I have to credit the securities industry. It has come up with really ingenious ways to separate investors from their money. Here's the latest scheme:
The allegations of misconduct
An Administrative Complaint filed by the Massachusetts Securities Division, Enforcement Section on November 15, 2016, alleges unlawful conduct by Investment Professionals, Inc. (IP) , an independent Texas-based brokerage firm. The firm has a unique business model. According to its website, it specializes "in the on-site delivery of investment programs for community financial institutions across the United States."
The Complaint (which contains allegations that are as yet unproven), alleges IP partnered with a number of banks and credit unions in Massachusetts. Between January 2014 and June 2016, the top ten IP representatives received approximately 2,208 customer referrals, of which about 45% were senior citizens, aged 65 or older.
About 14% of those referred invested in market-linked certificates of deposits and about 39% invested in annuities.
To incentivize its sales agents, IP allegedly promoted sales contests with prizes including a trip to Turks and Caicos, tickets to a Red Sox game, ski trips and cash bonuses. The Complaint alleges these contests were in violation of IP's own policies and procedures.
The Complaint alleges a variety of unsuitable investments to customers of the referring banks. These included multiple year market-linked certificates of deposit, non-traded REITs, and a non-traded business development company. Most shocking was the recommendation of an annuity with a 7-year term to an investor with Stage IV cancer who required liquidity. As a consequence, this terminally ill woman was left "with very limited access to liquid funds."
The Complaint alleges the arrangement between IP and the banks is a "win" for both of them. It includes "a generous revenue sharing program" and the receipt by the bank of "rent" in the form of a percentage of gross dealer concessions in exchange for allowing IP representatives to operate on their premises.
IP allegedly provided additional incentives to bank employees to refer customers. These included cash payments and gift cards.
The products sold to gullible investors by IP were characterized by -- you guessed it -- high commissions. Market-linked certificates of deposit generated gross dealer concessions ranging from approximately 2%-3% of the premiums paid by investors. In one case, this product was sold to an investor who was 83 years of age. It did not reach maturity until she turned 90.
Gross dealer concessions from the sale of non-traded REITS and non-traded Business Development Companies ranged from 3%-7% of premiums paid. They could be as high as 6% on annuities.
An insidious scheme
This scheme -- if proven -- is particularly insidious. Community banks and credit unions are no doubt held in high regard by their customers. When they put their imprimatur on a brokerage firm, by having them occupy its premises, it sends a powerful message.
The investments described in the Complaint would be suitable for few, if any, investors, much less for senior citizens and those with a terminal illness. The banks that participated in this unholy alliance are as culpable as the brokerage firm that is alleged to have instituted it.
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