LPL Financial LLC has been fined $100,000 for failing to supervise Jack Kleck, a broker who sold unsuitably risky investments to clients in their 80s, the Oregon Department of Consumer and Business Services announced on Nov. 22.
Boston-based LPL is a broker-dealer licensed by the State of Oregon and responsible for the activities of Jack Kleck, once a licensed broker and the former manager of LPL’s branch office in La Grande, Oregon.
Pursuant to a consent order in which it neither admitted nor denied the charges, LPL agreed to forego its right to a hearing, pay the fine, and improve its supervisory procedures.
Oregon Revoked Jack Kleck’s Securities License
The State of Oregon previously revoked Kleck’s securities license. He was barred from doing business in the state and fined $30,000, with $70,000 suspended.That action led to the investigation of LPL’s supervisory procedures.
The Consent Order
The consent order, signed by the state on Nov. 7, details Jack Kleck’s sales activities related to three elderly clients. The first client — called WK in the consent order — was an 89-year-old resident of La Grande whose overall investment objective was to obtain “income with moderate growth.” Kleck had been WK’s broker for over a decade.
From about 2003, WK showed signs of cognitive impairment, such as confusion and disorientation. Kleck testified before the state that he was aware of WK’s problems, yet he continued to sell him securities.
Before long, WK executed a power of attorney authorizing his son to act as his agent. Although the son told Kleck that he should not have any discussions about investments with WK unless the son was present, Kleck ignored this instruction, according to the consent order.
Kleck even went so far as to accompany WK into the Community Bank branch in La Grande, where he instructed a confused WK to withdraw funds from his account, the consent order said. WK then used the funds to purchase securities through LPL.
In addition, the investment products Jack Kleck sold while supposedly being supervised by LPL were unsuitable. “He sold partnerships in PDC, a West Virginia-based company whose activities include the acquisition, development, production, and marketing of natural gas and oil in the United States”, the consent order said.
34 Clients Bought From Jack Kleck
Thirty-four clients bought 71 PDC partnerships from Kleck, including WK and other elderly clients. The partnership units were not liquid securities. They were not listed on any public exchange and were not easily sold. These partnerships existed in an extremely speculative industry with a high risk of failure. Even if successful, the consent order said PDC partnerships do not begin to pay off until at least six months beyond the date of an investment. A complete payout on an investment can take years.
Moreover, Kleck sold some clients general partnerships, as opposed to limited partnerships, meaning losses could be unlimited, the consent order said. For example, a general partner could be named a party to a judgment and be held jointly and severally liable, resulting in the person’s individual assets being attached to satisfy the judgment if insurance fell short.
Both general and limited partnership units are properly classified as “aggressive growth,” the consent order said. They are not suitable for clients like WK, who had an objective of “income with moderate growth.”
Jack Kleck sold WK general partnership units in PDC three times in 2004: $20,000 in March; $10,000 in April; and $10,000 in November. The consent order said “Kleck was aware or should have been aware of WK’s fragile mental state and WK’s inability to review the lengthy prospectus. Kleck did not explain the risky nature of this investment to WK, nor did he discuss the transactions with WK’s son”.
Because these securities did not match Wk’s investment objective, Kleck misrepresented WK’s objective as “growth with income” when he sent the PDC documents to LPL’s alternative investment desk for approval, a misrepresentation never discovered by LPL.
“In January 2006, Kleck sold another round of unsuitable investments to WK. This time he sold high-yield bonds that were too risky for WK’s investment profile. WK purchased about $30,000 worth of a B-rated Albertsons Inc. high-yield bonds plus two BB-rated Sears Roebuck Acceptance Corporation high-yield bonds, one worth about $10,000 and one worth about $9,000”, the consent order said.
“Once again, Kleck did not explain the risk and failed to discuss the transactions with WK’s son”, the consent order said.
The second elderly client victimized by Kleck was called WH in the consent order. A resident of La Grande, WH was 85-years-old at the time. Kleck had been her broker for nearly 20 years, and like WK, she had an overall investment objective of “income with moderate growth.”
In September 2004 Kleck sold WH a PDC general partnership unit in the amount of $15,000 when he knew, or should have known, that this elderly woman could not understand the 175-page prospectus, the consent order said. Kleck never explained to WH that investing as a general partner could subject her to personal liability beyond the amount of her investment.
The third client victimized by Kleck was a La Grande resident called DF in the consent order. DF passed away in 2004 at the age of 89. Like the other two clients, DF’s investment goal was “income with moderate growth.”
Kleck sold DF a PDC general partnership unit in the amount of $20,000 in 2004 when he was both physically and mentally impaired. Kleck knew, or should have known that DF lacked the ability to make such choices, the consent order said. Keeping to his pattern, Kleck never informed DF about the substantial risks associated with the investment, and he misrepresented DF’s investment objective as being “growth with income” when he forwarded the transaction to LPL’s alternative investment desk for approval.
LPL’s Failure to Supervise Kleck
LPL’s alternative investment desk had a duty to adequately review these transactions before approving any such sale to a client, and LPL failed in that duty, the consent order said. The desk was supposed to ensure that the investments did not run afoul of the client’s stated investment objective and that it was suitable for the client.
As Kleck’s supervisor, the LPL alternative investment desk had a duty to conduct an independent analysis of each proposed transaction by reviewing account-related documents for a given client. The desk was not permitted to rely on Kleck’s representations. The desk never conducted an analysis and relied on numerous lies from Kleck about the clients’ annual income, net worth, and previous purchases, the consent order said.
The LPL alternative investment desk did disapprove of a number of transactions for failure to meet the issuer’s prospectus guidelines regarding minimum net worth, but when Kleck resubmitted the same transactions, claiming a sudden increase in the client’s net worth, the transactions were approved without scrutiny, the consent order said. At that point, the desk should have alerted LPL officials to Kleck’s conduct, but it did not.
Because of these and other indications of lax oversight, the State of Oregon found that LPL failed to diligently supervise the Kleck’s activities regarding WK, WH and DF, in violation of state securities law, the consent order said. Kleck lacked reasonable grounds to believe that these high risk securities would be suitable for these individuals with their advanced age and conservative investment objectives. The consent order also noted the deteriorating mental conditions of clients WK and DF.
LPL Failed to Provide Adequate Resources for the Proper Supervision
LPL also failed to provide adequate resources to enable the proper supervision of Kleck, and failed in its obligation to every brokerage client to ensure that the investments offered for sale are suitable.
According to the consent order, since the events described above, LPL has taken steps to improve its compliance and supervisory practices. These include an increase in the number of employees performing compliance and supervision-related functions, development of proprietary software tools to help with compliance, increased review of alternative investment transactions, and better, more thorough branch-office examinations.
Guiliano Law Group
If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.