Larry Michael Crabtree of Edmond, Oklahoma, a stockbroker with WFG Investments, Inc., was suspended for six-months in all capacities from association with any Financial Industry Regulatory Authority (FINRA) member firm after consenting to findings that Crabtree engaged in unsuitable trading and improperly exercised discretion in the account of a customer; sent inappropriate and unapproved communications to two customers; and failed to record his customer’s financial information on a new account form. Letter of Acceptance, Waiver and Consent, No. 2013038710501 (Dec. 30, 2015).
According to the AWC, in July 2008, customer CC had opened a SEP IRA account with Crabtree and WFG, when she was sixty two years old. The new account form reportedly indicated that CC was a physician earning between $300,000 – 350,000. CC’s net worth was recorded as $600,000 – $700,000. Her investment objective was long term growth and risk tolerance was moderate.
The AWC reported that CC’s new account document for the account incorrectly stated her income, while also incorrectly stating CC’s risk tolerance on the new account form as moderate and short term growth. FINRA found that as a result of misstating CC’s income and net worth, Crabtree was deemed to have violated FINRA Rule 2010 and caused WFG to be in violation of Section 17(a) of the Exchange Act and Rule 17a-4(b)(8).
The AWC subsequently stated that CC and Crabtree met when the account was opened, where Crabtree advised CC that she would be permitted to withdrawal eight percent annually without touching the account’s principal. CC reportedly took Crabtree’s advice.
From December 2010 through May 2011, Crabtree reportedly used discretion to make three unsuitable purchases of securities on CC’s behalf. CC’s purchase of a $100,831 position in GMX Resources Preferred Stock, a highly-leveraged oil and gas exploration company, resulted in nearly a complete loss when the company had declared bankruptcy. Further, the AWC indicated that other investments executed by Crabtree were closed-end funds, with substantial risks in pursuit of surpassing ten percent returns yearly. FINRA found that the three investments, which had collectively constituted almost one-half of the investable assets in CC’s account, had carried a level of risk that was unsuitable for a retired individual with known health problems, limited income, and limited liquid assets. The AWC indicated that each investment was also inconsistent with CC’s moderate risk tolerance. FINRA found that as a result of recommending unsuitable transactions, Crabtree had violated NASD Conduct Rule 2310, FINRA Rules 2010 and 2111.
The AWC subsequently stated that Crabtree had exercised discretion in the accounts of three customers. He had reportedly executed approximately two hundred and twenty-nine discretionary trades in the account of customer CC, an estimated eleven hundred discretionary trades in accounts of JS and RS. Crabtree reportedly never received written authorization or firm’s acceptance of accounts as discretionary. The AWC stated that Crabtree falsely denied using discretion in compliance questionnaires from 2009, 2011, and 2012.
FINRA found that by Crabtree using discretion to execute trades without first obtaining written authorization by the customer and approval from the firm, Crabtree had violated NASD Conduct Rule 2510(b) and FINRA Rule 2010.
The AWC further indicated that Crabtree had provided the client with investment projections which demonstrated how her account would be due to earn 9% – 12%, where such projections lacked risk disclosures or other return options. FINRA found that Crabtree violated FINRA Rule 2010 and NASD Rules 2210(d)(1)(A), 2210(d)(1)(B), 2210(d)(1)(D) and 2210(d)(2)(C) because the documents failed to provide a sound basis for the predictions, were unwarranted and misleading because of not disclosing downside risks, had made inappropriate projections, and failed to disclose the member’s name.
FINRA also found that from December 2012 through December 2013, Crabtree provided consolidated statements that failed to properly comply with FINRA’s Notice to Members 10-19, did not disclose the firm’s name, and did not have principal approval prior to being disseminated. FINRA held that these statements violated FINRA Rules 2010, 2210(b)(1)(A), and FINRA Rule 2210(d)(2)(A) and NASD Rules 2210(b)(1) and 2210(d)(2)(C).
FINRA Conduct Rule 2111 provides that a member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.
A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
Prior to the recommendation of any security, the broker must first understand the risk and characteristics of the securities being recommended, and whether that security is suitable for any customer. The second step, in connection with the recommendation of a particular investment or investment strategy, is to determine whether the transaction is suitable for that particular customer.
Firms and individuals, not surprisingly, are prohibited from unauthorized use of customer funds, borrowing of a customer’s securities or funds, forgery, non-disclosures or misstatements of material facts, and various deceptions and manipulations. Such conduct can also be found to violate criminal and other civil laws, and be subject to sanction from the federal and state government bodies.
Public disclosure records via FINRA’s BrokerCheck reveal that Crabtree has been subject to five disclosures. On May 10, 1996, Crabtree was discharged by Merrill Lynch amid allegations that Crabtree misled several clients to think that his previous employer had managed with Merrill Lynch, in addition to questions raised about appropriateness of a mutual fund transaction. On October 10, 1996, Crabtree was censured, fined 6,500, and suspended after consenting to National Association of Securities Dealers findings that upon joining Merrill Lynch, some of the state clients were contacted by mail with content that was not pre-approved by compliance.
On August 19, 2010, Crabtree settled a customer dispute for $16,000 after a client alleged that commission was being charged on the account while the client was also paying quarterly management fees. On September 25, 2013, Crabtree settled a customer dispute for $70,000 after a client alleged unsuitable recommendations in her retirement account from 2009 – 2013. WFG Investments discharged Crabtree on February 18, 2014, for failure to obtain principal approval of client communications.
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