Kyle William Chapman, of San Clemente, California, a stockbroker registered with American Trust Investment Services Inc. and Westpark Capital Inc., has been fined $5,000.00 and suspended for three months from associating with any Financial Industry Regulatory Authority (FINRA) member in any capacity because Chapman made unsuitable investment recommendations and made misleading statements to customers during the time that he was associated with those securities broker dealers. Letter of Acceptance, Waiver, and Consent No. 2020068655901 (September 5, 2024).
FINRA Rule 2111 requires that stockbrokers only recommend investments that are suitable for the customer, considering their financial situation, needs, and investment goals. Brokers must gather detailed information about their customers, including their risk tolerance, investment objectives, and financial status. The recommendation must be based on the customer’s investment profile and the stockbroker’s reasonable understanding of the risks and benefits associated with the investment.
Also, Regulation BI requires stockbrokers to act in their customer’s best interest when recommending investments. They must ensure that their advice does not prioritize their own financial gain over the interests of their customer. The stockbroker must understand the investment product, and its risks, and only recommend it if it aligns with the customer’s specific financial needs and risk tolerance.
According to the AWC, Chapman violated FINRA’s rules by recommending risky investments without properly considering his customer’s financial situation and needs. In January and December 2020, Chapman advised a customer to invest a total of $50,000.00 in GWG Holding Class L Bonds, a type of high-risk and speculative bond. These bonds were not suitable for the customer’s investment profile, which included a focus on income and preservation of capital rather than high-risk speculation. The customer had a liquid net worth of $350,000.00 and a moderately aggressive risk tolerance, but they did not have a desire to invest in speculative or high-risk securities. Chapman steered the customer into the L Bonds, which were not aligned with the customer’s stated goals or risk tolerance, according to the regulator.
FINRA also stated that Chapman failed to do enough research to understand the true risks of the GWG L Bonds. These bonds were unrated and not directly backed by assets, making them particularly risky. Chapman incorrectly assumed that changes in GWG’s business model had reduced the risks of the investment, when the changes reportedly made the bonds even riskier. FINRA stated that GWG had moved away from its traditional business of buying life insurance policies and instead focused on providing liquidity to holders of illiquid assets, increasing uncertainty for bondholders. Chapman did not reasonably review the offering documents, which would have shown that the bonds were high-risk and illiquid, making them inappropriate for some investors including the ones he made recommendations to.
Moreover, Chapman did not present the customer with any alternative investment options that might have been more suitable given their investment goals. FINRA found that by not considering safer alternatives, Chapman failed to meet his obligation to act in the customer’s best interest, a main requirement under Regulation BI.
FINRA also found that Chapman misrepresented the level of risk associated with the GWG L Bonds. He provided the customer with a third-party report that incorrectly rated the bonds as extremely low risk, even comparing them to the safety of cash. Chapman reassured the customer that the investment was conservative, even though the bonds were speculative and carried risks.
According to the AWC, when the customer inquired in December 2020 whether the GWG L Bonds were still a safe investment, Chapman failed to correct the customer’s misconception. He claimed that GWG’s merger had made the company more secure and suggested that it was normal for companies like GWG to operate at a loss for extended periods. FINRA found that Chapman’s statements were not accurate and contributed to the customer’s decision to invest another $22,000.00 in L Bonds, on top of the $28,000 they had already invested earlier that year.
Chapman earned commissions from his recommendations. FINRA found that he violated Regulation BI and FINRA Rules 2111 and 2010.
FINRA Public Disclosure also shows that on November 15, 2022, a customer filed an investment related FINRA securities arbitration claim involving Chapman’s conduct in which the customer requested between $100,000.00 and $500,000.00 in damages based upon alleged breach of fiduciary duty, violation of California securities laws, and breach of contract during the time that Chapman was associated with American Trust Investment Services Inc. FINRA Arbitration No. 22-01809.
Chapman was associated with American Trust Investment Services Inc. in San Clemente, California, from November 16, 2020, to July 8, 2022. Chapman was associated with Westpark Capital Inc. in Newport Beach, California, from August 4, 2018, to October 30, 2020, and with Cetera Advisor Networks LLC in Seal Beach, California, from August 9, 2017, to July 6, 2018.
