Without admitting or denying the allegations, the firm and  Mr. Gautney consented to the described sanctions and to the entry of findings that the firm, acting through Gautney, failed to establish, maintain and enforce an adequate supervisory system and adequate written supervisory procedures to detect and prevent excessive trading in customer accounts. The findings stated that the firm, acting through Mr. Gautney, failed to reasonably supervise registered representatives and failed to respond to red flags indicating the representatives’ apparent excessive trading. The findings also stated that the firm failed to comply with a previous Offer of Settlement, which Mr. Gautney signed on the firm’s behalf, requiring each to pay $100,000 in restitution to customers; approximately half of which remains unpaid.

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Firm to Pay Restitution of $189,723 for Unsuitable Sales

WASHINGTON — On October 20, 2010, The Financial Industry Regulatory Authority (FINRA) announced that it fined the former Ferris, Baker Watts LLC, acquired by RBC Wealth Management, $500,000 for inadequate supervision of sales of reverse convertible notes to retail customers as well as unsuitable sales of reverse convertibles to 57 accounts held by elderly customers who were at least 85 years old and customers with a modest net worth. 

Also, the firm was ordered to pay nearly $190,000 in restitution to the 57 account holders for net losses incurred as a result of purchasing reverse convertibles.

 ”Reverse convertible notes are complex investments that often entail significant risk of loss and also involve terms, features and risks that can be difficult for retail investors to evaluate,” said James Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “Ferris, Baker’s inadequate written procedures resulted in recommendations of sales to customers for whom the purchase of these securities was not suitable, including elderly customers and investors who had very modest assets.”

FINRA explains that reverse convertibles are notes with a coupon interest rate set for a fixed duration – three, six or twelve months –  that are tied to the performance of a particular stock. If the price of the underlying stock drops below a certain level during the duration of the reverse convertible, the customer receives a predetermined number of shares of the stock at maturity of the note.

 If the underlying security maintains its price level, at maturity, the customer receives return of the dollar amount invested and a final coupon payment. In most of the instances where customers received the underlying stock at maturity, the customer ended up with an investment loss. Reverse convertibles not only come with the risks associated with fixed income products, such as issuer default and inflation, but with the additional risk that the value of the underlying asset can significantly depreciate.

 Also, FINRA found that during the period January 2006 to July 2008, Ferris, Baker engaged in sales of reverse convertibles to approximately 2,000 retail accounts without providing sufficient guidance to its brokers and supervising managers on how to assess suitability in connection with their brokers’ recommendations of reverse convertibles.

 The firm did not have a system to effectively monitor customer accounts for potential over-concentrations in reverse convertibles. The firm also made recommendations without a reasonable basis to believe that the investment was suitable for elderly customers and those with modest net worth. The firm also failed to detect and respond to indications of potential over-concentration in reverse convertibles.

 One example, the firm sold an 86-year-old retired social worker five reverse convertibles in the amount of $10,000 each. At various times, these represented between 15 percent and 25 percent of her investment portfolio. In another instance, the firm sold a 20-year-old clerk making less than $25,000 annually five reverse convertibles in his Roth IRA and regular accounts. These securities represented 51 percent of the IRA account and 44 percent of the regular account’s value.

 The firm neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

This information was obtained from FINRA’s website.

If you feel you are a victim of these alleged fraudulent schemes of Ferris, Baker, Watts, LLC, or RBC Wealth Management, call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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