Sales of collateralized mortgage obligations to the elderly clients of a Florida securities firm were deemed fraudulent yesterday by a FINRA hearing panel. Learn more about the pros and cons of collateralized mortgage obligations.
A Florida securities firm faces $2.6 million in fines and restitution over the sales of collateralized mortgage obligations to elderly investors, according to a statement released yesterday by the Financial Industries Regulatory Authority or FINRA.
A FINRA hearing panel yesterday found that the firm, Brookstone Securities of Lakeland, FL, its owner, Antony Turbeville, and one of the firm’s brokers, Christopher Kline, made fraudulent sales of collateralized mortgage obligations, a complex and potentially risky investment product, to unsophisticated elderly investors. The decision will become final after 45 days unless it is appealed to FINRA’s National Adjudicatory Council. (Losing the ability to make financial decisions is the greatest fear of Millionaire Investors, according to Millionaire Corner research.)
The panel has barred Turbeville and Kline from the securities industry, and has also taken action against David Locy, Brookstone’s former chief compliance officer. Locy has been barred from acting in any supervisory or principal capacity, has been suspended in all capacities for two years and faces fines of $25,000.
From July 2005 through July 2007, Turbeville and Kline preyed on vulnerable seniors looking for safer alternatives to equity investments by making “fraudulent misrepresentations and omissions” regarding the risks of investing in collateralized mortgage obligations or CMOs, according to the panel’s decision. During the two-year periods, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers, while these customers lost more than $1.6 million.
Turbeville and Kline induced their elderly clients to purchase unsuitable collateralized mortgage obligations by appealing to their ”greatest fears,” such as becoming destitute in old age. (Investors’ most regret not saving enough for retirement, according to Millionaire Corner research.)Two of the clients were elderly widows with very limited investment knowledge, said FINRA, who were convinced to invest their retirement savings in risky CMOs. According to FINRA, “Kline told the widows that they would not lose money in CMOs because they were government-guaranteed bonds, and Kline further increased their risk by trading on margin.” Kline and Turbeville failed to communicate to their clients that rising interest rates were negatively affecting their collateralized mortgage obligations, according to FINRA. “Instead, they led customers to believe that the CMOs were ‘government-guaranteed bonds’ that preserved capital and generated 10 percent to 15 percent returns.”
When collateralized mortgage obligations came onto the investment scene nearly 30 years ago they provided a new way to invest in the mortgage market by pooling like mortgages to create mortgage-backed securities. The innovative products pass through interest and principal from mortgage payments to holders of CMO bonds. The potential benefits of collateralized mortgage obligations are relatively high credit quality, a potentially higher yield than other fixed-income products and a relatively low investment minimum, according to Wells Fargo Advisors. Risks to collateralized mortgage obligations include changes in interest rates, and delinquent mortgage payments. The products are generally most suitable for investors with a long-term horizon, and interest payments on collateralized mortgage obligations are subject to income taxes.
“While you can't lose principal if the CMO is backed by government guaranteed mortgages, there is considerable risk in terms of interest rates, time of maturity and liquidity,” according to the Better Business Bureau of New York. “CMOs are complex and, in many cases, big, institutional investors have better access to information on them than is available to individual investors. This can lead to difficulty in competing with the big players for the higher grade CMOs. These investments (collateralized mortgage obligations) require caution and should be bought only with the advice of a neutral investment professional.”