David Michael Miller of Columbus, Ohio, a registered representative with Huntington Investment Company, was charged by Financial Industry Regulatory Authority (FINRA) Department of Enforcement in a Complaint alleging that Miller did not have reasonable grounds for believing his recommendations were suitable in purchases of unit investment trusts in one hundred and twenty-nine customer accounts. Department of Enforcement v. Miller, No. 20130368749-01 (Nov. 17, 2015).
According to the Complaint, from August 2012 – May 2013, Miller had recommended one hundred and forty-one unit investment trusts (“UITs”) which totaled an estimated $5,400,000 in one hundred and twenty-nine customer accounts. The Complaint indicated that prior to recommending the UITs, Miller made a limited, inadequate effort to educate himself regarding the products. FINRA alleged that Miller did not conduct sufficient research or undertake reasonable diligence to ensure he adequately understood features and risks of the UITs prior to recommending them.
FINRA defines a unit investment trust is a type of investment company that issues securities (referred to as units) representing undivided interests in a relatively fixed portfolio of securities. The securities are generally issued by a sponsor that assembles the UIT’s portfolio of securities, deposits the securities into a trust, and then sells units of the UIT in a public offering. The units are redeemable securities that are issued for a specific term, where each investor is entitled to receive a proportionate share of the UIT’s net assets upon redemption or termination.
Specifically, the Complaint indicated that Miler did not read the prospectuses for the UITs; did not know underlying closed end funds were leveraged or understand the associated effect that leverage entailed for the closed end funds and unit investment trusts; did not understand the volatility of the securities; did not understand characteristics of the UITS; did not understand the market for UITs if a customer were to attempt to sell prior to maturity; and did not understand the valuation of the UITs at maturity.
FINRA further alleged that Miller had negligently misrepresented and omitted to disclose certain material facts to seven customers in connection with their purchases of UITs totaling $964,000.00. Miller allegedly pitched the UITs to seven customers, where he indicated that the UITs could only lose value if bond rates rose or municipalities defaulted prior to the UIT maturity; that although the net asset value could fluctuate, so long as municipalities did not go into default and bond rates did not increase, that customers’ principal would be returned when the UITs matured; and that any losses from the net asset value fluctuation would be less than interest payments the customers would receive over the life of the trust.
FINRA alleged that Miller’s aforementioned statements were false. FINRA alleged that the net asset value could actually decline for reasons that have no relation to the bond rates or municipalities defaulting; that the value of the UITs that Miller sold could, and actually did, decrease substantially; and that the value at trust termination was based on the then-current value of the underlying closed end funds, not the value of the underlying municipal bonds at their maturities; and that the losses from the decline in the net asset value fluctuation could, and actually did, exceed the interest payments on the unit investment trusts.
FINRA alleged that Miller also failed to disclose certain aspects of the UITs to customers that ultimately complained about their UITS, while also making negligent misrepresentations of material facts to an eighth customer who invested in a UIT based on recommendations of another one of the firm’s representatives. Based on the aforementioned conduct by Miller, FINRA alleged that Miller violated FINRA Rules 2111 and 2010 for reasonable-basis suitability violations, and that Miller violated Rule 2010 for negligent misrepresentations and omissions of material facts.
FINRA Rule 2111 requires that associated persons have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer. FINRA will generally find this rule to be violated, as is the case with Greenfield, when the individual does not have a basis to believe that the recommendation is suitable for at least some investors, that the recommendation is suitable for a particular customer considering the customer’s investment objectives and financial profile, and (for the accounts where the individual is exercising discretion) that a series of recommended transactions are not excessive and unsuitable even if each transaction alone would be deemed suitable.
Public disclosure records via FINRA’s BrokerCheck reveal that Miller has been subject to twelve disclosure incidents. On April 03, 2013, Miller settled a customer dispute for $11,061.70 after a customer alleged misrepresentations, suitability, and poor performance. On June 13, 2013, Miller settled a customer dispute for $17,670.13 after a customer made allegations of misrepresentations in the sale of a unit investment trust that he purchased.
On August 15, 2013, Miller settled a customer dispute for $29,860.03 after a customer alleged that Miller guaranteed him a specific rate of return plus his original investment at maturity on his unit. On August 15, 2013, Huntington Investment Company accepted Miller’s voluntary resignation amid allegations of Miller violating industry standards of conduct.
On August 22, 2013, Miller settled a customer dispute for $14,910.01 after a customer alleged poor recommendation(s) and misrepresentation(s). On September 4, 2013, Miller settled a customer dispute for $44,568.56 after a client alleged Miller lied about principal being safe with no risk in relation to the purchase of a unit investment trust. On September 13, 2013, Miller settled a customer dispute for $28,213.05 after a client alleged that she was never informed that she was purchasing an unsecured investment with risk of loss.
On November 5, 2013, Miller settled a customer dispute for $13,910.79 after a client alleged misrepresentations in the sale of a product, where she was told that the investment was safe and secure. On May 29, 2014, Miller settled a customer dispute for $42,852.30 after a client alleged that Miller did not fully disclose that she could lose her money and that Miller did not fully explain the investment to her. Finally, on July 1, 2014, Miller settled a customer dispute for $27,232.45 after a client alleged unsuitable recommendations were made to her regarding unit investment trust(s).
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