Federal securities regulators Tuesday hit Cadaret Grant & Co. Inc., an independent broker-dealer based in Syracuse, N.Y., with penalties totaling more than $1.7 million in enforcement actions related to the firm's failure to oversee its registered representatives.
The Securities and Exchange Commission
imposed $938,194 in disgorgement and penalties against Cadaret brokers and the firm for unsuitable sale of complex investment products tied to oil futures.
The Financial Industry Regulatory Authority Inc.
fined Cadaret $800,000 for failing to establish "a reasonably-designed supervisory system" across several areas of its business, including sales of variable annuities.
The SEC order alleges that between January 2015 and December 2016, Cadaret Grant brokers recommended that their clients buy and hold VelocityShares 3X Long Crude Oil ETN, an exchange-traded note that uses triple leverage linked to crude oil futures.
Its prospectus warned that the investment should not be held for more than one day and that it offered no direct exposure to oil prices. Nonetheless, Cadaret Grant brokers recommended the ETN to investors, seeking gains based on an increase in oil prices. The investors lost more than 90% of their investments.
The SEC order also alleged that Cadaret Grant failed to supervise the firm's brokers and prevent unsuitable sales of nontraditional exchange-traded products.
The firm agreed to a fine of $500,000 as well as disgorgement of $12,296.
Firm president Arthur Grant will pay a $100,000 fine, and Beda Lee Johnson, the firm's chief compliance officer, will pay a $75,000 fine. Eugene Long, a Cadaret Broker who recommended about $400,000 worth of the ETN to approximately 30 clients, will pay a fine of $250,000.
"Brokers have an obligation to understand complex products and their risks before recommending them to customers," Daniel Michael, chief of the SEC Enforcement Division's complex financial instruments unit, said in a statement. "As this action shows, we will continue to hold people accountable at every level for unsuitable recommendations that harm investors and for the failures that allow those recommendations to be made unchecked."
The firm and the individuals involved in the SEC and Finra cases did not admit nor deny wrongdoing. Lawyers for the firm, Mr. Grant, Ms. Johnson and Mr. Long were not immediately available for comment.
In its case, Finra alleged that Cadaret failed to adequately supervise its brokers from August 2012 through May 2017. The regulator said that three Cadaret compliance personnel each week manually reviewed blotters for the firm's 676 registered representatives, which led to problems in monitoring the suitability of variable annuity sales.
Earlier this year, Mr. Grant
sold his firm to Atria Wealth Solutions.
