HTK settles FINRA case alleging supervisory failures
6 mins read

HTK settles FINRA case alleging supervisory failures

A former broker who sold $7 million worth of investments in a massive Ponzi scheme targeting veterans never heard that his firm had rejected his request to push the product, FINRA said.

Horsham, Pennsylvania-based Hornor, Townsend & Kent — the No. 27 firm on Financial Planning’s IBD Elite rankings of independent brokerages and a subsidiary of insurer Penn Mutual — took seven months to review the broker’s potential outside business activity and failed to communicate its decision to him, according to the firm’s March 21 settlement with FINRA. The brokerage agreed to pay $180,000 to settle the regulator’s charges of supervisory failures.

The “structured cash flow investment” pitched by the unidentified ex-broker and issued by an Irvine, California-based firm called Future Income Payments promised customer returns of 7% to 8%, FINRA said. Instead, the products turned out to be a $300 million scam that defrauded 2,500 retirees and locked more than 13,000 veterans into predatory loans, according to the Department of Justice, which has called the scam a Ponzi scheme. The representative who sold the products to 39 investors, including 16 Hornor, Townsend clients, voluntarily resigned in 2016 and hasn’t been registered with any brokerages since.

“Had HTK conducted reasonable supervision, it would have learned that [the broker] was using firm resources to sell [the products] to firm customers, including his firm email account, and his assigned sales assistant (a non-registered fingerprint person at HTK),” according to the FINRA settlement order. “As a result, HTK failed to detect [the broker’s] sales of [the products].”

Asked for the former broker’s name, whether the firm has paid any arbitration awards or settlements to clients and if the firm would like to respond to FINRA’s allegations in the case, representatives for Hornor, Townsend declined to comment.

For financial advisors, the case offers the latest reminder of the need to seek a brokerage firm‘s approval for any private securities transactions or outside business activities, according to recruiter Phil Waxelbaum of Masada Consulting in Beverly Hills, California.

Supervisory obligations under FINRA rules require brokerages to scrutinize them representatives’ external entities and transactions for potential fraud or other misconduct. Those supervisory duties include potential M&A deals made by the brokers, according to Waxelbaum, who was praised by Cetera Financial Group for reminding its reps of what it needed last fall.

“Nothing could be damaged by having the broker-dealer say, ‘Yeah, this looks good to us,'” he said. “If your broker-dealer has approved the transaction, then you have two affirmative defenses… It’s really insane, when you have this opportunity, don’t exercise it.”

The ex-Hornor, Townsend broker requested approval in July 2013, according to FINRA. His supervisor gave the “structured cash settlements” a green light, but the compliance team at the brokerage firm’s corporate headquarters failed to review the request until the following February, investigators said. An official word from the head office took more than half a year, despite the broker’s stated intention on the approval form to begin selling the Future Income products the previous July. The compliance team refused to approve the products.

“Home office supervision informed [the broker’s] that supervisor [his outside business] request would not be approved,” FINRA’s settlement stated. “Although home office supervision recorded the disapproval in the firm’s systems, no one at HTK ever communicated this decision to [the broker].”

Hornor, Townsend’s flub of its “responsibility to reasonably investigate red flags” created a vacuum that became lucrative for the broker, according to FINRA. Between July 2013 and March 2016, when the representative left the firm, he sold millions of dollars worth of the products to more than three dozen investors. It’s not clear what happened with the customers’ investments or whether, as in some other cases involving brokers who have been found to have committed misconduct, the broker is still in business under a different regulatory authority.

The mastermind of the Future Income scheme, Scott Kohn, received a 10-year prison sentence last August after pleading guilty to fraud and conspiracy charges. Between 2011 and 2018, Future Income solicited pensioners who were in financial straits, most of them veterans, to turn over the rights to their monthly retirement and disability payments to Future Income in exchange for lump sums of money, according to FBI investigators. The conspirators portrayed the transaction as a sale, even though they were usurious loans with interest rates as high as 240%.

In turn, the conspirators tapped into “a network of hundreds of financial advisors and insurance agents nationwide” to sell thousands of older adults on the “structured cash flows” of the monthly payments, the DOJ said. The schemers pledged big returns and concealed the underlying transactions with the military pensioners, all while Kohn was using much of the money to live lavishly. When the scheme finally collapsed, investors lost $310 million.

In addition to the $297 million in forfeiture from the criminal sentence, the Consumer Financial Protection Bureau secured a judgment in its civil lawsuit against Future Income, Kohn and related entities ordering them to pay $436 million in restitution, plus a penalty of $65.5 million. The court appointed a receiver tasked with disbursing the available money to the victims.

“Kohn and his co-conspirators reached across the country to steal from veterans and seniors who desperately needed their money,” the US Attorney for the District of South Carolina, Adair Boroughs, said in a statement at the time of Kohn’s sentencing. “These hundreds of millions in losses will reverberate through the victims’ lives long after the defendants served well-deserved federal prison sentences.”

Related Posts