Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) sanctioned financial advisor John H. Towers (Towers) of VSR Financial Services, Inc. (VSR) concerning allegations of unsuitable sales of over $6,000,000 in alternative investments including oil and gas interests, real estate investment trusts (REITs), and other speculative private placement investments to an investor. FINRA’s determinations in this matter is significant because some in financial industry take the position that wealthy customers are automatically sophisticated and therefore fair game to recommend positions in speculative private placement securities. The theory goes that if you have a lot of money then it is ok for you to lose some of it speculating in alternative investments.
Towers entered the securities industry in 1970. From 2002 until December 2013, Towers was associated with VSR. According to Towers’ BrokerCheck at least 14 customers have filed complaints against Towers. The vast majority of those complaints involve claims concerning the improper sale of various private placement securities.
FINRA alleged that in September 2005, Towers recommended that a married couple invest $25,000 in APC 2005-B, a high risk private placement. Over the next five years, FINRA found that Towers continually recommended that the couple make an additional eighty-eight investments in private placements and REITs totaling approximately $6,259,400 and representing approximately 72% of their investments purchased at VSR. FINRA alleged that the private placements and REITS were all described in the offering documents as high risk investments. FINRA also found that the couple had stated a moderate risk tolerance on their new account forms and specified that no more than 10% of their accounts were to be invested in high risk products.
FINRA found that the couple, in consultations with Towers, expressed that they were uncomfortable with the volatility of the stock market. FINRA found that the recommend investments were inconsistent with the couple’s limited risk tolerance. FINRA found that by December 28, 2010, the couple had approximately 72% of their portfolio concentrated in high risk private placements and REITs. FINRA concluded that the couple’s investments in high risk products was not suitable. As a result, FINRA found that Towers conduct violated NASD’s suitability rule.
FINRA also found that Towers provided consolidated statements to the couple for their five accounts with VSR. According to FINRA, Towers used the consolidated statements to report to the couple the value of all of their investments. FINRA alleged that Towers manually entered values for the private placements and REITs on the statements. According to FINRA, VSR instructed its registered representatives that it was “never appropriate to show the customer’s original cost basis as the current value’ once the Rep or firm [was] aware that the investment [had] declined in value.”
Despite VSR’s instructions, FINRA found that Towers valued the investments himself using prices that had no correlation to prices published by VSR. FINRA found that Towers, despite knowing that the values of the investments had declined, listed the couple’s original cost basis as the value of the investments rather than the current value specified by VSR. FINRA stated that the March 26, 2009, pricing Towers used differed significantly from the pricing provided by VSR. FINRA found that thirty-three non-conventional investments listed by Towers at the cost basis were valued by VSR at a value of one penny for each investment. FINRA found that Towers’ statements vastly over inflated the value of these investments.
The attorneys at Gana Weinstein LLP are experienced in investigating claims concerning the unsuitable sale of alternative investments including REITs and oil and gas direct participation investments. Our consultations are free of charge and the firm is only compensated if you recover.