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Advisor Group firms to pay GPB investors restitution for 7% commissions

Four of Advisor Group’s brokerages settled FINRA charges that the firms negligently sold clients $16 million worth of alternative investments without informing them of the risks.

FSC Securities, Royal Alliance Associates, SagePoint Financial and Woodbury Financial Services agreed to pay $1.27 million in fines and restitution to nearly 200 clients who purchased stakes in limited partnerships called GPB Automotive Portfolio. The brokerages sold the investments even after the products’ issuer notified them of delays in filing its required audited financial statements to the Securities and Exchange Commission, according to the Nov. 21 settlement. The payout adds up to 92% of the sales commissions generated by the Advisor Group brokerages in the two months after the issuer, GPB Capital, alerted the firms in April 2018 to the late filings, FINRA said. GPB and its founder are facing fraud cases filed by the SEC as well as state and federal prosecutors last year.

The four firms must pay “most or substantially all of the commissions they earned on the sales they made after they should have stopped making sales,” said Hugh Berkson, a securities lawyer with McCarthy Lebit Crystal Liffman who is the president of the Public Investors Advocate Bar Association. Berkson hasn’t represented any clients who have filed hundreds of FINRA arbitration claims against brokerages that helped sell $1.77 billion worth of GPB products tied to car dealerships, information technology firms, storage companies and waste management. FINRA’s letter of acceptance, waiver and consent with the Advisor Group firms ordered restitution to the clients without prohibiting future claims, Berkson noted.

“This is a nice shift from a regulator,” he added. “It’s the regulator’s job to keep this from happening ever again.”

Phoenix-based Advisor Group didn’t admit or deny the allegations as part of settling the case; GPB has denied the fraud allegations. Representatives for Advisor Group, which has about 8,840 registered representatives across the four brokerages’ 3,660 offices nationwide, declined a request to comment on the case or state the amount the company has paid to clients in any settlements stemming from arbitration claims filed by GPB investors. At least seven clients who invested in GPB Automotive during the time covered by the case didn’t receive any restitution because they already settled their claims, according to the settlement.

At least 16 other pending client claims involving about $3.8 million worth of investments in GPB products have named Advisor Group brokerages as a defendant, a spokesperson for the firm told the industry publication AdvisorHub last week.

“We wish to note that suggestions of a lack of value within the GPB Automotive Fund are very much contradicted by the recent 10-Q and the Monitor’s Update,” the spokesperson was quoted as saying. “We strongly suggest that these sources be reviewed and considered in light of recent misstatements in the press.”

GPB Capital sent letters in April 2018 to representatives of FSC, Royal Alliance, SagePoint and Woodbury telling them about the delayed SEC filings and a forensic audit tied to a separate lawsuit the company had filed against a former operating partner a year earlier, according to FINRA. Without disclosing this information to investors, the four companies sold $16.31 million worth of investments in GPB Automotive through more than 200 transactions over the next two months, investigators said.

“The delay in filing audited financial statements was material information that should have been disclosed,” the settlement order said. The brokerages violated FINRA Rule 2010, the regulator’s guidelines for just and equitable principles of trade, by “negligently omitting material facts,” the document added. The regulator ordered the companies to pay $1.07 million plus interest in combined restitution to 196 investors and $200,000 in fines.

The four brokerages generated $1.14 million in commissions in the sales, which is 6.9% of the amount clients invested into GPB Automotive, according to FINRA. Those high rates actually came in lower than the 10.6% average commissions that the SEC alleged more than 60 “downstream broker-dealers” earned over a five-year span from selling GPB’s products to 4,000 seniors and about 13,000 other investors. Geneos Wealth Management and National Securities are among at least four other brokerages that have settled FINRA cases related to GPB.

“They get a lot more to sell this than they would a Vanguard mutual fund,” Berkson said of the brokers’ hefty commissions. He noted that the wealth management industry is increasingly pitching alternative investments as “safe, income-producing” products amid low yields on bonds. But “all too often, those representations about safety and income are just false,” he said. “We’re going to see an awful lot of shakeouts with alternatives.”

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