The Financial Industry Regulatory Authority suspended two representatives who allegedly violated FINRA rules while serving elderly clients in separate cases, according to the regulator.
Without admitting or denying the findings, ex-Berthel Fisher rep Mason Gann and First Western Securities rep Kerry Dean Wills each signed a FINRA letter of acceptance, waiver and consent in which they agreed to the sanctions imposed on them by FINRA.
Gann signed his letter Dec. 31, agreeing to a three-month suspension from FINRA firms, but is not currently registered as a broker, according to FINRA. Wills signed his letter Jan. 15, agreeing to a six-month suspension and $10,000 fine. FINRA accepted both letters Monday.
Berthel Fisher and Gann didn’t immediately respond to requests for comment Tuesday. No attorney was cited on Gann’s AWC letter.
Between August 2015 and January 2018, Gann “recommended and effected a risky options-trading strategy in the account of a retiree and senior investor who had limited income, modest retirement savings, and minimal investment knowledge,” according to FINRA. The rep “lacked a reasonable basis for believing that his options recommendations were suitable for the customer, given what Gann knew about” the investment profile of that client, according to FINRA, which identified the customer only as “JM.”
JM opened an IRA at Berthel in 2012, after having previously been Gann’s customer for several years at another broker-dealer, according to FINRA. At the time, JM was 71 years old, married and retired, and his account value was about $205,000, FINRA said. Since retiring in 2009, JM had taken $1,500 monthly withdrawals from his IRA to pay for current expenses and had also occasionally withdrawn larger amounts to pay other expenses, FINRA noted, adding JM informed Gann that he intended to continue withdrawing $1,500 on a monthly basis indefinitely.
Between 2013 and 2015, however, JM’s account holdings did not produce enough income or gains to offset his withdrawals, and by August 2015, the value of JM’s account had declined to about $120,000, according to FINRA.
On an annual basis, JM’s withdrawals equated to 15% or more of the account value by that point, the regulator noted. Therefore, continuing withdrawals at the same level JM had been doing was “likely unsustainable for the long term, and Gann exacerbated the problem by recommending that JM begin trading options, which Gann conceived of as a way to generate more income in the account,” FINRA said.
At the time, JM’s only other source of income was Social Security benefits, his IRA accounted for basically his entire liquid net worth, and he had little to no experience trading options, according to FINRA. But that didn’t stop Gann from recommending risky investments by JM. And, by January 2018, the “combined effect of investment losses and steady withdrawals had reduced JM’s account balance to below $20,000,” FINRA said.
Through his conduct, Gann violated FINRA Rules 2111 (governing the suitability of recommended transactions and investment strategies) and 2010 (governing standards of commercial honor and principles of trade), according to FINRA.
This wasn’t Gann’s first AWC letter. In March 2018, Gann entered into an AWC with FINRA in which he consented to findings that he exercised discretion without written authorization in six customers’ accounts, violating NASD Conduct Rule 2510(b) and Rule 2010. For that violation, Gann received a 20-business-day suspension and $5,000 fine, FINRA noted,
Gann first registered with FINRA in October 1999, as a general securities representative, and was associated with two firms between then and June 2012, when he joined Berthel Fisher. The firm terminated his registration, effective Feb. 12, 2018, “for possible violation of terms of heightened supervision,” according to a disclosure on his profile at FINRA’s BrokerCheck website.
Meanwhile, in the case of Wills, the rep borrowed $150,000 from a 90-year-old customer in violation of his employer member firm’s procedures and FINRA Rules 3240 (governing borrowing from or lending to customers) and 2010.
In May 2012, Wills borrowed $150,000 from a client only referred to as Customer A “to cover expenses incurred in litigation,” FINRA said. The loan was “memorialized with a promissory note that provided for a ten-year term and a 2% interest rate,” but Wills “never disclosed the loan” to his firm or sought an exemption from its procedures prohibiting the acceptance of a loan from a firm customer, according to the regulator.
Wills made one annual payment on the loan, in January 2014, but Customer A “never cashed the check [and] passed away six months later, leaving a trust document that provided for loan forgiveness,” FINRA said.
Wills also accepted a gift of about $19,500 in luxury travel from the same elderly customer, FINRA said. The rep did not disclose the travel gifts on First Western’s gifts and gratuities logs, despite the requirement that he do so, in violation of the firm’s procedures and FINRA Rule 2010, according to FINRA.
“Specifically, Customer A paid for the airfare and tickets for three international cruises for Wills,” FINRA said. Wills accompanied Customer A on the three trips, “providing personal care and assistance with travel logistics,” but the rep did not disclose the trips to his firm or report the trips on its gifts and gratuities log, FINRA said.
First Western, where Wills continues to be registered as a broker, according to his BrokerCheck profile, didn’t immediately respond to a request for comment. Nor did Kevin K. Fitzgerald, co-managing partner at the Los Angeles law firm Jones Bell, who represented the rep in the dispute with FINRA.
— Check out FINRA Bars Brokers Who Wronged Elderly Clients on ThinkAdvisor.