(FINRA Case #2014039169601)
Berthel, Fisher & Company Financial Services, Inc. (CRD #13609, Cedar Rapids, Iowa) and Jeffrey Paul Dragon (CRD #1874038, Swampscott, Massachusetts) were named respondents in a FINRA complaint alleging that Dragon generated more than $421,000 in concessions for himself and the firm, at the expense of his customers, by recommending and effecting a pattern of unsuitable short-term trading of UITs (Unit Investments Trusts).
The complaint alleges that the firm is liable for Dragon’s unsuitable investment recommendations under the doctrine of respondeat superior because he was an agent of the firm acting within the scope of his duties when he engaged in this misconduct. The short-term trading patterns were inconsistent with the design of the securities at issue and required the customers to pay substantial sales charges, most of which came back to the firm and the representative in the form of dealer concessions.
Dragon recommended to the customers—many of whom were seniors, unsophisticated investors, or both—that they liquidate UIT positions that they had held for only a few months, and which they had purchased on Dragon’s recommendations, and then use the proceeds to purchase other UITs. Because each UIT purchased carried a new sales load, and because UITs are designed not to be actively traded, Dragon’s recommendations were excessive and unsuitable. Dragon made the recommendations to the customers that they buy and sell UITs without having reasonable grounds for believing that the consistent pattern of short-term UIT trading he recommended was suitable for any of the customers, given their age, personal and financial situations and needs, the nature of the recommended UIT transactions, including the sales charges and other costs associated with them, and the availability of less costly alternatives. Dragon also routinely structured the UIT purchases he recommended to the customers in order to prevent the customers from qualifying for sales-charge discounts, which would have reduced the dealer concessions paid to him and the firm. Dragon made the structured recommendations to the customers without having a reasonable basis to believe that those recommendations, which prevented the customers from receiving available discounts to which they were entitled, were suitable for those customers or for any customer.
The complaint also alleges that the firm allowed this activity to occur, and in fact, profited from it, as a direct result of its inadequate system for supervising UIT trading. The firm failed to establish and maintain a supervisory system that was reasonably designed to ensure compliance with its and its representatives’ suitability obligations under the federal securities laws and FINRA and NASD® rules in connection with sales of UITs, and to ensure that customers received sales-charge discounts to which they were entitled on UIT purchases. The firm’s supervisory system was also inadequate because it was not reasonably designed to prevent short-term and potentially excessive trading in mutual funds. As with UITs, the firm’s supervisory system lacked any methods, reports, or other tools to identify mutual-fund switching or trading patterns indicative of other misconduct. The firm’s supervisory system was not reasonably designed to ensure that the firm’s UIT and mutual fund customers received all sales-charge discounts to which they were entitled. Instead, the firm relied on its registered representatives and its clearing firm to determine whether UIT and mutual fund purchases should receive sales-charge discounts, and did not conduct any review or supervision to determine if those discounts were applied correctly. This not only allowed Dragon’s breakpoint manipulation scheme to go unchecked, it also resulted in further injury to firm customers.
From 2010 through 2014, the firm failed to detect that more than 2,700 of its customers’ UIT purchases did not receive applicable sales-charge discounts. As a result, firm customers paid excessive sales charges of approximately $667,000, nearly all of which was paid to the firm and its registered representatives as dealer concessions.
If you feel you have been misled or taken advantage by Jeffrey Paul Dragon, Berthel, Fisher & Company Financial Services, Inc. or any Broker and wish to discuss legal action, please contact Darren Blum at 1-877-786-2552 (1-877-STOCK LAW), www.stockattorneys.com for a free consultation.