Brian Lawrence Stephan of Xenia Ohio a stockbroker formerly employed by LPL Financial LLC and Commonwealth Financial Network has been charged by Financial Industry Regulatory Authority (FINRA) in a Complaint alleging that Stephan engaged in unsuitable mutual fund trading and the mismarking of transactions and switch forms. Department of Enforcement v. Brian Lawrence Stephan Disciplinary Proceeding No. 2014042022401 (Aug. 17, 2018).
According to the Complaint, customer TF established a brokerage account in May of 2012, at a time that TF was eighty-eighty years old. The Complaint stated that to fund the accounts, $780,000.00 had been transferred from investment advisory accounts jointly held by TF and her then deceased sister. TF’s brokerage account documentation apparently indicated that her objective for investing primarily consisted of capital preservation and income. TF reportedly depended on other people to manage her investments given her lack of investment expertise. Additionally, her sixty-five-year-old niece, PJ, who was listed as her power of attorney, depended on the advice provided by others given PJ’s lack of investment expertise. Stephan was therefore tasked with advising TF with respect to her investments.
The Complaint stated that starting in May 2012, TF was advised to purchase class A mutual funds in ten different families of funds. Five investment transactions had been placed on May 21, 2012, and only one of those, the Optimum Large Cap Value Fund, apparently provided a breakpoint discount based on a $75,000.00 minimum investment being made. Apparently, under Stephan’s recommendations, $75,000.00 had been invested by TF in Blackrock Large Cap Value Fund; $75,000.00 in Columbia Marsico Growth Fund; $75,000.00 in John Hancock Classic Value Fund; and $75,000.00 in Oppenheimer Rising Dividends Fund. Apparently, only $70,000.00 had been invested in the Optimum Large Cap Value Fund, precluding TF from obtaining a breakpoint discounts.
The Complaint alleged that on June 1, 2012, TF made five additional purchases based on Stephan’s recommendations. Evidently, funds recommended between May 21, 2012 and June 1, 2012 contained the same or similar investment holdings and strategies. Particularly, four of those mutual funds had been comprised of large cap value funds, and the fund companies selected for investment each provided a diverse array of mutual funds within a single family.
The Complaint stated that on June 5, 2012, TF’s objective for investing had been changed by Stephan to growth and income. Over the following days, the Complaint stated that Stephan recommended more of TF’s funds be placed in the speculative investments, including a $10,000.00 purchase in Optimum Large Cap Value Fund on June 18, 2012. However, TF only received a breakpoint discount on this $10,000.00 purchase since the May 21, 2012 purchase did not trigger a breakpoint discount.
The Complaint alleged that four new fund families had been purchased by TF in November of 2013 according to Stephan’s recommendations: a $95,000.00 purchase of Neuberger Berman Long Short Fund; $90,000.00 purchase of Orinda Skyview Multi-Manager Hedged Equity Fund; $70,000.00 purchase of MainStay Epoch Global Equity Yield Fund; and $45,000.00 purchase of Delaware Emerging Markets Fund. Three of those purchases had apparently been made in amounts falling short of the requisite amounts for a breakpoint discount.
According to the Complaint, an additional $126,057.79 had been invested with Stephan on May 1, 2014, with proceeds from a condominium sale. Stephan allegedly advised the customer to buy class A shares in three more mutual fund families that TF had not invested in previously. Particularly, on May 5, 2014: $45,000.00 was invested in Munder Mid-Cap Core Growth Fund; $45,000.00 in Good Harbor Tactical Equity Income Fund; and 45,000.00 in Pacific Life Portfolio Optimization Moderate Fund. The Complaint alleged that TF would have been provided a breakpoint discount had she invested at least $50,000.00 in each of those funds.
In sum, the Complaint alleged that TF purchased twenty different mutual fund families based on Stephan’s recommendations. The Complaint stated that from May of 2012 to May of 2014, at least $60,000.00 in commissions had been paid by TF stemming from the class A mutual fund transactions executed in her account. Fifty percent of those funds had been purchased in amounts that were slightly below the breakpoint discount threshold. FINRA Department of Enforcement contended that Stephan’s recommendations in this regard led TF to pay commissions that were approximately twice what TF could have paid had her mutual fund investments been aggregated into fewer families of funds. Critically, Stephan purportedly raked in more commissions by way of his recommendations.
FINRA Department of Enforcement alleged that Stephan failed to possess an adequate foundation to advise TF to spread out her purchases among the mutual fund families given the higher rate of commissions assessed to TF. Stephan was also accused of lacking an adequation foundation to advise TF to buy fund shares in amounts that were between $5,000.00 and $10,000.00 below breakpoints. As a result, FINRA Department of Enforcement alleged that Stephan’s conduct was violative of FINRA Rules 2010, 2111 and NASD Rule 2310.
Stephan was also alleged in the Complaint to have mismarked order tickets. Apparently, from May 2012 to May 2014, Stephan recommended thirty-five transactions; however, they were marked as being unsolicited. Additionally, from October of 2012 to May of 2014, Stephan recommended sixty stock transactions but marked them as unsolicited.
The Complaint further alleged that Stephan falsified LPL’s Investment Switch / Exchange Disclosure forms on November 22, 2013 by stating that the switches were not solicited, and that they were being done because of TF’s dissatisfaction of performance. Those forms were purportedly falsified again by Stephan on February 21, 2014 – Stephan recommended investments that he claimed were unsolicited. FINRA Department of Enforcement alleged that Stephan’s conduct was violative of FINRA Rules 2010 and 4511.
Stephan’s registration with Commonwealth Financial Network was terminated as of December 1, 2017. Since then, he has been associated with American Wealth Management, Inc.
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