C.L. King and Associates, Inc., headquartered in Albany, New York, along with the firm’s chief executive officer, Gregg Alan Miller, were charged by Financial Industry Regulatory Authority (FINRA) Department of Enforcement in a Complaint containing allegations that the firm and Miller engaged in the improper redemption of death put investments, and failed to develop and maintain adequate supervisory procedures associated with such death put investments. Department of Enforcement v. C.L. King and Associates, Inc., No. 2014040476901 (Apr. 18, 2016).
According to the Complaint, from January 2012 through March 2015, C.L. King and Associates had assisted in a scheme in which one of the firm’s customers, EACM, would be able to gain financially upon the deaths of elderly individuals who were terminally ill and vulnerable.
The Complaint stated that EACM, along with JL (EACM’s managing member), would ascertain the information about such individuals who were terminally ill. Once the individuals were identified by EACM, they were offered compensation ranging from $10,000.00 to $15,000.00, in return for joint brokerage accounts to be opened up by such individuals in the name of the individuals and JL. Apparently, from January 2012 through October 2013, C.L. King and Associates helped EACM arrange for the opening of thirty-six accounts with C.L. King and Associates in this regard.
The Complaint stated that although the accounts were jointly held, such terminally ill individuals were required by EACM to contractually agree to turn over their responsibilities and rights associated with the brokerage account assets. Apparently, the accounts were then used by EACM in order to purchase notes, bonds, and CDs that were market linked. Such products, according to the Complaint, all contained death puts that were designed to allow JL as well as EACM to take possession of the investments’ entire principal before the investments had matured, upon the terminally ill individuals’ deaths.
C.L. King and Associates, according to the Complaint, assisted via redeeming such death put investments on behalf of EACM, where such redemptions totaled an estimated $60,000.000.00. In connection with the transactions, C.L. King and Associates raked in an estimated $1,200,000.00 in profits.
FINRA’s Department of Enforcement alleged that C.L. King and Associates materially misrepresented aspects of the redemptions, notably concerning the firm’s failure to provide the issuers with all material information regarding the death put investments’ beneficial owners. Such issuers allegedly were not notified that the deceased individuals did not stand to benefit from such redemptions.
The Complaint stated that with respect to the redemption of such death put investments, C.L. King and Associates failed to disclose that the terminally ill individuals were not entitled to borrow, transfer, or withdraw the funds held in the jointly held accounts. JL, however, was reportedly able to purchase and sell the securities and funds. The Complaint further stated that C.L. King and Associates omitted that the terminally ill individuals’ heirs would not be able to take possession of any assets upon the individuals’ deaths. Allegedly, such terminally ill individuals did not even receive transaction confirmations or accounts statements with respect to the jointly held accounts.
FINRA alleged that C.L. King and Associates’ conduct of making material misrepresentations regarding the redemptions was violative of FINRA Rule 2010 and Securities Act of 1933 Section 17(a). The Complaint further alleged that between January 2012 through March 2015, C.L. King and Associates failed to develop and implement supervisory procedures associated with death put investments. C.L. King and Associates apparently had no procedures concerning death put investment business, nor did the firm ever review any disclosure statements or prospectuses pertaining to such investments to determine whether the aforementioned redemptions were valid. As such, FINRA alleged that C.L. King and Associates violated FINRA Rules 2010 and 3110.
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