FINRA Fines Brookstone Securities Inc Over Sale of CMOs
In May, a FINRA arbitration panel fined Brookstone Securities Inc., $1 million over the sale of risky CMOs (collateralized mortgage obligations) and said they made “fraudulent misrepresentation and omissions of material fact in selling complex, esoteric and risky tranches of [CMOs] to unsophisticated, elderly and retired investors.” The FINRA panel also ordered its chief executive, Antony Lee Turbeville, along with a broker, Christopher Dean Kline barred from FINRA registered broker-dealers.
Brookstone and Antony Turbeville were jointly ordered to pay clients restitution of $440,600, while Brookstone and Christopher Kline were jointly ordered to pay $1,179,500 in restitution.
It was said in FINRA’s decision, that Turbeville and Kline “preyed on their elderly customers’ greatest fears,” such as losing their all of their savings to nursing homes and becoming penniless, thus enticing them into risky CMOs.
“Brookstone, Mr. Turbeville and Mr. Kline intentionally or recklessly misrepresented the CMO investments to their customers as a safe way, through government-backed bonds, to obtain a high rate of return on their investments,” according to the FINRA decision. “In reality, the CMOs the brokers purchased for the customers were high-risk investments whose returns were not assured, but instead, because of interest rate changes, were subject to dramatic changes in maturity, cash flow and value.”
According to FINRA, between July 2005 and July 2007, Brookstone earned $492,500 in commissions over that time on CMOs, and investors lost $1.62 million.
Seven clients, between 61 and 91, claimed they did not understand how CMOs worked and were not sophisticated investors, according to the FINRA decision. FINRA has a long-standing warning to firms and advisers about selling CMOs, since 1993, when the CMO market collapsed. Finra, formerly NASD, warned that “in light of the complexity and the varying risk characteristics of CMOs, member must be conversant in all of the characteristics of CMOs to assess adequately the suitability of CMOs for their customers. Moreover, members must ensure that their customers understand the characteristics and risks associated with CMOs.”
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