NASD Fines Hantz Financial $675,000 for Fraud, Misrepresentations Related to Undisclosed Revenue Sharing Arrangements
Washington, D.C. - NASD announced today that it has fined Michigan-based Hantz Financial Services, Inc. $675,000 for fraud and misrepresentations relating to undisclosed revenue sharing arrangements, as well as other violations. John Hantz, the firm's President, CEO, founder and primary owner, was censured and fined $25,000 for failing to supervise the firm's revenue sharing activities and suspended from acting in a supervisory capacity for 30 days.
The firm also agreed to implement substantial remedial measures, including making specific and immediate disclosures on its website about its potential conflicts, updating its policies, procedures and training, and retaining an independent consultant who will verify that Hantz Financial has completed the appropriate remedial activities.
NASD found that while Hantz Financial represented itself to clients as an independent firm offering a range of product choices from a variety of suppliers, the firm in fact had a single "preferred supplier" for each product category and directed the vast majority of sales to those preferred suppliers - in exchange for millions of dollars in marketing fees or special cash compensation. In representing itself to preferred suppliers, Hantz Financial emphasized that it had a proprietary rather than independent sales force, that it could determine what its employees sold, and that it expected 90 percent of its sales of each investment product to be the preferred supplier's product.
"This firm portrayed itself as independent, unbiased and armed with a myriad of product alternatives to meet its clients' needs - when in fact it was captive to a few preferred suppliers," said Barry Goldsmith, NASD Executive Vice President and Head of Enforcement. "Hantz Financial failed to meet its fundamental obligation to put its customers' interests first, and to disclose material conflicts of interest arising from revenue sharing arrangements, not to hide them."
NASD's investigation showed that, from 2002 to 2004, Hantz Financial misrepresented to its clients that the firm and its financial advisors (brokers) were "independent," "objective," and not "captive to one or a few product companies." A script brokers generally followed closely in their initial conversations with clients stated:
"I am an independent financial consultant. Do you know what that means? To be an independent financial consultant means a lot more freedom and flexibility to offer a number of different products and services without being captive to one or a few product companies. It allows me to better service my clients to help them reach their financial goals because there is more objectivity."
However, in confidential presentations to its preferred suppliers, Hantz Financial conceded that it was not "independent." NASD found that the firm entered into arrangements with a single "preferred supplier" in each product category, then encouraged its brokers to focus their sales almost exclusively upon its preferred suppliers' products. As Hantz Financial stated in a confidential marketing presentation to its preferred suppliers:
"Since [Hantz Financial's] entire sales force are employees, not independent contractors, [Hantz Financial] can dictate how they do business. … Unlike independent broker/dealer firms, almost all of [Hantz Financial's] new hires come from outside the industry, so [Hantz Financial] can train them to do business its way."
NASD found that Hantz Financial's brokers successfully directed between 81 percent and 99 percent of their sales in each product category to the designated preferred suppliers. The firm did not disclose to its customers that, contrary to its representations, it had preferred suppliers, or that it was selling their products almost exclusively. Hantz Financial also failed to disclose that it had negotiated deals with the preferred suppliers that allowed it to collect revenue sharing payments on sales of the preferred products. Between 2002 and 2004, Hantz Financial collected more than $4.2 million in marketing fees. The revenue sharing was so important to the firm's profitability that, without it, Hantz Financial's net profits in 2002 would have fallen from over $1 million to just $57,602. By 2004, its annual income from marketing fees had doubled and accounted for seven percent of the firm's overall revenues.
NASD also found that when Hantz Financial learned that its mutual fund preferred supplier was no longer willing to pay the firm marketing fees in 2002, it dropped that mutual fund firm as a preferred supplier and effectively stopped recommending its products to its customers. After signing an agreement to collect marketing fees from a new preferred supplier, Hantz Financial's sales of the new preferred supplier's mutual funds skyrocketed.
NASD's investigation also revealed that Hantz Financial recommended that thousands of its customers refinance their home mortgages through its affiliated mortgage broker, Tranex Financial, while mischaracterizing or not adequately disclosing its relationship with Tranex, the substantial compensation its brokers received for referring customers to Tranex, and the role Hantz Financial brokers played in the mortgage process. Hantz Financial suggested to both its customers and its mortgage regulators that the Hantz Financial brokers did not receive referral fees for directing mortgage loans to Tranex. In fact, Hantz Financial paid its brokers 25 percent of the net yield spread that Tranex earned on each loan that they referred. Hantz Financial did not disclose these conflicts of interest to its customers. NASD therefore found that Hantz Financial's misrepresentations and omissions concerning its mortgage activity violated NASD rules.
In settling this matter, Hantz Financial and John Hantz neither admitted nor denied the charges, but consented to the entry of NASD's findings.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches and request almost 190,000 reports for existing brokers or firms. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
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