Securities Arbitration Lawyer Blog
In a recent regulatory case, on May 5, 2023, the Financial Industry Regulatory Authority (FINRA) Office of Hearing Officers imposed sanctions on Centaurus Financial, Inc. and its financial advisor Donnie Ingram for engaging in unsuitable and unethical practices, as well as supervisory failures. Centaurus Financial, Inc. was censured and ordered to pay a $50,000 fine and $388,962 in restitution to harmed customers. Donnie Ingram was suspended from association with any FINRA member firm in any capacity for six months, fined $15,000, and ordered to pay $388,962 in restitution to harmed customers. The sanctions were the result of Ingram’s unsuitable recommendations to customers to purchase Unit Investment Trusts (UITs), Bluerock Residential Growth REIT Inc. (BRG), and MacKenzie Realty Capital, Inc. (MAC) at higher costs when there were lower cost options available.
Earlier this year, in February 2023, Centaurus Financial also agreed to pay a $750,000 civil penalty after the SEC charged the firm in connection with the unsuitable recommendation of variable interest rate structured products to retail customers. The SEC’s order found that Centaurus failed to implement, and its branch manager failed to follow, Centaurus’ customer-specific suitability procedures and that Centaurus violated the broker-dealer books and records provisions of the federal securities laws. The SEC’s order found that Centaurus violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (“Securities Act”) and Section 17(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 17a-4(e)(5), 17a-4(f)(2), and 17a-3(a)(17)(i)(B)(3) thereunder. The SEC concluded that Centaurus failed reasonably to supervise the firm’s brokers.
Financial institutions like Centaurus Financial, Inc. must properly supervise financial advisors and customer accounts. Brokerage firms must establish and maintain a reasonably designed system to oversee account activity, such as recommendations to purchase alternative investments, such as GWG L Bonds, UITs, and REITS, to ensure compliance with securities laws and industry regulations. When a brokerage firm fails to supervise its financial advisors or the investment account activity sufficiently, it may be liable for investment losses sustained by customers.
Customers of Centaurus Financial or Donnie Ingram are encouraged to contact Iorio Altamirano LLP, a securities arbitration law firm that represents investors, for a free and confidential consultation and to review their legal rights.
Iorio Altamirano LLP has also been investigating Centaurus Financial, Inc. for its sales practices related to GWG L Bonds. For the latest on the law firm’s investigation, please visit the following blog posts:
What L Bondholders Need to Know About GWG Holdings, Inc.’s Chapter 11 Plan
Broker-Dealers Sold GWG L Bonds Using Aggressive and Misleading Marketing
FINRA Disciplinary Proceeding No. 2018057298701
According to the complaint filed by FINRA’s Department of Enforcement, between September 2016 and September 2018, Donnie Ingram, a registered representative with Centaurus Financial and an investment advisor through his own SEC-registered investment advisory firm, Ingram Advisory Services, LLC (Ingram Advisory), made unsuitable recommendations to 81 customer accounts. Ingram’s recommendations caused his customers to incur unnecessary expenses of more than $300,000, providing no additional benefits to them while directly benefiting Centaurus and himself.
Ingram regularly recommended that his customers purchase “standard version” Unit Investment Trusts (UITs) instead of equivalent, lower-cost “fee-based” UITs. As a result, his customers incurred initial and deferred sales charges. These charges would have been waived if Ingram had recommended the fee-based UITs.
Other than causing the customer to incur the full transactional sales charges by purchasing the standard version UIT, there was no difference between the standard version UIT that Ingram recommended and purchased for his customers and the fee-based UIT.
According to the complaint, Ingram understood at the time he made these recommendations that he could have recommended and purchased the lower-cost fee-based UIT for his customers’ brokerage accounts. However, he recommended the higher-cost standard version UIT because it allowed him to receive as compensation a percentage of the transactional sales charge that the customer paid to the UIT sponsor, which the sponsor then paid to Centaurus as a dealer concession.
Additionally, Ingram recommended that his customers purchase Bluerock Residential Growth REIT Inc. (BRG) and MacKenzie Realty Capital, Inc. (MAC) through Centaurus instead of through Ingram Advisory, causing his customers to pay selling commissions that could have been avoided. Other than the selling commission that Ingram and Centaurus received, the underlying securities had the same features and benefits.
Ingram’s conduct violated the reasonable-basis suitability obligation in FINRA Rule 2111(a) and FINRA Rule 2010. Furthermore, Centaurus Financial failed to reasonably supervise Ingram’s recommendations of UITs, BRG, and MAC, violating FINRA Rules 3110(a), 3110(b), and 2010.
Centaurus Financial Inc.’s Supervisory System and Its Shortcomings
Centaurus Financial employed a multi-level supervisory system, which included assigned branch managers, trading principals, and Regional Compliance Supervisors (RCSs). The first level of supervision and oversight belonged to the branch manager, who was responsible for reviewing and processing orders and ensuring the suitability of recommended transactions.
During the relevant period between September 2016 and September 2018, the branch manager for Centaurus’ branch in Winter Park, Florida, was Ingram’s direct supervisor. In that capacity, the Centaurus branch manager was responsible for supervising Ingram and reviewing the suitability of his recommended transactions, including UITs, BRG, and MAC. However, the Centaurus branch manager failed to conduct a suitability review of Ingram’s investment recommendations, as he did not understand that it was his responsibility to do so. Furthermore, the Centaurus branch manager was allegedly aware of Ingram’s practice of recommending more expensive standard version UITs, BRG, and MAC through Centaurus due to the transactional sales charges and admitted that Ingram recommended the higher-cost UITs for “the compensation.”
In addition to the branch manager’s responsibilities, Centaurus’s Written Supervisory Procedures (WSPs) required a trading principal to carefully review UIT order forms for potential violations, unsuitable transactions, and other potential infractions. During the relevant period, no trading principal at Centaurus conducted any suitability review of Ingram’s UIT recommendations. The WSPs also mandated a Regional Compliance Supervisor (RCS) to review the suitability of Ingram’s investment recommendations of alternative investments or non-conventional investments (NCIs), such as BRG and MAC. The RCS responsible for Ingram’s recommendations, however, failed to consider the costs of his recommendations as part of the review.
About Iorio Altamirano LLP
Iorio Altamirano LLP is a securities arbitration law firm located in New York, NY. We represent investors nationwide and vigorously pursue FINRA arbitration claims on behalf of investors to recover investment losses.
We have over 20 years of combined experience as securities arbitration lawyers and have helped investors recover investment losses in over 1,000 cases. Our firm will file a FINRA securities arbitration claim on your behalf on a contingency fee basis to try to recover your losses. If we do not obtain a recovery, you do not owe us a legal fee.
If you have invested in alternative investments such as GWG L Bonds, REITS, or UITs through Centaurus Financial, Inc., contact securities arbitration lawyers August Iorio at august@ia-law.com or Jorge Altamirano at jorge@ia-law.com. Alternatively, you may reach the firm by phone toll-free at (855) 430-4010.