 1) between approximately March 2012, and August 2013 Center Street, through multiple brokers, made unsuitable recommendations to customers to purchase GWG Renewable Secured Debentures, an illiquid and high-risk private placement investment; 2) Center Street failed to maintain an adequate supervisory system and adequate written supervisory guidelines to reasonably supervise the sales of GWG debentures; 3) between approximately February 2012, and November 2012, Center Street also distributed an inaccurate GWG sales brochure to over 100 customers; and 4) certain Center Street customer account forms contained inaccurate information about customer net worth or other information, and thus the firm failed to maintain accurate books and records.
Center Street Securities is headquartered in Nashville, Tennessee, has been a FINRA member since 1991, has approximately 67 branch offices and approximately 84 registered representatives. This is not the first time that FINRA has brought regulatory action concerning the actions of Center Street representatives. See Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales; FINRA Sanctions Michael Wurdinger and Anil Vazirani Over GWG Debenture Sales (FINRA sanctioned brokers associated with Center Street Securities, Inc.).
The notes are issued by GWG Holdings, Inc. (GWG) which purchases life insurance policies on the secondary market at a discount to the face value of the insurance policies. GWG pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit, hopefully, by collecting more upon the maturity of the policies than the payment of the policy and servicing of the premiums. The Debentures have varying maturity terms and interest rates ranging from six-month at an annual interest rate 4.75% to seven years at 9.50%. The prospectus for GWG stated that the investments were speculative and involve a high degree of risk, including the possibility of risk of loss of the entire investment. An investment in the GWG Debentures, as a private placement, is illiquid and investors will not have access to their principal prior to maturity.
According to FINRA, Center Street began selling the GWG Debentures to its customers in February 2012, and went on to sell it to 269 customers. Many of those sales occurred in states with specific suitability requirements that needed to be met. FINRA found that Center Street’s supervisory procedures during the relevant period failed to address any state specific suitability or qualified investor requirements applicable to the GWG Debentures. In addition, FINRA alleged that until April 2013, Center Street did not maintain written guidelines, in its written supervisory procedures or otherwise, regarding the concentration of investments in alternative products that would be suitable for customers. It wasn’t until April 2013, that FINRA found that Center Street established a formal policy that limited amounts invested in alternative products to 25% of total customer assets, with no more than 10% invested in any one non-traded alternative product.
FINRA did find that between approximately March 2012, and April 2013, the firm maintained unwritten internal guidelines concerning acceptable concentrations in alternative products. These unwritten guidelines allegedly limited cumulative investments in alternative products to 25% of a customer’s total net worth and investment in any one alternative product to approximately 10% of a customer’s total net worth. FINRA found that while these guidelines were orally conveyed to the firm’s sales force at events such as the annual sales conferences, the guidelines were not included as part of the firm’s written supervisory procedures.
To be continued in Part II…