Finra tags advisor for sales of GPB alternatives

"It’s frustrating to see Finra charging brokers after the nail is in the coffin of [clients'] portfolios," one attorney says.

The Financial Industry Regulatory Authority Inc. has penalized plenty of broker-dealers over sales of private placements manufactured by GPB Private Holdings, typically for selling the high-risk securities in 2018, when GPB had failed to file required audited financial statements for two of its biggest limited partnerships with the Securities and Exchange Commission.

Now, it appears that Finra’s enforcement office is starting to take a harder look at the individual brokers and financial advisors who sold the GPB private placements, which were limited partnerships formed to acquire income-producing companies such as auto dealerships and trash businesses. GPB raised $1.8 billion from retail investors starting in 2013, but it hit the skids five years later when it failed to file audited financials with the SEC.

On Monday, Finra fined a broker, Arni J. Diamond, $5,000, and suspended him from the securities industry for four months as a result of alleged unsuitable recommendations of GPB private placements to two clients that totaled $250,00 and occurred prior to 2018, according to Finra.

At the time he sold the GPB securities, Diamond was registered with a broker-dealer called Kalos Capital Inc., which a year ago said it was closing down and filing for bankruptcy because it was swamped with $9 million in legal fees and costs related to sales of GPB private placements.

Diamond couldn’t be reached Tuesday to comment as the phone to his eponymous firm in Jacksonville, Florida, had been disconnected. According to his settlement with Finra, he accepted the regulator’s findings in the matter without admitting to or denying them. Diamond has two pending customer complaints, according to BrokerCheck, and 13 settled customer disputes. He is not currently registered as a broker or financial advisor.

Finra penalized 15 broker-dealers a total of $3.7 million for sales of GPB Capital Holdings private placements dating back to the spring of 2018. The regulator appears now to be more focused on individual financial advisors who sold the product.

It may be too little too late, one attorney said.

“From my clients’ perspective, it’s frustrating to see Finra charging brokers after the nail is in the coffin of their portfolios due to speculative, overconcentrated positions in risky alternatives,” said Scott Silver, a plaintiff’s attorney. “In this day and age, it’s not hard to track brokers doing this kind of behavior that could be prohibited at time of sale. And it gives the investor no solace to see this kind of slap on the wrist years after the fact.”

According to Finra, one of Diamond’s clients made a $50,000 investment in one GPB private placement, Automotive Portfolio, in June 2015. At that time, the 67-year-old client did not have the annual income or net worth to be deemed an accredited wealth investor, and private placements are supposed to be sold only to such investors.

The second client made six investments in private placements totaling $200,000, which pushed the concentration of those investments in the portfolio to close to 30% of the client’s holdings. The client’s risk tolerance was moderate. An overconcentration of a client’s portfolio in such investments violates industry rules.

Both customers eventually settled with Kalos Capital regarding their complaints, but there’s no way of knowing whether the awards were paid in total or in part because the firm filed for bankruptcy last year.