Three-Arbitrator Panel Grants Expungement Of 2 Disclosures

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Award Date: September 22, 2022
Hearing Site: Los Angeles, California
Respondent Firm: Sandlapper Securities, LLC
Claimant Representative: AdvisorLaw

Case Objective:

In 2019, just six years into his career in the financial services industry, an advisor was hit with two customer disputes, each with a long list of allegations. While the second claim was closed with no action, the first listed a settlement amount in the hundreds of thousands of dollars on our advisor’s public BrokerCheck record. The advisor hired HLBS Law to help him seek expungement of the marks.

Case Summary:

The customers who lodged the first dispute had approached our advisor in 2016, seeking his perspective on a list of private equity and real estate investments they had compiled. The couple were high-net-worth, sophisticated investors with extensive experience, and they wanted income from their investments.

Our advisor reviewed the investments on the couple’s list and explained the details. The couple received, reviewed, and signed multiple documents acknowledging the investments’ details, risks, and suitability. The investors elected to invest seven percent of their net worth in a private equity investment, and they purchased a real estate investment, as well.

About two years later, the private equity investment filed for bankruptcy, due in part to new legislation that had passed in Texas. In 2019, the couple filed for FINRA arbitration, alleging negligence, unsuitability, misrepresentations and omissions, fraud, breach of fiduciary duty, violations of various acts and rules, and more. They sought nearly $700,000 in damages, and the firm settled with them for $325,000. While the advisor didn’t have to contribute to the settlement, he still ended up with the disclosure on his records.

The couple involved in the second dispute approached our advisor in 2014. As with the first couple, they were sophisticated, accredited, high-net-worth investors with significant experience.

It was the couple’s specific intent to execute a Section 1031 exchange of some properties they were selling, in order to defer capital gains taxes. The husband wanted to use the proceeds from their properties to purchase a Delaware statutory trust (DST) with a certain requisite debt. However, there were less than 30 DSTs available that met his criteria at the time.

Our advisor performed extensive due diligence in order to determine suitability and make sound recommendations. He established a strong relationship with the investors and referred them to a third-party due diligence report, as well. He disclosed the relationship between the firm and the investment sponsor, as well as his status as a registered rep working in retail sales for the firm.

The investors selected two DSTs and signed numerous documents in connection with the purchases. They attested to their knowledge of all risks and details, as well as any potential conflicts of interest, and they attested to their suitability as investors in the DSTs. In total, the couple invested nearly $600,000 in two DSTs through the Section 1031 exchange.

Around 2018, due to several factors, including the Illinois government’s inability to pass a budget for more than two years, the performance of the DSTs was negatively impacted, and one of the DSTs ultimately failed.

In November of 2019, a customer dispute by the investors was reported to our advisor’s records, alleging that he had failed to conduct due diligence, along with allegations of negligence, conflict of interest, and breaches of fiduciary duty and contract. They sought nearly $600,000 in compensatory damages, though no settlement was made, and the claim was closed with no action.

Result:

The respondent firm is an inactive, terminated FINRA member, and it did not file a statement of answer in response to the advisor’s expungement claim. Neither the customers nor any representative of the firm participated in the FINRA Dispute Resolution hearing. The three-arbitrator Panel reviewed the documents submitted by the advisor and the customers’ complaints. The Panel listened to the advisor’s testimony and the arguments presented by AdvisorLaw.

The Panel agreed that both customer disputes met FINRA Rule 2080(b)(1)(C) criteria — that the claim, allegation, or information is false. The Panel found that “in both occurrences, [the advisor] properly determined the qualification of the Customers to make the investments, did appropriate due diligence, properly evaluated the suitability of the investments, and the Customers understood the risks involved.” Additionally, “[p]ossible conflicts of interest were disclosed to the Customers, and [the advisor] did not receive economic benefits greater than what he would have received if an alternative investment had been offered.” Finally, the Panel pointed out that “[t]he subsequent losses, which were realized two or more years after the investments, were caused by conditions and events that could not reasonably have been anticipated through due diligence at the time of the investments.”

With the Panel’s ruling, this advisor will soon have both customer dispute disclosures wiped from his CRD and public BrokerCheck records.

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