FINRA recently barred former LPL Financial broker, Gary Chackman (CRD #1705039, Baltimore, MD), for several violations of securities industry rules, including falsifying documents, related to the sale of nontraded real estate investment trusts from 2009 to 2012. See FINRA Case No. 2012031742301. Chackman was registered with LPL from December 2001 until his termination in February 2012 for violation of the firm’s policies and procedures relevant to the sale of alternative investments.
While FINRA’s Department of Enforcement has several complaints pending against registered representatives which allege misrepresentations in the sale of non-traded REITS, FINRA has barred only one other broker this year due to such misrepresentations, according to Investment News. Rather, regulators have focused their efforts on broker-dealers.
LPL, for example, was one of several firms fined by the Massachusetts Securities Division and ordered to pay $21.6 million in restitution in connection with clients of brokers affiliated with the firms that had more than 10% of their liquid net worth invested in nontraded REITs, a violation of Massachusetts rules. In particular, LPL Financial LLC agreed to pay restitution of $2 million to Massachusetts investors who bought seven nontraded REITs, as well as a $500,000 administrative fine.
Without admitting or denying the allegations Chackman consented to the entry of findings that from July 2009 to February 2012, Chackman recommended REITs and other alternative investments to at least eight of his LPL customers. FINRA found that Chackman routinely misidentified his customers’ liquid net worth on a required LPL alternative investment purchase form, which enabled him to evade LPL’s limitation on the concentration of alternative investments in customers’ accounts. As a result of Chackman’s misrepresentations on those forms, his customers’ concentration in alternative investments, gauged as a percentage of their purported liquid net worth, remained below LPL’s limitations. By falsifying the alternative investment purchase forms, Chackman increased his sales of alternative investments, but his unsuitable recommendations over-concentrated his customers’ assets in illiquid alternative investments.
For example, one customer made seven purchases of a particular REIT, each for $75,000, and after twelve months, 35% of the assets she entrusted to Chackman, and more than 25% of her liquid net worth, as stated on LPL account documentation when she first purchased alternative investments, were invested in REITS and other alternative investments. Similarly, another customer made seven purchases of the same REIT, totaling $135,000, over seven months, and after twenty-two months, he had more than 33% of his liquid net worth, as stated on LPL account documentation when he opened his accounts, invested in REITs and other alternative investments.
“When we became aware of Mr. Chackman’s activity, we moved promptly to terminate him and took the necessary steps to improve systems to prevent similar misconduct in the future,” said LPL spokeswoman Betsy Weinberger on Thursday, according to Investment News.
Brokerage firms and financial professionals may aggressively encourage their clients to pursue unsuitable investments, because these investments pay very high commissions, and are extremely profitable to those who sell them. Nontraded REITS are high-commission products, which often pay sales commission of 7%. The drive to make money can compel brokerage firms and financial professionals to ignore fundamental duties to their clients, such as the duty to research and understand an investment, as well as evaluate whether the investment is suitable for a particular client given the client’s investment experience, net worth, risk tolerance, and investment objectives.
Sonn Law Group specializes in representing investors (not brokerage firms) in securities arbitration and investor fraud cases throughout the country. Sonn Law Group has represented numerous investors in FINRA arbitration claims against the brokerage firms who sold illiquid, high-commissioned, non-traded investments, including TICs, REITS, promissory notes, and more, who have filed claims against their brokerage firms. To learn more, including whether you may have a claim for investments losses, please call us at 844-689-5754 or complete our “contact form.”