The SEC has fined New York-based Aegis Capital Corp. $2.3 million for failing to prevent 14 of its brokers from fraudulently selling unsuitable investments to clients that included retired elderly clients who lost up to hundreds of thousands in the transactions.
The SEC said it is seeking a jury trial for former Aegis Managing Director Alan Appelbaum, a worker with a lengthy disciplinary history who allegedly sold 140 of the variable interest rate structured products (VRSPs) to seven customers, often in unauthorized trades.
He did this despite the fact that the products are high-risk and the clients had a "moderate" risk tolerance, the SEC said. In some cases the products were also sold with lockup periods of a decade or more to clients who were in their 80s, the agency said.
Appelbaum made more than $1 million in commissions from the fraudulent transactions, according to the SEC complaint.
Another Aegis broker, Paul Gallivan, settled similar charges in a separate case, the SEC said. Gallivan agreed to a one-year suspension, disgorgement of $29,973 and a civil penalty of $25,000, according to the SEC.
Neither Aegis nor either of the two brokers could be reached for comment by press time.
According to the SEC, from January 2015 through May 2019, Aegis failed to implement written supervisory procedures, structured products procedures including training requirements, and policies regarding unauthorized trading, the SEC said.
In particular, the agency looked at Aegis’s use of VRSPs in client accounts.
“VRSPs are complex, structured securities, typically issued by large well-known financial institutions, that offer guaranteed periodic fixed-interest rate payments, typically for one to three years,” the SEC filing stated. After this period ends, the regulator noted, customers are not guaranteed to receive any further interest payments from the products.
Not only are these securities where a customer’s principal is at risk, but VRSPs also typically have maturity periods of 15 years or more, the SEC said.
From 2015 to 2019, 14 Aegis’ registered representatives recommended VRSPs to 48 customers in cases where the securities were unsuitable based on risk tolerance, investment objectives, age, experience, liquidity needs and investment time horizons, the SEC alleged.
While Aegis did have firm-wide structured products procedures in place that required supervisors to review the investments for customers who were 70 or older, the supervisors in two branches—Melville, N.Y,.,and Boca Raton, Fla.—failed to implement the reviews and Aegis did not have another procedure in place that would have detected the failure, the SEC said.