Overland Park, Kansas based VSR Financial Services, Inc. and Donald Joseph Beary, a registered representative at VSR Financial Services, submitted a Letter of Acceptance, Waiver and Consent in which the firm and Mr. Beary consented to, but did not admit to or deny, the described sanctions and to the entry of the Financial Industry Regulatory Authority's (FINRA) findings that the firm failed to establish, maintain and enforce a reasonable supervisory system regarding the sale of non-conventional investments. The findings stated that the firm's written supervisory procedures (WSPs) provided that no more than 40 percent to 50 percent of a client's exclusive net worth could be invested cumulatively in alternative investments unless there was a substantial reason to exceed the guidelines and that justification was well documented. Supplemental to these procedures, the firm, through Mr. Beary, created additional procedures that applied a discount to certain non-conventional instruments, reducing the percentage of a customer's liquid net worth invested. The findings also stated that as the Direct Participation Principal, Mr. Beary had responsibility for the implementation and supervision of the discount program. In a letter to the firm, the Securities and Exchange Commission (SEC) identified that the firm it did not have adequate written procedures relating to the discount program. The SEC made the same finding two years later. Despite these warnings from the SEC, Mr. Beary did not take reasonable steps to implement WSPs or to otherwise discontinue the use of the discount program.
As a result of historically low interest rates, brokers and retail investors have been turning to non-conventional or alternative investment vehicles in search of a better return or yield on investments. Some of the products commonly categorized as non-conventional investments include real estate investment trusts (REITS), Regulation D private placements, tenants-in-common exchanges (TICs), hedge funds, asset-backed securities, distressed debt, and derivative products. In this case, most alternative investment program sponsors identified their products involving, at a minimum, a high degree of risk. However, FINRA found that VSR Financial Services also assigned a risk category to each alternative investment it sold. Rather than assign a risk category based upon the risk level identified by the sponsor in the alternative investment offering documents, the firm routinely assigned lower risk categories. In several instances, the firm lowered its internal risk rating subsequent to the firm's acceptance of the product, and in spite of the firm's efforts to increase sales of alternative investments through the use of discounts and risk rating reductions, customer investments still exceeded the 40 percent concentration guideline. The firm did not document the existence of a substantial reason to exceed the concentration guidelines as required by its WSPs.
FINRA also found that the firm, acting through a registered representative, recommended and sold high-risk private placements, namely Odyssey Diversified VI, Arciterra Note Fund III, Odyssey Diversifies Notes IX, MPF Income Fund 22 LLC, DBSI 2008 Notes Corporation, and APC 2005-B. Private placement investments sponsored by Black Diamond Energy, Inc. and Waveland Capital were also recommended and sold to customers. While these products may have been suitable for certain customers, they were not suitable for these customers given their financial circumstances and condition. The firm earned approximately $35,950 in commissions on the transactions. In addition, the firm, through another registered representative, made recommendations to customers that were not suitable given their moderate risk tolerance and specifications, and the firm earned commissions on the transactions of approximately $483,077.38. FINRA determined that the firm failed to reasonably supervise its representatives with respect to the unsuitable transactions. VSR Financial Services was censured and fined $550,000. Mr. Beary, of Lenexa, Kansas, was fined $10,000 and suspended from association with any FINRA member in any principal capacity for 45 days. The suspension is in effect from June 3, 2013, through July 17, 2013.
Broker-dealers must establish and implement a reasonable supervisory system and WSPs to protect customers from stockbroker misconduct. If broker-dealers do not establish and implement these protective measures, they may be liable to investors for damages flowing from the misconduct. Therefore, investors who have suffered damages in unsuitable, high-risk unconventional investments can bring forth claims to recover losses against broker-dealers like VSR Financial Services, which should consistently oversee its brokers' sales activities in order to prevent the above described prohibited conduct. Have you suffered losses in your VSR Financial Services, Inc. account due to unsuitable, high-risk unconventional investments? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. Mr. Pearce is accepting clients with valid claims against VSR Financial Services, Inc. stockbrokers who may have engaged in misconduct and caused investors losses.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 33 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at email@example.com for answers to any of your questions about this blog post and/or any related matter.