National Securities Corporation, a securities broker-dealer headquartered in Boca Raton, Florida, has been censured and fined $3,600,000.00 by Financial Industry Regulatory Authority (FINRA) based in part on National Securities Corporation’s negligent omissions relating to GPB Capital Holdings and its failure to supervise the recommendation of non-traded real estate investment trusts (non-traded REITs) to customers. Letter of Acceptance, Waiver, and Consent No. 2019061652404 (June 23, 2022).
According to the AWC, by May of 2016, investments in both GPB Automotive Portfolio LP and GPB Holdings II LP had been approved by National Securities Corporation for stockbrokers to recommend and sell to investors. The AWC states that in July of 2017, a lawsuit had been filed by GPB Capital against a former partner. In a counterclaim, the former partner alleged that financial statements had been falsified by GPB Capital and that investors had been defrauded.
FINRA states that in April of 2018, National Securities was made aware that GPB was attempting to register securities issued by GPB Automotive Portfolio and GPB Holdings II and that this process included audited financial statements filed by GPB Automotive Portfolio and GPB Holdings II. This letter clarified that the audited financial statements would not be filed on time and that a forensic audit would need to be completed. GPB indicated that the audit was partially intended to resolve accusations made by the former partner relating to false financial statements and fraud.
FINRA states that $8,700,000.00 in GPB investment purchases had been made by National Securities customers between April and July of 2018, allowing for National Securities to generate commissions of $701,480.00. FINRA states that National Securities knew of GPB Capital’s letter upon selling 8 limited partnership interests in GPB Holdings II and 115 interests in GPB Automotive Portfolio. National Securities’ customers were not informed about the adverse information, including the reason why audited financial statements were delayed. Accordingly, FINRA found that National Securities violated FINRA Rule 2010.
The AWC also indicates that a stockbroker was not reasonably supervised by National Securities relating to alternative investment recommendations. Over 100 customers received recommendations from a stockbroker regarding purchases of non-traded real estate investment trusts. At least $35,000,000.00 alternative investment purchases were made and recommended to customers. FINRA states that supervisors were required to review those recommendations to ensure both suitability and the stockbroker’s compliance with rules the firm created to curb overconcentration in alternative investments.
FINRA found that the stockbroker inflated the financial information of customers on documents relating to non-traded real estate investment trust purchases. Account forms submitted by this stockbroker showed false statements concerning the net worth of his customers. The regulator notes that in one case, the documents showed that a customer’s net worth went from $500,000.00 to $10,000.0000 in less than a year.
The stockbroker’s recommendations were scrutinized by National Securities, but there was no reasonable action taken beyond the initial review . As an example, a customer’s suitability and financial information was not verified by the firm. There was no attempt to obtain supporting information from the customer about their net worth. The recommendations made by this stockbroker resulted from customers’ artificially inflated financial figures.
FINRA states that many of firm’s other customers had too much of their liquid net worth in non-traded real estate investment trusts. Over 90 percent of one customer’s liquid net worth was tied up in alternative investments because of the stockbroker.
The AWC states that one of the non-traded real estate investment trusts recommended by the firm had seen a steep drop in its share price following customers’ purchases. Customers have experienced significant losses because of following the stockbroker’s recommendations. FINRA states that National Securities violated NASD Rule 3010 and FINRA Rules 2010, 4511, and 3110.