Massachusetts Secretary Galvin Charges B/Ds With Client Abuse

Two distinct but related enforcement actions were filed in Massachusetts this week, charging that two broker/dealers engaged in deceptive, dishonest and unethical conduct in the treatment of clients.

The first of the two actions seeks to commence an adjudicatory proceeding against Spartan Capital Securities LLC and adviser Dean Kajouras for violations of the Massachusetts Uniform Securities Act, among other regulations. It alleges that the respondents “engaged in deceptive, dishonest, and unethical conduct and that Spartan failed reasonably to supervise its agents or other employees to assure compliance with the act and regulations, in violation of the act and regulations.”

Details from the text of the complaint show Secretary of the Commonwealth of Massachusetts William Francis Galvin is not just pushing the firm to cease rule-breaking activity and to compensate anyone who has been wronged—Galvin’s office is also seeking to revoke Spartan Capital’s registration as a broker/dealer in the Commonwealth of Massachusetts. The complaint also seeks to bar the firm and the named adviser from “associating with or registering in the Commonwealth with any state-registered investment adviser, Securities and Exchange Commission registered investment adviser, and investment adviser technically excluded from the definition of investment adviser.”

In terms of specific conduct, the complaint alleges “top-to-bottom failure” by Spartan and its registered representatives to adhere to the spirit of its client-centric mission statements and marketing. Among other activities, the complaint alleges that Spartan, between April 2009 and September 2014, “engaged in abusive sales practices in the accounts of at least one retired resident of Massachusetts.”

“Lack of meaningful supervision by Spartan allowed [a sales agent who has subsequently died] and Kajouras to continue [problematic] activities unchecked, ultimately depleting the individual’s accounts with high commissions and fees and unsuitable investment recommendations,” the complaint states.

The background of the alleged abuse goes as follows: In early 2009, the deceased agent cold called a then-64-year old retired resident of Massachusetts (referred to in the suit simply as Retired Investor). “At the time, Retired Investor had been retired for approximately seven years,” the complaint says. “He had never been an aggressive investor, investing primarily in mutual funds and conservative fixed income products. Retired Investor had always relied on a financial adviser to make investment decisions in his accounts.”

Although Retired Investor initially declined to open an account at Spartan, the complaint suggests he finally relented after continued solicitation by the agent and invested substantially all of his liquid assets that he had saved for his retirement. The investor opened an individual brokerage account in April 2009, funding it with over $222,000 from his savings.

“Despite Retired Investor’s age, financial situation, and investment history, Spartan opened his brokerage account with an investment objective of ‘speculation’ and a corresponding risk tolerance of ‘very aggressive,’” the complaint continues. “When Spartan sent him forms to sign in order to open the brokerage account, he received the forms with a letter which told him to ‘sign . . . where indicated.’ Like the vast majority of customers at investment firms, Retired Investor trusted that his new financial advisers had accurately recorded the necessary information to open his accounts and he signed the documentation as instructed.”

In August 2009 the agent and Spartan CEO John Lowry “convinced Retired Investor to transfer his third-party IRA worth approximately $162,000 in mutual funds to Spartan with the promise that he would save money on fees by investing in individual stocks through Spartan … Instead, the agent churned both accounts, generating a total of $115,791 in commissions and $9,050 in fees and other costs over only seven months.”

According to the complaint, the annual turnover rate—the number of times that the securities in an account are replaced with new securities—was 24.47 in the brokerage account and 9.77 in the IRA, “both well above the rate indicative of churning.”

The full text of the Spartan complaint is available here. 

NEXT: Related complaint filed against Revere 

The second complaint filed by Secretary Galvin’s office targets Revere Securities LLC, which is accused of “failing to protect at least one of its investors from harm.” The suit also seeks to bar the firm from providing brokerage services within the Commonwealth, in additional to damages sought for the individual complainant. 

The enforcement action “arises out of Respondent Jonathan Eric Altman's dishonest and unethical conduct and Respondent Revere's failure to reasonably supervise Altman.” According to the text of the complaint, Revere's lack of meaningful supervision “allowed Altman to engage in excessive trading, unauthorized trading, and making unsuitable recommendations, resulting in substantial losses to an investor totaling at least $290,000.”

Details from the text of the complaint show that, in May of 2012, this investor was 62 years old and became in charge of her finances, after her husband passed away suddenly.

“Altman assisted Investor One in setting up a commission-based brokerage account at Revere, and Investor One transferred her husband's Individual Retirement Accounts at Revere that she inherited into her Beneficiary IRA,” the complaint explains. “At this time, Investor One had been a homemaker for at least 20 years and had no previous investment experience.”

According to the complaint, the application for this investor’s beneficiary IRA listed her as having a “medium” risk tolerance, and investment objectives of “income,” “growth,” and “speculation.” However, the investor claims she did not personally check off “speculation” as an investment objective.

“Rather, she trusted Altman and signed any paperwork that Altman asked her to sign. Then, from May 2012 through March of 2015, Altman engaged in dishonest and unethical conduct involving excessive trading, unauthorized transactions, unsuitable recommendations, and violating Revere's written policies and procedures,” the complaint continues. “Altman excessively traded Investor One's Beneficiary IRA despite Investor One's medium risk tolerance, investment objectives, financial situation, limited investment experience and needs."

The complaint alleges that, throughout the duration of the brokerage relationship, Altman exercised control over the beneficiary IRA. From July 1, 2013 to June 30, 2014, based on the average portfolio value of all liquid securities in Investor One's Beneficiary IRA, the annualized turnover rate was approximately 7.33, and the annualized cost-to-equity ratio was 20%.

“This means that Investor One's Beneficiary IRA would have had to earn at least 20% annually in order to cover transaction costs and break even,” the complaint concludes. “During the time period of July 1, 2013 to June 30, 2014, for purchases and sales in Investor One's Beneficiary IRA, Altman and Revere split $77,060.70 in commissions, which were directly charged to Investor One. Additionally, Altman and Revere split $18,190 in selling concessions from syndicate deals purchased in Investor One's Beneficiary IRA.”

Throughout the brokerage relationship, the complaint also alleges Altman effected unauthorized transactions in the beneficiary IRA.

“Altman testified that he received permission from Investor One to buy and sell specific investments,” the complaint says. “However, e-mails between Altman and Investor One suggest Altman regularly failed to obtain prior approval for trades from Investor One.”

The full text of the Revere complaint is available here.