FINRA announced in its July 2013 disciplinary action report that it has fined Kansas-based brokerage firm VSR Financial Services, Inc. $550,000 and fined and suspended VSR co-founder Donald Joseph Beary. The fine and suspension are related to VSR’s failure to supervise sales of non-conventional or alternative investments and other misconduct. Supervision of sales of non-conventional investment is necessary to prevent brokers from selling unsuitable securities and from over-concentrating investors’ accounts with investments that are too risky. Placing too many high-risk investments in a customers’ account is a form of stockbroker misconduct that investors often do not recognize.
FINRA found that VSR’s internal rules prohibited brokers from placing more than a certain percentage of a client’s net worth in alternative investments unless there was a substantial reason to exceed the limit that was well-documented. But VSR’s co-founder, Beary, created procedures that applied a discount to certain non-conventional investments, reducing the percentage of a customer’s liquid net worth that allegedly was invested in the products. The SEC informed VSR that its supervisory procedures regarding the discounting were inadequate, but Beary failed to improve the supervisory protocols or stop the discount program. VSR also improperly understated the risk of some of the alternative investments in an effort to avoid exceeding VSR’s internal limits regarding the percentage of investors’ money that could be invested in risky alternative investments. VSR’s ultimate goal presumably was to allow its brokers to sell more high-commission, alternative investments.
Despite VSR’s efforts to circumvent its own policies in order to increase sales of alternative investments, many customer accounts still held alternative investments that exceeded VSR’s internal limits. Yet, there was no documentation supporting any substantial reason for exceeding the limits, as VSR’s policies required.
FINRA also found that VSR allowed its brokers to recommend and sell unsuitable, high-risk private placements to investors. FINRA identified more than $500,000 in commissions that VSR generated from the sale of unsuitable private placements. Some of these transactions involved at least one broker falsifying a customer’s account documents and at least one broker providing inaccurate securities prices on manipulated account statements.
It is shocking that a brokerage firm would permit the above conduct in the aftermath of the billions of dollars that investors lost in high-risk private placements in 2007, 2008, and 2009. After the implosion of Ponzi schemes by Provident, Medical Capital, Bernard Madoff, Allen Stanford, and others, there simply is no excuse for circumventing investor safety protocols and failing to supervise brokers. But greed is powerful. Brokerage firms’ chasing commissions often ignore their responsibilities to investors in favor of enriching themselves, regardless of the ever-growing history of fraudulent investment schemes that eat away at the integrity of the securities markets.