CN) - The Financial Industry Regulatory fined Brookstone Securities of Lakeland, Fla. $1 million for committing fraud against the elderly.
The company, its CEO, one of its brokers and the former compliance officer were found by a hearing panel to have sold collateralized mortgage obligations (CMOs) to "unsophisticated, elderly and retired investors." The company was ordered to pay restitution in addition to the fine.
CEO Anthony Lee Turbeville, broker Christopher D. Kline and former compliance officer, David Locy were all called out on their conduct and the panel noted that Locy as compliance officer should have been the customer's first line of defense against improper practices by Brookstone brokers.
According to the investigators, the securities firm "preyed on their elderly customers greatest fears." They "made negligent misrepresentations and omissions of material fact" and were told that the CMOs were "government guaranteed bonds"
Two of Kline's customers were elderly widows with very limited investment knowledge, the report stated, and were very vulnerable after their husbands' deaths when they were approached and convinced to invest their retirement savings in CMOs, the panel found.
It was discovered that Kline told the widows that they could not lose money in CMOs because they were government-guaranteed bonds. He then further increased their risk by trading on margin.
The company was also accused of sending letters which contained misleading statements to customers who had invested in CMOs.
The investigation determined that the firm's supervision of its personnel was lacking since there were no written procedures for due diligence requirements for third party private placements and that brokers failed to attend compliance meetings. It also found that they failed to update forms, failed to report customer complaints, failed to report transactions to TRACE (Trade Reporting and Compliance Engine) and failed to complete tickets for transactions involving corporate bonds.
"The hearing panel did not find Turbeville's testimony credible," the decision states. They didn't believe his claims that he fully explained the CMOs risks to his clients.
Also, the panel noted that Locy completely ignored his responsibility as chief compliance officer and "should have been a line of defense against Turbeville's and Kline's egregious conduct," but instead "he looked the other way while Turbeville and Kline traded CMO accounts that were unsuitable for their customers."
Enforcement called nine witnesses which included five customers and two family members of customers. There were 324 exhibits submitted to the panel by the investigators and 185 by customers at the hearing.
Both Kline and Turbeville now permanently barred from the securities industry and they must pay $440,600 of the $1 million fine imposed jointly and severally with Turbeville, and the remaining $1,179,500 imposed jointly and severally with Kline. Locy is barred from acting in any supervisory or principal capacity, was suspended in all capacities for two years and fined $25,000.
The investigation began as a routine examination of the company by FINRA.