New Jersey and other states are stepping up their efforts to punish investment professionals, such as broker-dealers and investment advisers, for breaching fiduciary duties to their customers and clients.
The New Jersey Securities Bureau revoked the registrations of and imposed a $750,000 civil monetary penalty on, an investment adviser firm and the firm’s investment adviser representative-owner, for breaching fiduciary duties to clients by knowingly recommending and selling them fraudulent, unregistered securities tied to Ponzi schemes (In the Matter of Gary Richard Scheer and Retirement Financial Advisors, February 25, 2020).
Eight-year fiduciary duty breach. During the eight-year relevant period, from 2010 to 2018, the New Jersey investment adviser representative, through his firm, breached a fiduciary duty to at least 50 clients by recommending and selling them unregistered securities in seven different investments. The Securities Bureau determined, moreover, that the investment adviser representative continued to recommend and sell these securities to the clients even after discovering that some of the investments were tied to a $1.2 billion or a $47 million Ponzi scheme, and that six of the seven investment funds were deemed fraudulent and, hence, subject to cease, desist and revocation orders by the SEC and by the states Arizona, Illinois, Massachusetts, Michigan, New Hampshire, and Texas.
The Securities Bureau revoked the representative’s and the firm’s respective registrations and imposed the $750,000 penalty after finding that he violated New Jersey securities law by specifically:
- selling the unregistered securities as an unregistered agent for the sales;
- omitting and materially misrepresenting to the clients the risks associated with the investments; he knew he was putting certain risk averse clients into high risk investments;
- breaching his fiduciary duty to the clients by failing to conduct a due diligence investigation into the securities he was recommending, which would have revealed to a reasonable person the fraudulent nature of those investments and the federal and state orders imposed on the issuers of the underlying securities; and
- breaching his fiduciary duty to the clients by failing to disclose significant conflicts of interest caused by his recommending unsuitable investments to the clients because of the substantial commission he would receive on those investments; he would have received much lower commissions on more suitable recommendations so he never recommended them; and while he told the clients that he would receive commissions, he never disclosed specific amounts.
New Jersey’s Securities Bureau Chief and current President of the North American Securities Administrators Association (NASAA), Christopher Gerold, stated "Investors must be able to trust that the investments they are sold are legitimate. Their investment professionals have a duty to conduct reasonable due diligence before making a recommendation. The Bureau of Securities will continue to aggressively enforce New Jersey’s securities laws against investment professionals that fail to fulfill their duties to their customers by selling unregistered and/or fraudulent securities."
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