In 2014, FINRA fined Berthel Fisher & Co. Financial Services Inc. and one of its affiliates $775,000 for a number of failures to supervise sales of nontraded REITs and leveraged ETFs between 2008 and 2012. Now the company is on thin ice with FINRA again for failing to supervise the sale of an investment product. This time the sale of unit investment trusts is the problem. In March, FINRA sued Berthel Fisher and its ex-broker Jeffrey Dragon for structuring sales from 2013 to 2014 of UITs to customers to allegedly avoid reaching levels at which breakpoint discounts would kick in, hurting clients while increasing the broker’s commission.
The firm terminated Dragon in September 2016 as it “believed he did not adhere to a term of his heightened supervision agreement, which required him to run all business, including fixed indexed annuities, through the firm’s commission grid,” Dragon’s BrokerCheck states. FINRA’s complaint alleges that he generated over $421,000 in commissions for himself and the firm by recommending short-term trading of the UITs, which is not consistent with the buy and hold design of the products, and also making customers pay “substantial” sales charges.
In particular, Dragon solicited twelve customers, many of whom were elderly and unsophisticated investors, to liquidate UIT positions they had only held for a few months and which they had purchased on the solicitation of Dragon and then use the money to buy other UITs, according to FINRA.
“Berthel allowed this activity to occur — and in fact, profited from it — as a direct result of the inadequate system for supervising UIT trading,” FINRA’s filing states. “Throughout the UIT period, Berthel’s only regular supervisory review of UIT recommendations and customer activity consisted of manual reviews of daily trade blotters that did not indicate either how long UIT positions had been held before liquidation or the source of funds used to purchase UITs.”
Even further, Berth Fisher fell behind on its overseeing of flipping of mutual funds, a constant issue with regulators, the regulator says. “Berthel’s supervisory system was also inadequate because it was not reasonably designed to prevent short-term and potentially excessive trading in mutual funds,” according to the complaint.
Over the last several years, FINRA has been focused on firms missing discounts when selling UITs. In that regard, Berth Fisher is not alone. What distinguishes the firm is that the alleged failure to supervise the short-term trading of UITs by Dragon is that is happened immediately following the firm’s sanctions for failing to supervise sales of non-traded REITs. If FINRA’s allegations are true, Berthel Fisher would appear to have a system problem with supervision.When firms fail to supervise their brokers, it may cause substantial losses for the investor. The Frankowski Firm has years of experience representing investors who have lost money as the result of brokers’ malfeasance. If you or someone you know has lost money as a result of such a scheme, please contact Richard Frankowski at 888-741-7503 to discuss your potential legal remedies or complete the contact form.