A former registered representative with Coastal Equities has been charged by Finra with allegedly making $2.4 million worth of unsuitable recommendations of illiquid alternative investments to nine clients and falsifying documents to circumvent his firm’s asset allocation policies
Luke Michael Johnson, of Paradise Valley, Ariz., allegedly changed his customers’ reported net worth, liquid net worth, risk tolerance, liquidity needs, annual income, and/or status as an accredited investor to make investments in nine funds, including GPB Capital Holdings, and as a result made $132,000 in commissions, Finra said in a disciplinary action filing.
The Finra Department of Enforcement asked an arbitration panel to order sanctions in the case, including the disgorgement of all ill-gotten gains, plus interest, and the costs of the proceedings. Johnson could not be reached for comment.
In December, Wilmington, Del.-based Coastal Equities agreed to a $150,000 penalty to settle Finra charges that it failed to notify clients when a recommended investment had regulatory trouble and failed to supervise an unnamed representative who falsified client documents. It also paid $268,800 plus interest for restitution to eight clients.
That representative was described in December as having put 22 customers into unsuitable GPB Capital Holdings investments. In addition to the GPB Capital funds not matching with client objectives and net worth, the firm itself was involved in lawsuits between the firm and a former operating partner in which the partner alleged GPB was defrauding investors. Not only did Coastal’s representatives fail to notify its clients of the issues at GPB, the firm continued to recommend and sell the partnership interests, Finra said in the settlement.
As of December, Johnson had 22 allegations from his time at Coastal, according to BrokerCheck, many of which cited unsuitable investment recommendations and misrepresentations by Johnson. Of those, 20 were settled for a total of $2.872 million. Two more allegations were filed in 2023, and the pending four allegations are requesting an additional $953,000 in damages.
According to this week's disciplinary action filing, from April 2015 to May 2018, Johnson violated a Coastal Equities policy that limited customers from investing more than 35% of their liquid net worth in alternative investments, Finra said.
“Johnson dramatically inflated his customers’ net worth and liquid net worth and dramatically understated the percentage of his customers’ assets invested in alternative investments in order to circumvent Coastal’s concentration policy and Coastal’s supervisory oversight,” the Finra filing said.
The investments Johnson recommended were four GPB Capital Holdings limited partnerships, two non-traded REITs (American Realty Capital Hospitality Trust and MVP REIT I and II), one non-traded business development company (MacKenzie Realty Capital) and four other illiquid alternative investments (Priority Income Fund, MCI Preferred Income Fund II, Cunat Multi-Family Investment Fund II, GWG Holding Series 2 Redeemable Preferred Stock).
In order to put his clients into these investments, Johnson had to fill out disclosure forms and questionnaires to ensure suitability, and to submit them to a supervisor for approval.
“When obtaining executed copies of the Alternative Investment Documents, Johnson presented certain customers with only the signature pages. Once the signature pages were signed by the customer, Johnson or his assistants, acting at Johnson’s direction, added inflated information regarding the customer’s net worth and liquid net worth to the documents unbeknownst to the customer,” the Finra filing stated. “At other times, after obtaining executed copies of the Alternative Investment Documents, Johnson or his assistants, acting at Johnson’s direction, would white-out information about a customer’s liquid net worth, for example, and then provide false and inflated information on the forms.”
In one instance, an 80-year-old client seeing moderate growth and income had income ranging between $120,000 to $170,000 and a net worth and liquid net worth between $500,000 and $600,000, Finra said. Between June 2015 and September 2017, Johnson recommended he purchase four alternative investments totaling $170,000, the regulator said.
At the time, however, the client already had a $100,000 exposure to alternatives, Finra said. Johnson allegedly changed the client’s net worth to $2.6 million and his liquid net worth to $1.6 million in order to fit within Coastal’s exposure cap. According to Finra, the customer’s allocation to alternatives was about 45% of his real net worth and liquid net worth.
In another case, a 69-year-old retiree indicated he was interested in moderate growth and income for his liquid net worth of $1.5 million after he sold his house. Johnson allegedly recommended 14 alternative investments totaling $1.04 million, the action said, which represented more than 69% of his net worth, Finra said.
The client had to go back to work part-time in building maintenance because of the illiquidity of these investments, Finra said.
Johnson was fired from Coastal in December 2019, according to BrokerCheck.