Geneos Wealth Management, a securities broker dealer headquartered in Centennial, Colorado, has been censured and fined $150,000.00 by Financial Industry Regulatory Authority (FINRA) based upon allegations that it failed to supervise alternative investment transactions, resulting in losses to Geneos Wealth Management customers. Letter of Acceptance, Waiver, and Consent No. 2019061764701 (March 18, 2022).
According to the AWC, between 2016 and 2018, stockbrokers recommended that customers invest in LJM Preservation and Growth Fund (LJM). The securities broker dealer failed to supervise those recommendations and sales.
The regulator states that there were no procedures or systems used by Geneos to identify if a mutual fund should be construed as an alternative mutual fund or complex product. This meant that no matter how complex or different the mutual fund was, it was placed in the category of ordinary mutual funds for purposes of a supervisor’s review of suitability. Those standards did not take into account the risks and rewards pertaining to the fund’s strategies.
The regulator states that there were no written procedures that would educate supervisors on how they should scrutinize a stockbroker’s alternative mutual fund recommendations.
The AWC additionally notes that the firm’s electronic trade review system was deficient because it did not address the risks pertaining to alternative mutual funds. This meant that recommendations of LJM Preservation and Growth Fund were not more closely reviewed for suitability, even in cases where investors had low tolerances for risk.
FINRA also finds that without reviewing LJM’s trading strategy and without imposing any limitations on LJM sales, Geneos’ affiliate registered investment adviser added the fund to its portfolio model. Between November 9, 2016, and February 6, 2018, $2,500,000.00 in LJM shares were sold to 80 customers. At least four customers were conservative investors.
The AWC states that LJM sustained an 80 percent loss in value between February 5-6, 2018, primarily due to market volatility. By March 29, 2018, LJM was liquidated and dissolved, locking in approximately 80 percent losses to those investors holding shares on February 6, 2018. FINRA states that Geneos failed to supervise, violating FINRA Rules 2010 and 3110.
The AWC also shows that investors were deprived of important information from Geneos as it relates to a 2018 GPB Capital offering. GPB Capital, an alternative asset management firm, launched limited partnerships between 2013 and 2018 for the purpose of owning income-producing properties. The regulator states that GPB Automotive Portfolio was one of them, and it was responsible for owning and managing auto dealerships.
FINRA states that GPB was on Geneos’ radar in February 2015. In 2015, GPB Automotive Portfolio and another GPB Capital limited partnership had been approved by Geneos to be recommended by Geneos stockbrokers.
The AWC states that GPB has been dealing with litigation since 2017, and at least one former operating partner accused the company of doctoring financial statements and concealing that it was defrauding investors. FINRA states that limited partnership interests in GPB Automotive Portfolio had been sold by Geneos in 2018. But when investors made their purchases, they were not informed by Geneos that GPB Automotive Portfolio had not yet filed audited financial statements with Securities and Exchange Commission (SEC). FINRA found that Geneos violated FINRA Rule 2010 for negligent omissions.
