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Last month Leland O. Stevens, a former broker with Great American Advisors Inc., settled a disciplinary action against him after he served up his unwitting customers to a Ponzi scheme.

The Financial Industry Regulatory Authority (FINRA) filed a complaint against Stevens last year for his role in the sale of promissory notes that turned out to be part of the fraudulent scheme.

Stevens Submitted an AWC

Stevens submitted a Letter of Acceptance, Waiver and Consent (AWC) to settle the charges, through which he consented to the entry of findings without admitting or denying the findings. The AWC was accepted by FINRA on Feb 27.

According to the AWC

Stevens solicited and sold fraudulent promissory notes, issued by Queen Shoals LLC and related entities, between October 2008 and April 2009 while he was registered with Great American, a FINRA-member firm in Virginia.

Twelve of Stevens’ customers invested about a total of about $565,000 in the fraudulent notes. The lost almost all of their money.

Through the AWC, Stevens was ordered to pay restitution to the customers of $100,000, and to disgorge the $16,900 he made in commissions, also to be paid to the customers. In addition, he was suspended from association with any FINRA member firm in any capacity for two years and fined $10,000. He was fired by Great American in 2009.

Separate from the FINRA action, Stevens consented in July 2011 to a settlement order to resolve an action brought by the Virginia Division of Securities and Retail Franchising for the same misconduct. The state ordered Stevens to pay a $10,000 penalty.

Without performing adequate due diligence, Stevens sold promissory notes to his customers as safe investments with unrealistically high rates of return. The returns were supposed to be generated from investments in precious metals, foreign currency and index trading, the AWC said. The notes promised interest rates of 12 percent to 18 percent.

The funds were used to further a Ponzi scheme run by the owners of the Queen Shoals entities, however, and the role Stevens played violated multiple rules of FINRA and the National Association of Securities Dealers (NASD), a FINRA predecessor.

The rule violations included lack of a reasonable basis to recommend these unsuitable notes to customers, sale of unregistered securities, failure to obtain the approval of his firm, and the dissemination of misleading and incomplete advertising materials that promoted the investments, the AWC said.

The Queen Shoals Ponzi scheme was perpetrated by a husband and wife identified in the AWC only as SH and CH. Through sale consultants, a website and other advertising they persuaded investors to sink their retirement savings into the Queen Shoals entities.

Investors were promised a return of the principal amount at maturity plus interest at a specified annual rate, the AWC said. Over three years, SH and CH raise about $32.5 million from 500 investors before it was discovered that they were taking some of the funds invested in Queen Shoals to make quarterly interest payments to prior investors, a classic Ponzi scheme.

The balance of the investors’ funds was either sunk into risky private investments or misappropriated by SH and CH to pay personal expenses and commissions to sales consultants like Stevens, the AWC sad.

In September 2009, the scheme was detected and Queen Shoals assets were frozen. SH was later convicted of securities fraud, mail fraud and money laundering. In March 2011, SH was sentenced to 22 years in prison.

Stevens’ involvement with Queen Shoals began in 2008 when he attended an information session and met SH, the AWC said. Among a long list of other falsehoods, Stevens was informed the promissory notes did not have to be registered with the SEC, that they were safe investments backed by precious metals as collateral, and that they were being sold through private placements and not to the public at large.

Before he went looking for customers to invest in the Queen Shoals notes, the AWC said, Stevens reviewed the company’s website. This should have alerted him to the fact that the Queen Shoals notes were being marketed to the general public on the Internet, which directly contradicted what Stevens had been told about private placements.

Despite Stevens total lack of experience in foreign currency trading and the other types of trading Queen Shoals said it was pursuing, he never sought any documentation from Queen Shoals to verify its trading activities, the AWC said. Nor did he ask to review Queen Shoals’ financial statements, or discuss his plans to sell Queen Shoals promissory notes with anyone at Great American. In short, Stevens relied on the unverified and self-serving statements of the Ponzi scheme grifters.

Among those Stevens solicited to buy the Queen Shoals notes, eight were his existing customers at Great American and four others were approved outside clients. Six out of the 12 customer were over the age of 65 who used their retirement savings to invest in the sham notes.

The notes had a 60-month term and promised to pay unrealistic annual interest rates of 12 percent to 18 percent. Based on Stevens’ recommendation, the 12 customers invested amounts running from $10,000 to $286,000, and all but two investors lost their principal, the AWC said.

To earn his $16,900 in commissions from these sales, Stevens liquidated the customers assets and transferred funds to Queen Shoals, the AWC said. He also prepared the paperwork for the customers to sign, among other things.

The story was essentially the same for all 12 defrauded customers. The people who lost the most were identified in the AWC only as WB and SB, a married couple both in their late 60s. They had been customers of Stevens for about five years.

As Stevens’ recommended, WB and SB liquidated 75 percent of their retirement savings to invest $286,000 in two Queen Shoal Notes. Their money had been placed previously in conservative investments such as in mutual funds and individual retirement accounts.

The couple invested $204,000 in the first note in January 2009, and $82,000 in the second note in March 2009. Pursuant to the terms, WB and SB were supposed to receive interest at an annual rate of 16 percent, to be paid quarterly over a term of 60 months. They received a single quarterly payment of $1,200, the AWC said.

Moreover, the couple’s son, 37-year-old CB, invested $55,000 in a Queen Shoals note, also based on Stevens’ recommendation. The note promised interest at an annual rate of 14 percent to be paid at maturity. He never received a payment.

Public Disclosure Records on Stevens

As a result of his involvement in the Ponzi scheme perpetrated SH and CH, Stevens was terminated by Great American in November 2009. He is no longer registered or associated with a FINRA member.

Guiliano Law Group

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