WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that Albany, New York-based Purshe Kaplan Sterling Investments (PKS) will pay nearly $3.4 million in restitution to a Native American tribe, after the tribe paid excessive sales charges on purchases of non-traded Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs). In addition to ordering restitution, FINRA fined PKS $750,000 for its failures to supervise the sales of these securities. This settlement resolves charges brought in a February 2016 FINRA complaint against PKS. The charges alleged in the same complaint against the tribe’s PKS registered representative, Gopi Vungarala, are ongoing.
FINRA found that from July 2011 through at least January 15, 2015, Vungarala was the tribe’s PKS registered representative and also the tribe’s Treasury Investment Manager responsible for managing the tribe’s investment portfolio. PKS failed to adequately review the risks inherent in that relationship or establish procedures designed to mitigate the risks. FINRA found that as a result of these supervisory failures, Vungarala was able to misrepresent to the tribe that neither PKS nor he would receive commissions on its purchases, and he was therefore able to induce the tribe to invest more than $190 million in non-traded REITs and BDCs. In fact, Vungarala personally received at least $9 million in commissions from the tribe’s investments.
FINRA also found that PKS failed to identify that more than 200 of the tribe’s purchases were eligible for discounts based on the volume of the purchases. FINRA found that Vungarala’s commissions would have been reduced to approximately $6 million if the tribe received the volume discounts for which it was eligible; however, Vungarala misrepresented to PKS that the tribe did not want to receive the volume discounts. PKS failed to take reasonable steps to verify this statement even after it received inquiries about the missed discounts from a REIT issuer and FINRA staff.
In addition, FINRA found that, between April 2009 and October 31, 2014, PKS failed to maintain and enforce an adequate supervisory system and written supervisory procedures to ensure compliance with the securities laws and FINRA rules when it sold non-traded REITs and BDCs. PKS did not have procedures that were reasonably designed to identify accounts that were eligible for volume discounts, and did not provide any guidance to its representatives or supervisors regarding how to ensure that the sales volume discounts were applied appropriately.
In concluding this settlement, PKS neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
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