The Financial Industry Regulatory Authority Inc. last week penalized another broker-dealer, Coastal Equities Inc., over sales in 2018 of private placement managed by GPB Capital Holdings.
But Finra, in the $418,000 settlement dated December 16 with Coastal Equities, cited the firm's failing to supervise one of its registered representatives, dubbed Rep A in the matter, by failing to reasonably investigate red flags. According to Finra, those included that the rep "was falsifying documents regarding customers' financial status, for example by recording false increases in the net worth and liquid net worth of customers."
The firm's failure to supervise the rep occurred between 2014 and 2018, according to Finra. Coastal Equities, with about 165 registered reps and financial advisers, accepted Finra's findings without admitting or denying them. Charles Reiling, the firm's president, did not return a call Thursday morning to comment on the matter.
The issue at hand, in line with other broker-dealers' settlements and fines with Finra related to GPB sales, was that the firm negligently failed to tell investors that in the spring of 2018, GPB had failed to make timely required filings, including audited financial statements for its largest funds, with the Securities and Exchange Commission, according to Finra. That was in violation of Finra’s Rule 2010, the standards of commercial honor and principles of trade rule.
Brokers can sell private placements, for the large part, only to accredited investors, or those with $1 million in net worth. The unnamed Coastal Equities rep circumvented firm rules that topped out client allotments to alternative investments at 35% in almost two dozen transactions by inflating or boosting their liquid net worth, according to Finra.
Using white out and other means, the rep doctored financial information disclosure forms, according to Finra. The rep sold about $15 million of GPB Capital private placement in the four years in question.
"The majority of these alterations involved unsubstantiated increases in the customer's net worth, liquid net worth, or both," according to Finra. "In many instances, there were indications on the face of the documents that information had been whited-out and written over."
"In other cases, Rep A sent emails to customers attaching only the signature pages for documents related to the investment, including new account information forms, the disclosure forms, and subscription agreements," according to Finra. "Rep A then completed the remaining portion of the documents with financial information that was inflated and/or false."
In one instance, Rep A "caused the financial information for a customer to falsely reflect that his liquid net worth tripled, increasing from $4.5 million in May 2015 to $13 .6 million in September 2017," according to Finra. "By altering the forms and falsely inflating the customer's financial information, Rep A concealed the fact that, by September 2017, the customer's investments in alternative investments constituted approximately 75% of the customer's actual liquid net worth, far in excess of the firm's 35% concentration limit."
"These red flags should have caused the firm to investigate the accuracy of customer financial information Rep A submitted, but the firm failed to take any reasonable action," according to Finra.
The firm's penalty was in two parts: a fine of $150,000 and partial restitution to clients of $268,000.
GPB Capital, a New York-based alternative asset management firm founded in 2013, served as the general partner for limited partnerships formed to acquire income-producing companies such as auto dealerships and trash businesses. GPB eventually raised $1.8 billion from investors. GPB has been selling assets, but it has not yet released clear plans for investors to get back money from those transactions.
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