LPL Financial is one of the largest financial services companies in the United States.
The broker-dealer reports that it has more than $500 billion in assets under its management and has around 14,000 financial advisors.
Based in Boston, Massachusetts, this brokerage firm is licensed to operate in all 50 states and in several U.S. territories.
LPL Financial: Notable Cases Involving Broker Negligence or Misconduct
According to BrokerCheck, LPL Financial has accumulated 127 FINRA disclosures. A “disclosure” refers to customer disputes, disciplinary events and financial matters on the brokerage firm’s record.
To access information regarding the company, please reference the firm’s Central Registration Depository (CRD) number: 6413.
Here, our securities fraud attorneys discuss three of the most notable recent cases that have been brought against LPL Financial.
LPL FINANCIAL WAS FINED $26 MILLION FOR THE SALE OF UNREGISTERED SECURITIES
On May 1st, 2018, the North American Securities Administrators Association (NASAA) announced a $26 million settlement agreement with LPL Financial.
The NASAA is an international regulatory organization that is dedicated to protecting the rights and interests of investors. The NASAA represents 67 different nations, states, and territories. This includes all 50 U.S. states, the District of Columbia, Canada, Puerto Rico, and many others.
This settlement came out of a comprehensive investigation into the practices of LPL Financial and its securities representatives that started in Massachusetts. There were many other state securities regulators that quickly joined and participated in the investigation.
Allegations were raised that LPL Financial failed to put into place and maintain the proper safeguards to make sure that the brokerage firm’s securities representatives were not improperly selling unregistered securities to investors.
Securities must be properly registered. Unregistered securities can only be offered in narrow situations, when specific exemptions apply.
Notably, the NASAA states that it did not find any evidence that LPL willfully or recklessly defrauded its investors by improperly selling unregistered securities. However, the regulatory organization did find evidence that suggested that LPL Financial failed to put adequate supervisory procedures in place.
In addition, investigators also determined that LPL Financial failed to maintain its books and records. This is a serious violation. Comprehensive, accurate record-keeping is required to ensure full compliance with all state and federal securities regulations. The violative transactions could and should have been prevented with proper protocols.
Under this agreement, LPL Financial has agreed to repurchase any violative unregistered securities from affected investors. This settlement agreement reaches back until October 2006. Beyond offering fair compensation for victimized investors, LPL Financial has also agreed to pay affected investors three percent interest per year.
If you are an investor who lost money in unregistered securities sold by LPL Financial, you may be entitled to financial compensation through this settlement.
FAILURE TO SUPERVISE SECURITIES REPRESENTATIVES
On February 6th, 2018, the Financial Industry Regulatory Authority (FINRA) announced sanctions against LPL Financial. Without admitting or denying any misconduct, LPL Financial consented to FINRA’s proposed penalties. These sanctions were sought in relation to the firm’s alleged failure to supervise its securities representatives.
For full information regarding this case, please refer to Disciplinary Proceeding No. 2015045703001.
During the relevant period in this case, regulators assessed that LPL Financial failed to provide proper training to its individual brokers regarding certain CD investments. As a result, many of the firm’s brokers did not fully understand the risks involved with the financial products that they were offering, and thus failed to make proper disclosures to the firm’s customers.
According to FINRA, LPL Financial’s negligent conduct had significant consequences: one of the firm’s securities representatives made material misrepresentations to at least five different elderly investors. As a result of the poor guidance, these investors sustained collective losses in excess of $75,000.
FINRA alleges that LPL Financial violated Rule 3110, which requires all registered brokerage firms to put an adequate supervisory system in place. In relation to the alleged misconduct, the brokerage firm was fined $375,000 and ordered to pay financial restitution to the affected investors.
UNSUITABLE INVESTMENT RECOMMENDATIONS
On October 24th, 2017, the New Jersey Bureau of Securities announced that LPL Financial entered into a $950,000 settlement agreement. According to New Jersey’s top securities regulators, LPL Financial failed to ensure that its investment recommendations and securities sales failed to meet the state’s suitability requirements.
Specifically, the New Jersey Bureau of Securities contends that LPL Financial’s unsuitable investments recommendations occurred as a result of the brokerage firm’s failure to ensure that its client’s liquid net assets were properly recorded and updated on the firm’s internal documents.
Under New Jersey regulations, brokerage firms must update this information at least once every 36 months. The failure to do so could result in violations of the state’s suitability rules. Other U.S. states have similar requirements.
Without admitting to or denying any of the allegations raised by New Jersey securities regulators, LPL Financial consented to the penalties proposed by the agency. In addition to the $950,000 fine, penalties also included:
- A full review of all violative transactions and an agreement to pay restitution whenever appropriate;
- A promise to update the LPL Financial investor prospectus; and
- A $25,000 payment to New Jersey’s Investor Education Fund.
EXCHANGE TRADED FUNDS (ETFs): Material Misrepresentations
On June 20th, 2017, a FINRA Arbitration Panel based in Seattle, WA ruled in favor of an investor in a claim against LPL Financial.
In this case, the investor asserted several different causes of action against the brokerage firm, including:
- Breach of fiduciary duty;
- Broker negligence;
- Negligent misrepresentation;
- Failure to supervise; and
- Breach of the implied covenant of good faith and fair dealing.
The investor bought this arbitration claim after she claimed that she sustained significant losses in exchange traded funds (ETFs).
The FINRA Arbitration Panel determined that LPL Financial was legally liable for a portion of the investor’s losses. The customer was awarded a total of $25,000 in financial relief.
BROKER NEGLIGENCE: BREACH OF FIDUCIARY DUTY
On June 19th, 2017, a FINRA Arbitration panel located in San Francisco, California ruled in favor of an individual investor in a claim against LPL Financial and one of its registered securities representatives: Cory Burnell (CRD#: 3260340).
Mr. Burnell was employed by LPL Financial from 2007 through 2015. The investor alleged that Mr. Burnell’s negligence caused him substantial financial losses. Among others, the causes of action that were raised in the claim included:
- Breach of fiduciary duty,
- Investment fraud,
- Broker negligence;
- Unsuitable investment recommendations; and
- Failure to supervise.
The financial product that was at issue in this case was a class of highly aggressive exchange traded funds (ETFs): Proshares Ultra VIX Short Term Futures (UVXY”) and ProShares Short VIX Short Term Futures (“SVXY”). These are risky funds that are not suitable for all investors.
Upon review of the case, the FINRA Arbitration Panel agreed with the investor, awarding him $160,000 in financial compensation.
Improper Transactions Involving Non-Traded Real Estate Investment Trusts (REITs)
An REIT is a complex financial product, by purchasing one, investors can get access to the real estate market. While the product does offer some benefits for certain investors, it is also risky. As such, it is simply not appropriate for many retail investors. Nonetheless, LPL Financial sold REITs to thousands of different retails investors between 2008 and 2013.
In far too many cases, LPL brokers were recommending REITs to investors who had no business making such a trade. According to the North American Securities Administrators Association (NASAA), in making these sales, LPL Financial violated:
- Overall prospectus standards;
- Suitability requirements;
- State concentration limits; and
- Their own internal guidelines.
In relation to the misconduct, LPL Financial agreed to pay $1.43 million in fines, disgorgement and financial restitution. Customers across many different states were affected by LPL Financial’s improper sale of non-traded REITs.
This required the firm to reach settlement with many different state authorities. For example, in 2016, the brokerage firm reached a final settlement with the Florida Office of Financial Regulation, the Colorado Division of Securities, the California Department of Business Oversight and several other state regulators.
The Inappropriate Use of Leveraged and Inverse ETFs
On September 15th, 2015, LPL Financial reached a settlement agreement with the Commonwealth of Massachusetts; the company agreed to pay $1.8 million in fines and restitution. This agreement was reached after accusations that the brokerage firm inappropriately sold unsuitable exchange traded funds (ETFs) to several hundred Massachusetts investors.
An ETF is a security that trades like a common stock, but that tracks a specific index or basket of goods. ETFs are not necessarily risky. The risk level depends on the underlying product. For example, you could hold an ETF that tracks high grade corporate bonds, and you could hold that ETF as a small part of an all around well diversified portfolio.
In that case, such an investment would not be particularly risky. However, in this case, LPL Financial was selling investors speculative, and highly leveraged ETFs.
Indeed, LPL brokers were instructing their clients (many of whom had conservative-leaning investment objectives) to buy Proshares Ultra S&P 500. This an extremely speculative ETF. Worse yet, brokers were not even trading this ETF correctly. In many cases, LPL Financial customers held this fund for more than one year.
In reality, this fund should never be held for more than a single day. In its Summary Prospectus, Proshares warns investors that their Ultra S&P 500 ETF:
- Seeks investment results for only one day;
- Will likely lose money if held for more than one day, even if the index rises;
- Is far riskier than other benchmarked funds; and
- Is not suitable for most investors, but only for those who fully understand and accept the high risks of daily leveraged trading.
On December 1st, 2016, Massachusetts regulators brought an investment fraud claim against LPL broker Roger S. Zullo (CRD#: 1882087). Mr. Zullo has since ended his employment with the company. Additionally, on January 27th, 2017, LPL Financial agreed to pay $3.7 million to settle claims pertaining to Mr. Zullo.
According to the complaint from the Massachusetts Securities Division, LPL Financial broker Roger S. Zullo actively fabricated suitability profiles for a number of different investors. The reason he did this was so that he could sell them large amounts of unsuitable, high commission financial products. Both he and LPL Financial made considerable profits from these sales.
In all, Mr. Zullo raked in more than $1.8 million of personal commissions selling variable annuities. The vast majority of his commissions (nearly 99 percent) were related to the sale of one single annuity product: Polaris Platinum III (B Shares). While he was bringing in considerable fees for himself, many of his clients had to pay unnecessary (and unwanted) surrender charges just to buy these annuities. Worse yet, these annuities were never in their best financial interests.
Due to the fact that Polaris Platinum III annuities are only appropriate for a very narrow subset of investors, those who are high net worth and young, Mr. Zullo often had to make misrepresentations on client paperwork to complete these sales. For example, on one woman’s financial documents, Roger S. Zullo decreased her age by twelve years and then inflated her overall net worth by a multiple of ten.
When pushed into unsuitable investments, investors can suffer tremendous losses. LPL Financial was extremely slow to take action to correct this issue. Additionally, the brokerage firm did not have proper oversight procedures in place to protect its clients.
Brokerage firms have a legal duty in place to ensure that their individual brokers are acting in the best interests of their clients. If they fail to conduct adequate supervision, the brokerage firm can be held financially responsible for their clients’ damages.
Contact Our Office Today
If you lost money because of broker negligence or misconduct, our investor losses attorneys can help. To set up a free review of your claim, please do not hesitate to call us today at 844-689-5754. At the Sonn Law Group, we take all claims on a contingency fee basis. We will only collect our legal fee if we help you secure compensation for your losses.