Coastal Equities has agreed to pay a $150,000 penalty to settle Finra charges that it failed to notify clients when a recommended investment had regulatory trouble and failed to supervise a representative who falsified client documents, the regulator said.
The Wilmington, Del.-based broker-dealer, which has 165 registered reps and 72 branch offices, will also pay $268,800 plus interest for restitution to eight clients, according to the consent agreement.
This is the latest regulatory trouble for a firm that over the years has been plagued with allegations of representative wrongdoing, settlements and even significant jail time for the company’s former president, Michael Donnelly.
Coastal declined to comment on the Finra action.
The settlement stemmed from investigation Finra was making into investment firms that sold the securities of GPB Capital, a New York-based alternative asset management firm that served as the general partner in limited partnerships formed to acquire income-producing companies.
Coastal Equities had been one such a firm, approving one of the portfolios for sale by the firm’s registered reps in October 2013 and another in May 2015, after conducting its due diligence, the letter said.
Problems arose in July 2017, when GPB and a former operating partner lobbed lawsuits at each other, during which that partner alleged GPB had falsified financial statements to hide that it was defrauding investors, according to Finra. And then in April 2018, GPB delayed filing audited financial statements with the Securities and Exchange Commission because, the firm said, it was working with a third-party forensic auditor in other to put those allegations of fraud to rest, Finra said in the agreement.
Not only did Coastal’s representatives fail to notify its clients of the issues at GPB, the firm continued to recommend and sell the partnership interests, Finra said.
“Although Coastal received the email from GPB Capital notifying it of the delays and GPB Capital’s stated intention to complete a forensic audit, Coastal sold 11 limited partnership interests … after the date of the letter,” Finra stated in the consent agreement. “The principal value of those 12 sales, which were finalized and accepted by GPB Capital between May 1, 2018, and June 30, 2018, totaled $3.05 million. Coastal received a total of $244,000 in commissions from the sales.”
At the same time, one representative referred to only as “Representative A” was singled out by Finra for allegedly falsifying documents in order to sell more of the GPB partnerships.
According to Finra, Coastal’s policy for complex investment products like GPB’s included a disclosure form signed by both the client and the representative that listed the client’s overall liquid net worth, prior alternative assets investments and the proposed new investment. In addition, a suitability calculation was made to ensure that alternative investments were no more than 35% of a client’s portfolio. This disclosure form would then be reviewed and approved by the representative’s supervisor.
Between August 2014 and July 2018, Representative A recommended his clients buy into the GPB partnerships for a total of $15 million, only the firm failed to notice that in some cases he was circumventing the 35% concentration limit by altering information on the disclosure forms, Finra said.
“In connection with at least 22 customers’ investments in GPB Capital, Representative A submitted altered disclosure forms. The majority of these alterations involved unsubstantiated increases in the customer’s net worth, liquid net worth, or both. In many instances, there were indications on the face of the documents that information had been whited-out and written over,” the letter said. “In other cases, Representative A sent emails to customers attaching only the signature pages for documents related to the investment, including new account information forms, the disclosure forms, and subscription agreements. Representative A then completed the remaining portion of the documents with financial information that was inflated and/or false.”
For example, Finra alleged that one customer’s liquid net worth mysteriously tripled from $4.5 million in May 2015 to $13.6 million in September 2017, during which time Representative A recommended $875,000 in GPB investments. By September 2017, this client’s total investment in alternative assets constituted about 75% of their actual liquid net worth.
According to Finra, Coastal did not attempt to confirm any of the changes to customers’ financial documents.
In addition to the $150,000 fine, Coastal agreed to pay partial restitution of $268,800 plus interest to eight customers. The restitution represents the commissions those customers paid on their GPB investments. In addition to these customers, according to Finra, there are four other customers who previously settled their claims with the firm.