Securities Lawyers Blog
Currently financial advisor Gary Arnold (Arnold), currently employed by brokerage firm Investment Network, Inc. has been subject to at least one disclosable event. These events include one tax lien. According to a BrokerCheck reports most of the recent customer complaints concern either corporate debt securities or alternative investments such as direct participation products (DPPs) like business development companies (BDCs), non-traded real estate investment trusts (REITs), oil & gas programs, annuities, and private placements. The attorneys at Gana Weinstein LLP have represented hundreds of investors who suffered losses caused by these types of high risk, low reward products.
FINRA BrokerCheck shows a final customer complaint on October 16, 2024.
Without admitting or denying the findings, the firm and Arnold consented to the sanctions and to the entry of findings that the firm and Arnold failed to establish, maintain, and enforce a supervisory system, including WSPs, reasonably designed to achieve compliance with Reg BI and FINRA rules relating to the sale of private placements and identifying and addressing potentially excessive trading. The findings stated that Arnold failed to update the firm WSPs to include any written policies and procedures regarding private placements and as a result, did not designate a supervisor with responsibility for supervising private placement offerings. The firm’s WSPs do not provide guidance about how to identify accounts that are excessively traded. Further, the firm has no reports or alerts designed to identify factors that would indicate excessive trading, instead relying primarily on a daily, manual trade-blotter review. As a result, the firm willfully violated Reg BI by failing to comply with Reg BI’s Compliance Obligation, set forth at Exchange Act Rule 15l- 1(a)(2)(iv). The findings also stated that the firm and Arnold failed to establish written policies and procedures reasonably designed to achieve compliance with Reg BI. Despite awareness of Reg BI’s June 30, 2020, implementation date, Arnold never updated the firm’s WSPs to include policies or procedures regarding compliance with Reg BI’s requirements. Therefore, the firm willfully violated Reg BI by failing to comply with its compliance obligation.
Alternative investments like nontraded REITs, oil and gas offerings, and equipment leasing products are part of DDPs. Investors almost never benefit from these alternative investments, which are typically inappropriate due to their steep fees and costs. Brokers earn additional commissions for promoting these low-quality investments, fostering a system of skewed incentives that result in an artificially sustained market.
Several studies have confirmed that Non-traded REITs underperform publicly traded REITs with some showing that Non-Traded REITs cannot even beat safe benchmarks, like U.S. treasury bonds. Brokers are supposed to warn investors that non-traded REITs offer lower returns than treasuries while being risky and illiquid—however, this disclosure is often neglected. Since investors do not receive extra returns for taking on higher risk and illiquidity, these types of alternative investment products are seldom, if ever, suitable for investors.
Brokers have a responsibility treat investors fairly which includes obligations such as making only suitable investments for the client after conducting due diligence. Due diligence includes an investigation into the investment’s properties including its benefits, risks, tax consequences, issuer, history, and other relevant factors. Appropriate due diligence would identify that an alternative investment’s high costs, illiquidity, and conflicts of interests that would make the investment not suitable for investors. Investors often fail to understand that they have lost money until many years after agreeing to the investment. In sum, for all of their costs and risks, investors in these programs are in no way additionally compensated for the loss of liquidity, risks, or cost.
Unfortunately, these types of alternative investment products continue to popular among brokers due to their high commissions. In order to counter the perverse incentives to sell these flawed product many states now limit investors from investing more than 10% of their liquid assets in Non-Traded REITs and BDCs. Many states impose these limitations because these investments do not benefit investors.
Arnold entered the securities industry in 1985. Arnold has been registered as a Broker with Investment Network, Inc. since 2003.
Investors who have suffered losses are encouraged to contact us at (800) 810-4262 for consultation. At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts. Claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.
