Douglas William Finlay, Jr., a registered representative with Cadaret Grant, was suspended, fined, and forced to pay disgorgement by the Financial Industry Regulatory Authority after consenting to findings that Finlay engaged in an unsuitable recommendation and execution of a faulty transaction in his firm’s customer account. Letter of Acceptance, Waiver, and Consent, No. 2013035576601 (Apr. 9, 2015).
According to FINRA, Finlay over-concentrated Cadaret Grant customer EP’s assets by placing funds into an illiquid Real Estate Investment Trust. Subsequently, Finlay then had failed in providing disclosure to the client regarding the REIT Sale.
Non-publicly traded REITs have no public trading market. Instead of being able to sell these shares on an exchange, investors in non-publicly traded REITs, generally have to wait until the REIT is dissolved, usually within a finite period, to get their money back. Some REITs do however directly offer investors some form of redemption directly from the REIT, but these redemption provisions generally can be withdrawn or discontinued at any time, or may be subject or conditioned on other special circumstances.
Most non-publicly traded REITs are sold directly to small investors by networks of financial advisers and securities broker-dealers. It is often said that non-publicly traded REITs are sold not bought.
Investors are often unaware that these non-publicly traded REITs are often highly leveraged with debt and that while they may produce significant income for investors, at least initially, they are making these distributions by borrowing or are simply giving investors their money back. Moreover, these distributions are not guaranteed and in most cases are merely discretionary.
The AWC indicated that in 2009, Finlay had recommended to client EP the investment of 100% of the client’s funds into the REIT. EP reportedly indicated to Finlay that she was a moderate risk based investor who wanted to have her portfolio consist of growth and income. Finlay, according to the AWC, never disclosed to EP information regarding the REIT regarding the risk factors.
Additionally, according to the AWC, Cadaret Grant had a policy which limited investments into the REITS and alternative investments to a maximum of ten percent of the client’s net worth. In this case, according to the AWC, Finlay recommended that EP invest one hundred percent of her net worth which equated to $116,625, into the REIT products. Finlay reportedly received commissions totaling $6,639.23.
The AWC noted that Finlay had falsified EP’s account forms in order to circumvent his firm’s concentration limitations for investors by overstating the client’s net worth and annual income (EP’s net worth was $135,000 when Finlay represented it at $1,355,000, EP’s annual income was $70,000 compared with Finlay’s representation of $150,000).
FINRA found that Finlay’s conduct in recommending EP invest in the aforementioned fashion was not suitable considering that the client was a moderate risk investor who had objectives of income and growth, objectives which conflicted with the REIT’s aggressive characteristics. Consequently, Finlay’s punishment was a suspension from association with any FINRA member for eighteen months, $6,639.23 in disgorgement, and a $15,000 fine.
Public disclosure records via BrokerCheck reveal that on February 8, 2013, Finlay settled a dispute with a customer for $62,458.11 after a customer alleged misrepresentation and unsuitable investments.
Firms and individuals, not surprisingly, are prohibited from unauthorized use of customer funds, borrowing of a customer’s securities or funds, forgery, non-disclosures or misstatements of material facts, and various deceptions and manipulations. Such conduct can also be found to violate criminal and other civil laws, and be subject to sanction from the federal and state government bodies.
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity.
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esquire, 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.
