Cabot Lodge Securities LLC a securities broker dealer headquartered in New York New York has been charged by Financial Industry Regulatory Authority (FINRA) Department of Enforcement in a Complaint containing allegations that (1) Cabot Lodge failed to supervise a non-traded real estate investment trust initial public offering and (2) the securities broker dealer poorly advised at least one elderly customer in regard to non-traded real estate investment trust transactions. FINRA Department of Enforcement v. Cabot Lodge Securities LLC Disciplinary Proceeding No. 2014041541401 (Jan. 2, 2020).
According to the Complaint, between August of 2012 and February of 2016, Cabot Lodge Securities took part as dealer manager in a non-traded real estate investment trust initial public offering. Allegedly, the organization and offering expenses for this IPO were unreasonable and excessive; and there was a lack of disclosures made to investors in regard to the compensation of the securities broker dealer’s representatives. The Complaint stated that the underwriting and sales processes were not reasonably supervised by the securities broker dealer.
Allegedly, Cabot Lodge Securities personnel disregarded their duties to oversee the organization and offering expenses to ensure compliance with FINRA Rules. The Complaint stated that more than fifteen percent of gross offering proceeds went towards overall organization and offering expenses; and more than ten percent of the proceeds went towards underwriting compensation except for those securities which had been purchased by reinvestments of distributions. FINRA claimed that the securities broker dealer’s conduct in this regard was violative of FINRA Rules 2010 and 2310(b)(4).
In addition, FINRA stated that prospectuses did not identify that restricted shares of the common stock of the real estate investment trust would be awarded to certain individuals associated with the securities broker dealer which would constitute an item of underwriting compensation. FINRA alleged that Cabot Lodge’s conduct in this regard was violative of FINRA Rules 2010, 2310(b)(3) and 5110(c). The Complaint stated that Cabot Lodge’s failure to comply stemmed from its failure to create and implement adequate supervision systems and written supervisory procedures aimed at complying with FINRA Rules 2310 and 5110. FINRA Department of Enforcement alleged that the securities broker dealer’s failure to supervise in this regard was violative of FINRA Rules 3110(a) and (b).
The Complaint also alleged that Cabot Lodge did not have an adequate basis to conclude that its recommendations to an elderly customer were appropriate given the customer’s investment profile. Allegedly, the non-traded real estate investment trust products were only appropriate for a small group of customers who were able to properly analyze the risks and who had the financial ability to take on the risks. FINRA indicated that the securities broker dealer advised HS – a seventy-two year old investor who only intended on taking moderate risk and who considered income a priority – to liquidate municipal bonds to make a $75,100.00 purchase in a non-traded real estate investment trust.
FINRA alleged that the investment recommended to HS posed a substantial risk concerning distributions and the issuer lacked any operating history. The Complaint stated that fifty-seven percent of HS’ liquid net worth was tied up in the non-traded real estate investment trust. Allegedly, the recommendation failed to be suitable given the customer’s investment objectives, existing holdings, risk tolerance and investment experience. FINRA Department of Enforcement alleged that Cabot Lodge’s conduct was violative of FINRA Rules 2010 and 2111.
