Rande Scott Aaronson of Lawrenceville, New Jersey, a stockbroker and principal of David Lerner Associates Inc., has been fined $5,000.00 and suspended for one month from associating with any Financial Industry Regulatory Authority (FINRA) member in any principal capacity based upon consenting to findings that he failed to supervise stockbrokers’ sales of limited partnerships to ensure that they were suitable for investors. Letter of Acceptance, Waiver, and Consent No. 2019063686204 (May 30, 2023).
According to the AWC, Energy 11 L.P. (E11) and Energy Resources 12 L.P. (E12) are non-traded oil and gas partnerships sold by agents at David Lerner Associates Inc. to their customers. These limited partnerships were established to buy and cultivate oil and gas assets. They aimed to distribute profits to investors and, five to seven years after the end of the initial sale, initiate an event for investor liquidity.
Each partnership’s potential to distribute the initial investment back to its members and conduct a liquidity event relied on how well the oil and gas properties they invested in performed. According to the E11 and E12 offering documents, investing in these partnerships came with substantial risk, and these partnership shares were suitable only for investors ready and capable of assuming the risk of an illiquid, risky, and longer term investment.
FINRA stated that from January of 2015 to October of 2019, under the firm’s written supervisory procedures, supervisors were required to verify all customer orders for suitability. The securities broker dealer also had a policy that addressed changes to a customer’s risk tolerance, as shown in each customer’s suitability profile. This policy prevented changes to a customer’s risk tolerance just to make the account eligible for a particular transaction. Branch managers at David Lerner Associates Inc. had the duty to oversee the customers’ suitability profiles, evaluate the validity of any changes in risk tolerance on the profiles, and accept and sign the profiles.
The securities broker dealer also set limitations on customer investments in E11 and E12 to certain proportions of their assets based on a customer’s liquid net worth and risk tolerance. Therefore, customers with higher risk tolerance and liquid net worth could buy more shares in E11 and E12. Branch managers had to examine and authorize each E11 and E12 sale ticket, which comprised information about the customer including investment period, age, total wealth, risk tolerance level, and liquid net worth.
The AWC stated that when Aaronson evaluated a specific E11 or E12 deal, he used to ensure the related customer suitability profile was signed and that the customer had executed the subscription agreement and an Acknowledgement of Risk form. He also compared the sale with David Lerner Associates Inc.’s sale limitations for E11 and E12. However, Aaronson did not perform a thorough suitability analysis of E11 and E12 transactions for certain customers, even when he examined sales to elderly customers and within one month of an increase in risk tolerance.
FINRA noted that Aaronson knew about, but did not reasonably examine and address, warning signs of potentially inappropriate sales of E11 and E12 by stockbrokers to specific elderly customers. Aaronson also knew of alterations to customer risk tolerances when sales of E11 and E12 were made. A boost in a customer’s risk tolerance could be necessary for a customer to buy E11 or E12 under the securities broker dealer’s sale guidelines or necessary to allow the customer to buy an increased amount of E11 or E12. Still, he did not reasonably examine customer risk tolerance increases as a warning sign that needed more scrutiny.
Aaronson violated Rules 2010 and 3110 by failing to supervise suitability of E11 and E12 sales.
Aaronson’s registration with David Lerner Associates Inc. was terminated on June 3, 2021.
