Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2011
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
November 2011
Paul Leon White II
OS/2009017798201/November 2011

White recommended that a customer invest in non-listed real estate investment trusts (REITs) and a tenants-in-common (TIC) interest in undeveloped rural real estate without a reasonable basis to believe that the recommendations were suitable for the customer based on the customerís financial status and investment objectives, and the customerís need for liquidity, preservation of capital, ready access to cash, and safety of principal. The customer instructed White to sell the REITs and White acknowledged receipt of the sell instructions and informed the customer to expect to receive a check for the sale proceeds within one to two weeks, but later refused to process the sell orders.White participated in the sale of TIC interests totaling $3,700,000, outside the course or scope of his employment with his firm and collected selling compensation of approximately $1,653,958 but failed to provide his firm with prior written notice describing the proposed transactions. 

Paul Leon White II: Barred
Tags:  REIT     |    In: Cases of Note : FINRA
July 2011
David Allen Naefke
AWC/2009016728501/July 2011

Naefke circumvented his member firmís guidelines regarding investing in illiquid investments by submitting documents, including illiquid investment letters and account information forms, that falsified and exaggerated customersí net worth which in turn permitted investments in amounts that the firm would have otherwise prohibited and that were unsuitable for the affected customers.

The firm had internal guidelines that limited the amounts customers were permitted to invest in illiquid investments; the internal policy further stated that illiquid investments for older investors required additional review and consideration pertaining to their needs for liquidity and income. Naefke submitted documents that knowingly falsified customersí net worth, causing his firmís books and record to be inaccurate and customers to invest in illiquid investments in amounts that his firm would have otherwise prohibited; and Naefke impeded his firmís ability to adequately supervise the suitability of his recommendations.

On three illiquid investment letters, Naefke falsely stated that a

  • 50-year-old customerís adjusted net worth was $2,000,000, when in fact it was about $150,000;

O at least two account information forms, Naefke falsely stated that an

  • 87-year-old customerís net worth was between $1,000,000 and $2,999,999, when, in fact, it was approximately $250,000; and

O four illiquid investment letters, Naefke falsely stated that the

  • 87-year-old customerís adjusted net worth was $1,000,100.

Naefke recommended and sold illiquid investment interests in publicly registered non-traded real estate investment trusts (REITs), direct participation programs and a limited partnership to customers totaling about $299,000. When Naefke made the recommendations and sales, he did not have reasonable grounds for believing that the recommendations were suitable based on each customerís other security holdings, financial situation and needs.

David Allen Naefke: Barred
Tags:  REIT    Elderly     |    In: Cases of Note : FINRA
February 2011
Resource Horizons Group LLC
AWC/2009017637201/February 2011

The Firm approved advertising materials registered representatives used during several public seminars; the firm sent invitations to members of the public, and the seminar attendees received supplemental materials designed to introduce the firm and the financial services it offered. The invitations failed to provide a sound basis for evaluating the facts regarding the products or services offered. The supplemental materials contained exaggerated and unwarranted language, and the seminar handout had unwarranted language.

The seminar presentations failed to explain a product or strategy.  The discussion of equity-indexed annuities (EIAs) failed to provide a balanced presentation and omitted information.  The discussion of variable annuities omitted material information.

The presentations failed to disclose

  • that projections are hypothetical and are not guarantees,
  • risks attendant with options transactions, and
  • risks and rewards of real estate investment trusts (REITs) in a balanced way.

The discussion of expenses pertaining to mutual funds and variable annuities was misleading; discussion of annuities in Individual Retirement Accounts (IRAs) was misleading.

The list of benefits and features of variable annuities failed to disclose potential restrictions and costs, discussion of 1031 exchanges failed to elaborate on Internal Revenue Code restrictions. The discussion of variable annuities provided an incomplete, and oversimplified presentation and representation that safety and protection are provided by diversification market index certificates of deposit, puts, and living benefits profits provided by variable annuities was promissory and exaggerated.

The firm failed to reasonably supervise its communications with the public and its supervision was not reasonably designed to meet the requirements of FINRA Rule 2210(b)(2). The firmís procedures required the supervisory principal to evidence approval by signing public communications submitted for approval and use, but the supervisory principal only initialed a coversheet that did not identify which communication was approved. In addition, the firm failed to maintain records naming the registered principal who approved the public communication or the date approval was given, nor documentation establishing that a certified registered options principal approved options material or that the material had been properly submitted to FINRAís Advertising Regulation Department for pre-approval.

Resource Horizons Group LLC : Censured; Fined $15,000
Tags:  REIT    EIA    Variable Annuity     |    In: Research and Advertising
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