FINRA accuses Centaurus of supervisory failures

0

A financial adviser under increased scrutiny by his employer after half a dozen client complaints still managed to sell his clients hundreds of additional products that cost them extra fees, according to FINRA.

In a September 27 Case against Centaurus Financial and former adviser Donnie E. Ingram, the regulator accused the midsize wealth management firm of failing to review 83 clients who bought unit investment funds and nine clients who have invested in alternative products, all on the recommendation of Ingram. The investments carried high fees, raising the question of whether they were suitable for clients. FINRA said Ingram clients paid more than $350,000 in unnecessary sales commissions to the advisor and Centaurus, investigators said. Centaurus has denied FINRA’s allegations.

Wealth managers like Centaurus expressed their concern that the crackdown by regulators in recent years on products such as unit investment trustsunlisted real estate investment trusts and business development companies reduce access to worthwhile investments and lead some companies to bankruptcy. Centaurus, based in Anaheim, Calif., is taking the rare step of fighting the supervision and fitness case rather than settling it. FINRA alleged that Ingram was receiving commissions and consulting fees at the same time — an illegal practice known as “double dipping” — without any backing from Centaurus for two years.

“Paid discretionary accounts are formally fiduciary accounts and should have the highest possible level of loyalty, trust and oversight,” Louis Straney, fraud expert and founder of compliance consultant Arbitration Insight, said in an email. . “Conflicts of interest should be avoided, or potential conflicts disclosed clearly and accurately. Doubling fees is clearly a conflict of interest. The industry has had software designed to detect double charges for decades.”

Representatives of Ingram Advisory Services, a Winter Haven, Florida-based registered investment adviser that Ingram launched in 1999 and still does business as Ingram Financial Group, declined a request for comment on the case. Ingram voluntarily terminated his registration with the RIA in March 2021, about five months after resigning from Centaurus, according to FINRA. The RIA still uses Centaurus as a broker.

Centaurus Representatives, which has approximately 600 registered representatives who collectively generated more than $187 million in revenue in 2021 as the #20 company on Financial Planning’s IBD Elite study, said the company denies FINRA’s allegations. Centaurus is a family business that opened in 1992; this settled its last major regulatory case with the SEC by agreeing to pay $1.3 million in reimbursement, interest and fine in June 2021.

“It is general company policy not to comment on outstanding regulatory matters,” Centaurus executive vice president Jerry Duhovic said in an email. “Nevertheless, the company vehemently denies the allegations and looks forward to presenting its case and concluding this matter.”

The case and Ingram’s career record leave Centaurus with a tough climb to defeat the regulator’s case. In eight different settlements paid for by Ingram’s former brokerage firm – a private company owned by the Cetera financial group called Investors Capital that she consolidated in Cetera Advisors – clients received a total of $775,000 between 2013 and 2017 after pressing arbitration cases, according to FINRA BrokerCheck. Ingram did not pay any part of the Cetera company settlements, which related to client complaints about inappropriate investment recommendations. In comments on BrokerCheck, he denied any allegations of wrongdoing.

“I spent a lot of time doing due diligence on the client, her needs and the final investments,” Ingram said in response to an August 2016 case that settled for $115,000 the following year. “All investments were both tailored and explained in detail to the client.”

Despite his denial of those earlier allegations, Centaurus placed Ingram under enhanced surveillance about a year and a half after he joined the company from Investors Capital in 2016, according to the FINRA complaint. The firm did so because it had attracted six suitability complaints from clients in the previous two years.

Either way, the supposed review didn’t lead to much tighter oversight, investigators say. Ingram made 229 unit investment fund purchases on behalf of clients under enhanced supervision without any suitability review by his supervisor, FINRA said. The supervisor, who is not identified by name in the complaint, was Ingram’s RIA Chief Compliance Officer and the branch manager responsible for implementing the company’s enhanced monitoring plan for him. .

In total, Ingram recommended and completed 595 UIT transactions between September 2016 and September 2018 with additional sales fees amounting to $300,000 above the cheaper “paid” units available to Ingram and its customers, according to investigators. . Nine clients paid a total of $54,600 in unnecessary commissions for their non-traded REIT and BDC investments, FINRA said. Neither Ingram’s supervisor nor any regional compliance supervisor analyzed whether the cost of the products made them unsuitable, according to the complaint.

“Ingram’s recommendations to these customers were not appropriate because Ingram had no reasonable basis for recommending the higher cost UITs and alternative investments when it could have recommended the lower cost UITs and alternative investments to its customers,” the document reads. “In doing so, Ingram violated one of the fundamental tenets of the industry – a Registered Representative cannot seek to maximize their own compensation at the expense of their clients.”

FINRA’s complaint also took Centaurus to task, saying the firm “failed to conduct a reasonable prudential review of Ingram’s recommendations on UITs and alternative investments.”

FINRA has charged Ingram and Centaurus with three different rule violations, and the regulator plans to pursue restitution of “all ill-gotten gains” for restitution plus interest for affected clients. The case could have lasting ramifications for other wealth managers, according to Straney.

“Application findings of this nature are not common and, when applied, serve as a benchmark for the industry,” Straney said. “BrokerCheck’s multiple disclosures and increased oversight are red flags that need to be carefully managed. The company’s response to these issues is important.”

Share.

About Author

Comments are closed.