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.

As the SEC investigated the issue, Aegis retained a consultant to review and rewrite its written supervisory procedures and a revised policy now prohibits the purchase of VRSPs for retail customers, the regulator said. In addition, the firm fired the two reps most involved in the unsuitable sales—Appelbaum and Gallivan—as well as their supervisor in the Florida branch, and then closed it, the SEC said. Aegis also replaced the supervisor in the New York branch.

The SEC ordered Aegis to pay disgorgement of $165,828, prejudgment interest of $55,037 and a civil penalty of $2.3 million, the filing said.

Appelbaum, 75, began his career in 1976 as a broker-dealer and became dually registered in 2010, according to BrokerCheck. From July 2015 to May 2021, he was not only a registered rep in Aegis’ Boca Raton branch, but also a managing director, and from August 2015 to September 2018 he headed the firm’s municipal bond desk, the SEC said. From September 2018 to May 2021, he was co-head of the firm’s fixed-income desk.

“Appelbaum has a lengthy disciplinary history in the securities industry. At least 14 of Appelbaum’s customers have filed Finra or National Association of Securities Dealers (NASD) arbitration claims or customer complaints against him,” the SEC stated. “Eleven of the claims and complaints were settled through a payment to the customers and another resulted in an NASD arbitration panel finding Appelbaum liable for, among other things, unsuitable securities trading and ordering him to pay compensatory damages.”

In 2006, he was fined $55,000 by New Hampshire’s Bureau of Securities Regulation for servicing brokerage accounts in the state without a license, according to BrokerCheck.

Despite Aegis’ structured products procedures that were in place since July 2017, Appelbaum failed to take the mandatory training associated with the VRSPs and failed to complete any of the paperwork those procedures required, the SEC said.

In all, Appelbaum purchased over 140 VRSPs for seven customers from July 2017 through May 2019, the SEC alleged, during which he “disregarded his obligations to his customers and repeatedly violated the antifraud provisions of the federal securities law by making unsuitable recommendations and by engaging in unauthorized trading.”

For example, he purchased 21 of the instruments for a couple, ages 82 and 80, who had only moderate risk tolerance and an investment time horizon of nine to 11 years, the SEC said. All those VRSPs had maturity dates 15 years or more from the date of the purchase, and many of the purchases were unauthorized, the agency added.

For another client, an 89-year-old widow who had moderate risk tolerates with a one- to three-year investment horizon, he purchased 16 VRSPs, all of which had maturity dates that were 10 years or more in the future, the SEC said. The client lost at least $200,000, according to the SEC.

A third client, a 58-year-old woman, lost at least $1 million through 44 VRSPs that Appelbaum purchased for her without authorization after telling her he was investing her money in “boring bonds” so she would have “guaranteed income” for her retirement, the SEC said.

The SEC’s filing asked that Appelbaum be permanently banned from the industry and ordered to disgorge ill-gotten gains, pay prejudgment interest and pay a civil monetary penalty, the amounts to be determined by a jury trial.

Gallivan, 49, settled with the SEC over allegations that he sold an undisclosed number of VRSPs to four customers between October 2017 and December 2018, in situations where the product was not suitable due to the customer’s age, risk tolerance level or investment time horizon, the agency said.

The settlement included a one-year suspension, disgorgement of $26,807, prejudgment interest of $3,166, and a civil money penalty in the amount of $25,000 to the SEC. The payments are to be made in four installments over the next nine months, the filing said.