Brookstone Securities Inc. of Lakeland, Fla., was fined $1 million after a hearing panel of the Financial Industry Regulatory Authority (FINRA) found the broker-dealer made fraudulent sales of collateralized mortgage obligations to elderly, unsophisticated investors.
Brookstone Hearing Panel Decision
Antony L. Turbeville, the firm’s owner and former CEO, and Christopher Kline, one of its brokers, were also found to have engaged in the fraudulent sales, according to the 71-page decision from the hearing panel, dated May 31. FINRA did not announce the decision until June 4.
Bookstone Fined & Ordered to Pay Restitution
In addition to the fine, FINRA ordered Brookstone to pay more than $1.6 million in restitution to customers. Of that amount, $440,600 was to be paid jointly and severally by Brookstone and Turbeville, and roughly $1.2 million was to be paid jointly and severally by Brookstone and Kline.
Turbeville & Kline Permanently Barred, Lacy Suspended
The hearing panel permanently barred Turbeville and Kline from the securities industry. David Locy, Brookstone’s former chief compliance officer was fined $25,000, suspended for two years, and permanently barred from assuming any principal or supervisory role.
The Fraud & Its Victims
The defrauded customers ranged in age from 68 to 98. Two were elderly widows with little or no investment experience who were vulnerable after their husbands died. The decision said Kline told the widows that the collateralized mortgage obligations (CMOs) were government-guaranteed bonds and that they could not lose their money. Kline also ramped up the risk by trading on margin.
According to the decision, Brookstone, Turbeville and Kline intentionally or recklessly mispresented the CMOs in violation of federal securities laws and FINRA rules. They sold the CMOs as a safe means to obtain a high rate of return through government backed bonds.
In fact, these CMOs were high-risk investments subject to extreme vagaries in maturity, cash flow and value because of changing interest rates, the decision said.
The government only backed the CMOs as to credit risk — the risk that the CMOs would default — not as to other, greater risks such as interest rate sensitivity. Therefore, the decision said, there was no reasonable basis for the representations that Turbeville and Kline made to their elderly and unsophisticated customers that the CMOs were low risk because of government guarantees.
Brookstone has been a member of FINRA since 1983. The firm employs 198 registered brokers at 45 branch offices. See FINRA public disclosure records for a detailed history of disciplinary actions and customer disputes involving Brookstone, as well as Turbeville and Kline.
Turbeville and Kline made their fraudulent misrepresentations concerning CMOs from July 2005 through July 2007. The two also intentionally omitted material information during that time, the decision said. FINRA brought charges in the matter in December 2009.
All of the victimized customers were retired and were looking for alternative investments that were safer than equity investments. Turbeville and Kline induced these customers to purchase CMOs that were totally unsuitable for their risk profile by playing on their fears about losing all their assets to nursing homes and falling into poverty in their old age, the decision said.
Moreover, Turbeville and Kline were well aware of the negative effect that rising interest rates were having on CMOs by 2005, but they did not apprise their customers of the changing conditions and the increased risk, the decision said. Instead, they told customers that the CMOs were guaranteed by the government. They told their customers that their capital would be preserved and that they could expect returns of 10 percent to 15 percent.
During the two-years that Turbeville and Kline were selling these CMO bonds to the seven customers named in the December 2009 complaint, Brookstone made $492,500 in commissions on the sales, while the customers lost more than $1.6 million, the decision said.
As for Locy, the chief compliance officer, the FINRA hearing panel said he ignored his responsibility and did nothing to put a stop to the egregious conduct at Brookstone. Locy looked the other way while Turbeville and Kline sold vulnerable customers unsuitable CMOs.
The hearing panel concluded that Brookstone was responsible for Turbeville’s and Kline’s behavior. According to the decision, the firm never accepted responsibility for the misconduct and attempted to blame the customers for their own losses through Turbeville and Kline.
Brookstone, Turbeville and Kline have 45 days to appeal the hearing panel’s decision to FINRA’s National Adjudicatory Council, which may also call the decision for review. The decision becomes final after 45 days.
Investment News Report
According to a report from Investment News, Brookstone has said it will appeal the decision.
“This is a non-final decision by the FINRA hearing officer,” said Paul Richardson, the firm’s CEO. “We are appealing the decision and refuting the underlying allegations.”
Guiliano Law Group
If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.