Elder fraud and abuse is a growing crime – and one that in recent months has garnered heightened scrutiny from securities regulators. Last week, the Financial Industry Regulatory Authority (FINRA) fined broker-dealer Brookstone Securities $1 million in connection to sales of risky tranches of collateralized mortgage obligations (CMOs) to elderly clients. The firm, its top executive and a broker also were ordered to pay $1.62 million in restitution to affected customers.
According to FINRA’s decision, Brookstone Securities made “fraudulent misrepresentation and omissions of material fact in selling complex, esoteric and risky tranches of [CMOs] to unsophisticated, elderly and retired investors.”
As part of the ruling, Brookstone’s owner, Antony Lee Turbeville, and a broker, Christopher Dean Kline, have been barred from working with a FINRA-registered broker/dealer.
In addition, Brookstone and Turbeville were jointly ordered to pay clients restitution of $440,600, while the firm and Kline were jointly ordered to pay $1,179,500.
Another Brookstone executive and minority owner, former chief compliance officer David Locy, was suspended from the securities industry for two years, barred from working as a supervisor in the future and fined $25,000.
Brookstone plans to appeal FINRA’s decision.
FINRA says that from July 2005 through July 2007, Turbeville and Kline intentionally made fraudulent misrepresentations and omissions to elderly and unsophisticated customers about the risks associated with investing in CMOs. All of the affected customers were retired investors looking for safer alternatives to equity investments.
Turbeville and Kline “preyed on their elderly customers’ greatest fears,” such as losing their assets to nursing homes and becoming destitute during their retirement and old age, in order to induce them to purchase unsuitable CMOs, FINRA said in announcing its decision against Brookstone.
By 2005, when interest rates began to rise and the negative effect of CMOs became evident to Turbeville and Kline, the men never explained the changing conditions to their customers, FINRA says. Instead, they led their clients to believe that the CMOs were “government-guaranteed bonds” and would preserve capital and generate returns of 10% to 15%.
During that two-year period, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers who were named in a December 2009 complaint. Meanwhile, those same customers lost $1,620,100.
Two of Kline’s customers were elderly widows who had very limited investment knowledge. Following the death of their husbands, the women were convinced to invest their retirement savings in risky CMOs. FINRA says that Kline told the widows that they could not lose money in CMOs because they were government-guaranteed bonds, and Kline further increased their risk by trading on margin.