Investigating Independent Financial Group
The Law Offices of Patrick R. Mahoney (PRM) represents clients with active claims against Independent Financial Group (IFG). PRM has launched an investigation on behalf of those clients. PRM’s clients have made FINRA arbitration claims that allege financial losses as a result of the following (among other things):
PRM’s clients believe that this alleged misconduct resulted in both financial losses and improper excessive fees and commissions paid to IFG and its agents. The investigation seeks to discover additional facts or information that may help the prosecution of PRM’s clients’ cases.
PRM’s investigation of Independent Financial Group takes place concurrently with two other, related investigations:
- PRM’s investigation concerning Crosby Investment Group; and
- PRM’s investigation concerning stock broker Stewart Ginn.
IFG has a history of alleged misconduct that state, federal, and FINRA regulators have cited. PRMs clients allegations of misconduct concern some of the same allegations of misconduct that these regulators have directed towards IFG.
If you have any information concerning PRM’s investigation into Independent Financial Group, or any related investigation, please Contact Us.
What is Fund Misconduct?
Fund misconduct, more accurately described as “broker-dealer misconduct,” or “brokerage firm misconduct,” refers to misconduct that a brokerage firm engages in that has resulted in regulatory discipline from FINRA enforcement. Or, recommended discipline from FINRA enforcement.
FINRA-licensed brokerage firms, like IFG, must comply with FINRA’s extensive rules. If broker-dealers do not follow these rules, they have engaged in misconduct. Misconduct can lead to discipline from FINRA enforcement. Discipline can range from sanctions, orders of disgorgement, fines, industry bars, or other forms of discipline. FINRA can also recommend discipline.
Broker-dealer or fund misconduct can arise in a variety of ways. But the following forms of broker-dealer misconduct constitute red flags for investors who are customers of firms that have a history of actual or alleged malfeasance. Some red flags are described below.
Broker-dealers that FINRA has cited for engaging in fraud is a red-flag to current and prospective customers of offending firms. A FINRA citation for fraud means that the brokerage firm engaged in conduct designed to deceive its customers. Brokerage firms can use deceptive tactics in a variety of self-serving ways. This can include misstating or omitting significant risks associated with a particular investment. Or it can relate to deceiving clients about fees attributable to an investment the brokerage firm offers.
Misconduct attributable to fraud typically means that the firm engaged in intentionally deceptive conduct that often causes customers to lose money. Comparatively, negligent content, which can also give rise to liability in a FINRA arbitration, is typically unintentional.
Selling excessively risky investment products, funds, and/or strategies
Brokerage firms cited for exposing customers to excessive risk represents another red-flag for customers. FINRA rules require broker-dealers to ensure they properly disclose to their customers the risk of losing money in the investments offered. If brokerage firms fail to provide sufficient information relating to the risk of losing money, FINRA can discipline the firm.
Proper risk disclosure is essential. Without it, investors cannot make informed decisions about their investments. It further inhibits investors from having necessary information to ensure their investment portfolios are properly allocated.
Brokerage firms that FINRA cites for misconduct attributable to issues concerning the level of risk attributable to their investments, funds, or strategies can be cause of concern for investors because it might suggest ignorance to the true risk of loss of their investments.
Selling high-risk and obscure investments to retirees
FINRA discipline for selling high-risk investments to retirees and seniors is another red flag. State and federal law, and FINRA rules universally prohibit elder financial abuse. FINRA, in particular, takes seriously investment misconduct that targets elders and their money. In general, firms that sell elderly investors or retiree’s risky investments are typically motivated by the fees those underlying investments generate.
When a brokerage firm’s desire to collect fees trumps the best interests of the customer, it’s a red flag and suggests a potential breach of fiduciary duty.
Improper compliance procedures to monitor brokers
FINRA strictly enforces compliance with its rules to ensure that brokerage firms properly monitor the activity of their financial advisors. Without proper supervision, financial advisors have more opportunity to engage in securities violations, including fraud or other misconduct. Brokerage firms should have a robust system in place to monitor their brokers. This includes:
- Monitoring financial advisor correspondence with customers.
- Helping to ensure that the transactions their brokers recommend are suitable for the investor.
- Monitoring recommended investment strategies.
- Helping ensure investors are not overconcentrated in a particular investment or asset class.
Regulatory discipline attributable to alleged issues concerning failures to supervise or compliance issues therefore could be a red flag for investors.
Independent Financial Group’s History of Alleged Misconduct
Independent Financial Group’s publicly available BrokerCheck record reports a 11 regulatory events. BrokerCheck, which FINRA controls, is an online database that provides publicly available information about stock brokers and brokerage firms. Below are summaries of some of these events.
The SEC Censured Independent Financial Group for Alleged Misrepresentations Relating to Fees it Charged for Certain Mutual Funds.
In September 2019, the Securities and Exchange Commission (the “SEC) disciplined IFG. It alleged that IFG breached its fiduciary duty and made inaccurate disclosures when it advised clients to hold certain mutual funds that generated fees for IFG, when the investors could have purchased the same mutual funds for a lower fee.
The SEC censured IFG and required it to pay the following: $1,250,386.58 in disgorgement; and $175,764.06 in interest. Disgorgement refers to the return of any improperly obtained profits or financial gains. Here, the money IFG had to pay in disgorgement refers to the amount it allegedly received from improper fees attributable to mutual funds.
IFG Consented to a Fine from Allegations of Risky Trading of Leveraged ETFs
In April 2021, the Texas State Securities Board alleged that IFG had an “unreasonable supervisory system” in place when one of its financial advisors “implemented a high risk trading strategy in leveraged exchange traded funds.”
Without admitting or denying the board’s findings, the firm consented to pay a $75,000 fine and agreed to refund more than $275,000 to the affected customers.
A leveraged ETF is an exchange-traded fund that uses financial derivatives and debt to amplify the returns of an underlying index. Leveraged ETFs aim to deliver two or three times the daily return of their benchmark index. For example, a 2x leveraged ETF that tracks the S&P 500 index would aim to deliver twice the daily return of the S&P 500 index.
Leveraged ETFs use techniques such as borrowing money, buying derivatives, or using other financial instruments to achieve their desired level of leverage. This can increase the risk and volatility of the ETF compared to a traditional ETF. As a result, leveraged ETFs are generally considered higher risk than unleveraged ETFs.
Leveraged ETFs aim to achieve their leverage on a daily basis, which means that the performance of the ETF over longer periods may not be exactly two or three times the performance of the underlying index. The impact of compounding and market volatility can cause the returns of a leveraged ETF to deviate from its intended leverage ratio over longer holding periods.
Agreed to Sanctions Relating to Allegations of Improper Sales of Alternative Investments to Retirees and Seniors
Also in April 2021, FINRA alleged that one of the firm’s brokers improperly recommended to retirees, often with limited investment experience, to invest in alternative investments. Alternative investments are often high-risk. FINRA’s allegations cited the following potential “irregularities”:
- Discrepancies with investor account documents;
- Discrepancies with investor suitability questionnaires.
- Potentially mismarked trades;
- Customer signatures that did not match;
- Questionable changes to customer risk tolerances.
Without admitting or denying FINRA’s findings, IFG consented to a censure and $200,000 fine.
Additional, notable regulatory events disclosed on IFG’s BrokerCheck Reports
The state of South Dakota alleged IFG failed to supervise a former broker who allegedly engaged in selling away
In July 2020, the state of South Dakota alleged that IFG failed to supervise and failed to properly evaluate the outside business activity of one of its for brokers. The former IFG broker allegedly engaged in selling away after selling an unregistered security, which violated several statutes including FINRA Rule 3270.
Without admitting or denying the allegations, IFG consented to paying restitution of $18,750.
The state of Virginia alleged IFG failed to supervise two of its brokers who allegedly made untrue statements in selling high-risk investments.
In June 2014, the state of Virginia alleged that two IFG brokers engaged in securities fraud by making materially untrue statements in marketing alternative investments (specifically, non-traded REITs) formally designated as high risk high risk, as moderate to low risk.
Non-traded REITs (Real Estate Investment Trusts) are a type of REIT that is not traded on a public stock exchange. Unlike publicly traded REITs, which can be bought and sold like stocks on a stock exchange, non-traded REITs are sold through broker-dealers or financial advisors.
One of the main differences between non-traded REITs and publicly traded REITs is that non-traded REITs are typically illiquid investments, meaning that investors cannot easily sell their shares before the end of the investment term. Non-traded REITs are typically designed for long-term investors who are willing to hold their shares for several years.
Non-traded REITs are also subject to higher fees and expenses than publicly traded REITs, which can impact the potential returns for investors. Additionally, the lack of transparency and the difficulty of valuing non-traded REITs can make it difficult for investors to accurately assess their investment performance.
These brokers also sold these investments in high and unsuitable concentrations, which may have adversely impacted customer investment allocation.
Virginia further alleged IFG made supervisory failures including failing to implement adequate compliance procedures to monitor the brokers who allegedly sold these investments.
Without admitting or denying the allegations, IFG agreed to pay a $30,000 fine.
If you have any information concerning PRM’s investigation into Independent Financial Group, please Contact Us.