FINRA Lawyer Blog
Purshe Kaplan Sterling Investments (PKS) of Albany, New York, recently agreed to pay $3.4 million to a Native American tribe to resolve allegations that one of its brokers, Gopi Krishna Vungarala, took millions of dollars in undisclosed commissions on the tribe’s investments.
Vungarala was not only a financial advisor to the tribe; he was also employed as its Treasury Investment Manager, which allowed him to participate in investment decisions. Vungarala allegedly used his position for his own personal gain, although he was purportedly aware that employees of the tribe were banned from engaging in any business activities that might imply a conflict of interest.
According to a statement by FINRA,“Vungarala was able to misrepresent to the tribe that neither PKS nor he would receive commissions on its purchases, and he was therefore able to induce the tribe to invest more than $190 million in non-traded REITs and BDCs. In fact, Vungarala personally received at least $9 million in commissions from the tribe’s investments.”
FINRA alleges that PKS failed to adequately review Vungarala’s dealings with the tribe. “PKS failed to maintain and enforce an adequate supervisory system and written supervisory procedures to ensure compliance with the securities laws and FINRA rules when it sold non-traded REITs and BDCs,” the authorities explained in a statement.
In addition to these alleged violations, FINRA also found that more than 200 of the tribe’s purchases would have been eligible for volume discounts. Because these would have reduced Vungarala’s commissions, he was found to have failed to communicate to the tribe that the discounts were available. Meanwhile the broker allegedly misrepresented to his firm that the tribe was aware of the discounts but had turned them down.
FINRA Rules on Non-Trade REITs and BDCs
FINRA has strict rules for selling non-traded REITs and BDCs. According to the regulatory authority, PKS should have had a system in place to ensure Vungarala’s trading was compliant with securities laws.
Broker-dealers involved in the sale of non-exchange traded real estate investment trust, also known as REIT, must give investors a per share estimated value for the REIT using one of two methodologies listed in FINRA Notice 15-02.
They must also disclose to investors that such securities are usually illiquid and that they are not listed on a securities exchange.
In 2016, FINRA’s Regulatory and Examination Priorities Letter highlighted risks that, “exposed [investors] to high commissions and fees, illiquidity risks and uncertainty regarding the time-period BDCs will hold funds before they are invested.” Brokers involved in the sale of non-traded REITs and BDCs must carefully follow FINRA’s guidelines to ensure compliance.
If you are a broker-dealer or advisor involved in the sale of non-traded REITs (Real Estate Investment Trusts) and BDCs, a Herskovits Law securities lawyer can help with compliance, FINRA Notice 15-02 issues, or help with your best defense should regulators and/or investors target your firm for legal action. Call us for a confidential consultation:212.897.5410 or Email Us