John S. Hudnall, of San Francisco, California, a stockbroker with U.S. Bancorp Investments and Bancwest Investments Services, Inc., was charged by Financial Industry Regulatory Authority (FINRA) Department of Enforcement in a Complaint alleging that Hudnall engaged in unauthorized private securities transactions, unsuitable recommendations, and made false representations to FINRA regarding his misconduct. Department of Enforcement v. Hudnall, No. 2013036412601 (May 2, 2016).
According to the Complaint, in May 2012, while Hudnall was associated with BancWest, Hudnall engaged a private securities transaction. Particularly, Hudnall divided up a customer’s $400,000.00 investment in a Real Estate Investment Trust into two parts, while only disclosing one part ($40,000.00) to BancWest’s supervisory personnel for their review and authorization.
During this time, the firm apparently required pre-approval of REIT sales prior to the funds being sent to the sponsor of the REIT. Apparently, Hudnall had passed the bulk of the customer’s funds ($360,000.00) directly to the sponsor of the Real Estate Investment Trust, so as to bypass the supervision process by his firm.
Specifically, at the time that Hudnall split up the transactions, his firm’s policies called for no more than ten percent of a customer’s net worth to be invested in any specific REIT sponsor. Further, the firm apparently required that no more than twenty percent of the customer’s net worth be invested in all REIT investments.
The Complaint stated that the firm’s guidelines, if considering the client’s total investment, would have indicated that the client’s investment was over concentrated, and would have probably resulted in the denial of the transaction. Apparently, Hudnall generated $25,200.00 in commissions regarding the $360,000.00 investment in the REIT that he withheld mention of to his firm. FINRA alleged that Hudnall violated NASD Rule 3040 as a result of his unauthorized private securities transaction.
The Complaint further stated that in April 2011 and July 2012, Hudnall also engaged in unauthorized sales promotions, where he offered and ultimately compensated customers with his own funds in order to get the customers not to surrender their positions in Jackson National fixed annuity contracts.
Hudnall reportedly stood to maintain the commissions from the fixed annuity transactions so long as the customers held the accounts for at least one year prior to surrendering. The promotion apparently allowed for customers to be paid one-percent annual interest in return. Yet, such promotion did not occur via Jackson, but merely through Hudnall.
The Complaint alleged that Hudnall concealed from his firm the fact that customers were paid the funds, and additionally alleged that Hudnall’s firm would have never approved of his promotion if he disclosed such to his firm. Hudnall reportedly raked in $13,750.00 in gross commissions pertaining to four fixed annuities one customer purchased, while also earning $6,985.00 in gross commissions pertaining to another customer’s four annuity purchases. Such customers, in connection with holding their annuities pursuant to the promotion, did not know that Hudnall was the one making payments (as opposed to Jackson National or BancWest). FINRA alleged that Hudnall violated FINRA Rule 2010 as a result of his unauthorized promotion.
The Complaint further stated that while Hudnall was with U.S. Bancorp, he effected a variable annuity sale in July 2014 that was unsuitable for customer RD. The Complaint stated that RD was a moderately conservative sixty-eight-year-old investor, who intended to transfer his pension assets from his prior employer into an IRA without subjecting the funds to risk. Hudnall apparently recommended a Prudential Variable Annuity, raking in five percent gross commissions in the process.
FINRA alleged in the Complaint that the annuity that Hudnall recommended was not designed to address RD’s needs, and was actually overly costly in relation to the customer’s alternative investment options. The annuity had apparently not provided the customer any material benefit considering the additional costs associated with such product. Rather, according to the Complaint, the annuity was less flexible for the customer than an IRA, did not provide the customer as many investment option as an IRA would, and carried higher risk regarding liquidity per the surrender fees associated with the annuity. FINRA claimed that Hudnall violated FINRA Rules 2010 and 2111 as a result of his unsuitable recommendations.
Finally, FINRA claimed that Hudnall make inaccurate statements to FINRA regarding cashier’s checks that he provided to customers in connection with these aforementioned promotions. Hudnall reportedly admitted to FINRA that he provided cashiers to such customers, BC and FM, after he had previously denied having done when questioned. FINRA alleged that Hudnall violated FINRA Rules 2010 and 8210 as a result.
Public disclosure records reveal that Hudnall has been subject to eight public disclosure incidents, five consisting of customer disputes. On March 29, 2005, Hudnall settled a customer dispute for $2,500.00 after the customer alleged misrepresentations. On October 10, 2014, Hudnall settled a customer dispute for $2,075.49 after a customer alleged unauthorized transactions.
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