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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Stone & Youngberg LLC (CRD #795, San Francisco, California)

submitted a Letter of  Acceptance, Waiver and Consent in which the firm was censured, fined $350,000 and ordered to pay $206,054.72, without interest, in restitution to customers. Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that it charged excessive markups on collateralized mortgage obligations securities (CMOs) transactions effected for retail customers. The findings stated that the firm failed to establish and maintain a supervisory system and procedures regarding the sale of CMOs to customers to ensure that its markups for retail trades were fair and reasonable. The group supervisor never instructed the trading supervisor, who also served as the firm’s CMO trader, how to assess the reasonableness of CMO markups. The findings also stated that as a result of these procedures, the firm performed CMO transactions with retail customers where the markup the firm assessed exceeded 4 percent of the current market price of the security. The amount of the CMO markups to these customers exceeding 4 percent was $206,054.72. These markups were excessive, in that they were not fair and reasonable when taking into account the circumstances of each trade. The findings also included that the firm failed to provide appropriate guidance regarding how to assess customer suitability for inverse floaters and failed to inform its sales force of Notice to Members (NTM) 93-73 regarding inverse floaters. Because of the firm’s lack of guidance, the firm permitted registered representatives to recommend the purchase of inverse floaters to retail customers who did not understand the risks involved, or whose investment objectives were moderate. FINRA found that the firm did not develop any of its own educational materials regarding CMOs, but purchased educational brochures on CMOs an association authored. At least one of these brochures met the informational requirements of Interpretative Material-2210-8 with respect to CMOs. Although the firm provided registered representatives with access to these brochures, each registered representative had the discretion to decide if and when to offer these brochures to their retail customers.

(FINRA Case #2009017769701) 

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