FINRA on Friday fined a mid-sized broker-dealer, Kingswood Capital Partners, $150,000 as part of a settlement that alleged the broker-dealer from March 2019 through June 2019 failed to reasonably supervise a former advisor’s recommendations of illiquid alternative investments to three senior customers.
The unsuitable investments included sales of GWG L bonds, which were issued by GWG Holdings and are now virtually worthless after GWG declared bankruptcy in 2022.
In one instance, the unnamed financial advisor recommended an 81-year-old client, with an annual income of less than $50,000 and net worth – not include primary residence - of no more than $100,000 buy $96,000 of GWG L bonds, according to FINRA.
In another instance, the rep recommended a 66-year-old client with a net worth of no more than $250,000 invest $88,000 in GWG L bonds.
Alternative investments typically carry higher fees and commissions than plain vanilla stock and bond mutual funds. Financial advisors and their firms expose themselves to sales problems at times with such products.
Close to 40 broker-dealers sold about $1.6 billion in speculative, illiquid GWG L bonds before GWG declared bankruptcy in 2022, leaving customers who bought the product in the lurch.
“A firm should not let an 80-year-old client buy 90% of any product, let alone GWG,” said Adam Gana, a plaintiff’s attorney. “Any amount of reasonable due diligence at the time would have shown that GWG was unsuitable.”
Kingswood Capital, with 200 financial advisors, neither admitted or denied FINRA’s findings as part of the settlement.
But the firm’s chief compliance officer, Michael Alsoraimi, on Monday said that the advisor’s work to load up clients’ account with GWG bonds and other alternative investments happened at a different broker-dealer, Chalice Capital Partners, that Kingswood bought in 2020, or the year after the alleged sales and supervision violations.
“These are legacy issues we have been dealing with and are linked to the purchase of Chalice,” Alsoraimi said. “The settlement with FINRA came more than six years after event in question, and because of the lack of record for the transactions and the fact that the rep was no longer working with us, we accepted it.”
Meanwhile, the GWG saga doesn’t appear to be going away anytime soon. Just last month, Bradley Heppner, the former chair of GWG and a related company, Beneficient, was charged by the Department of Justice with five counts, including securities and wire fraud, related to a scheme to steal $150 million.
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