Kalos Capital, a securities broker dealer headquartered in Alpharetta Georgia, and Darren Michael Kubiak of Lawrenceville Georgia, a stockbroker formerly registered with Kalos Capital, have been sanctioned by Financial Industry Regulatory Authority (FINRA) based upon findings that (1) leveraged inverse exchange traded funds (LIETFs) had been recommended to the firm’s customers without Kalos Capital or its stockbroker having an adequate foundation to conclude that the transactions were appropriate for customers (2) the firm failed to supervise alternative investment recommendations to ensure that they were suitable for customers and (3) the firm neglected to supervise Kubiak’s recommendations of those alternative investments. Letter of Acceptance Waiver and Consent No. 2016048196801 (Sept. 6, 2019).
According to the AWC, prior to the firm’s supervisory failures, Kalos Capital was cautioned by FINRA that it needed to create an adequate supervision system – specifically with regard to investment recommendations – that was capable of complying with FINRA and Securities Exchange Commission (SEC) Rules. This included inverse and leveraged exchange traded funds. Kalos Capital was also cautioned by FINRA that the securities broker dealer needed to have supervisory procedures that required for stockbrokers to undertake suitability reviews for its customers relating to the sales of those products. FINRA stressed to Kalos the importance of stockbrokers having an understanding of the features and terms of non-traditional exchange traded funds which include (1) the manner in which the funds are meant to accomplish investment goals, (2) the effect that market volatility has on the funds, (3) the leverage used by non-traditional exchange traded funds, and (4) the effect on the performance of investments when customers hold these products for extended periods.
The AWC stated that nineteen leveraged inverse exchange traded fund purchases had been recommended by Kubiak, and purchases had been made in seventeen Kalos Capital accounts. Positions were held by customers anywhere from approximately three hundred days to nearly six years, with customers holding the leveraged inverse exchange traded funds for almost two years on average. FINRA stated that customers sustained losses of $98,000.00 because of holding the alternative investments for extended periods.
FINRA indicated that there was no suitability analysis conducted by Kubiak on the leveraged inverse exchange traded funds. The risks and features of these products were not understood by him at the time that recommendations had been made to customers. In particular, Kubiak reportedly intended that customers maintain their leveraged inverse exchange traded funds positions for a period of time which was not consistent with FINRA guidelines. Kubiak also failed to comprehend that there could be losses in the value of the leveraged inverse exchange traded funds when investments are held for extended periods, and that those losses could be exacerbated because valuations of the funds reset on a daily basis. FINRA found Kubiak’s conduct violative of FINRA Rules 2010 and 2111.
The AWC additionally stated that the firm neglected to create and implement an adequate supervision system or written supervisory procedures designed for compliance with FINRA Rules, National Association of Securities Dealers (NASD) Rules, and federal securities laws. Specifically, there were no written supervisory procedures used by the firm that specifically addressed leveraged inverse exchange traded fund risks. In fact, the procedures used by Kalos Capital did not go over training, supervision or suitability as it pertained to those products.
FINRA also stated that stockbrokers had not been formally trained by Kalos Capital on leveraged inverse exchange traded funds. The firm additionally lacked any mechanism to check for products inappropriately being held for prolonged periods. These supervisory failures resulted in Kubiak not being trained on the risks that the alternative investments posed to his customers, causing customers holding the investments for extended periods to experience unwarranted losses. FINRA found that the firm’s failure to supervise the stockbroker’s alternative investment transactions was violative of FINRA Rules 2010, 3110(a), and 3110(b).
Kubiak has been fined $5,000.00 and suspended for three months from associating with any FINRA member in any capacity. Kalos Capital was censured and fined $30,000.00.
FINRA Public Disclosure reveals that Kubiak has been identified in two customer initiated investment related disputes containing allegations of his misconduct during the time that he was employed with Kalos Capital. Specifically, a customer filed an investment related arbitration claim involving Kubiak’s conduct in which the customer requested $500,000.00 in damages based upon allegations that the customer had been poorly advised in regards to GPB Funds held between 2014 and 2018 which led the customer to sustain unwarranted losses. FINRA Arbitration No. 19-01396. Also, on July 12, 2019, a customer filed an investment related complaint regarding Kubiak’s activities where the customer sought $495,368.50 in damages founded on accusations of unsuitability as it related to the business development company and real estate security transactions that were effected in the customer’s account.
Kubiak has been registered with Kalos Capital since January 3, 2017.
