The Financial Industry Regulatory Authority (FINRA) announced Monday that a hearing panel fined Brookstone Securities $1 million for fraudulent sales of collateralized mortgage obligations (CMOs) to unsophisticated, elderly and retired investors.
The FINRA panel ordered the Lakeland, Fla.-based firm’s owner and CEO, Antony Turbeville, and a broker, Christopher Kline, to also pay restitution of more than $1.6 million to customers.
According to the FINRA panel, from July 2005 through July 2007, Turbeville and Kline intentionally made fraudulent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks associated with investing in CMOs. All of the affected customers were retired investors looking for safer alternatives to equity investments.
According to the decision, Turbeville and Kline “preyed on their elderly customers’ greatest fears,” such as losing their assets to nursing homes and becoming destitute during their retirement and old age, in order to sell them unsuitable CMOs. By 2005, “interest rates were increasing, and the negative effect on CMOs was evident to Turbeville and Kline, yet they did not explain the changing conditions to their customers,” FINRA says.
Instead, they led customers to believe that the CMOs were “government-guaranteed bonds” that preserved capital and generated 10% to 15% returns. During the two-year period, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers named in the December 2009 complaint, while those same customers lost $1.6 million.