The Financial Industry Regulatory Authority is ordering Purshe Kaplan Sterling Investments (PKS) to pay almost $3.4M in restitution to a Native American tribe. The tribe had paid excessive sales fees for the purchase of Business Development Companies (BDCs) and non-traded Real Estate Investment Trusts (REITs).
Gopi Vungarala was the Purshe Kaplan Sterling registered representative for the tribe from 7/2011 through at least 1/15/15. He was also the tribe’s Treasury Investment Manager at the same time. It was his job was to oversee the group’s investment portfolio.
FINRA’s case against Vungarala in this matter has yet to be resolved. However, Purshe Kaplan Sterling must also pay $750K for its purportedly inadequate supervision of nontraded REIT and BDC sales.
According to the self-regulatory organization, Purshe Kaplan Sterling failed to identify that the Native American tribe had made over 200 purchases that were eligible for volume-based discounts. FINRA contends that had the firm properly identified the purchase, Vungarala would have been paid just $6M in commissions instead of $9.6M. The tribe also paid almost $2M in commissions to Purshe Kaplan Sterling.
FINRA said that Vungarala misrepresented to Purshe Kaplan Sterling that the tribe was not interested in volume-based discounts. The regulator said that it was because of the firm’s supervisory failures that it did not conduct a proper review of Vungarala’s relationship with the tribe or assess whether his dual roles put him at greater risk of fraudulent behavior.
FINRA Cites Supervisory Failures As a Reason for The Nontraded REIT Fraud
FINRA believes Purshe Kaplan Sterling’s supervisory failures are the reason that Vungarala was able to misrepresent to the tribe that that neither he nor the firm would be receiving commissions for the tribe’s purchases. The SRO said that this was how he was able to convince the tribe to invest more than $190M in nontraded REITs and BDCs.
The regulator’s order said that Vungarala knew that the Native American tribe bars employees from engaging in business activities that either present possible conflicts of interest or could hurt an employee’s ability to act impartially for the tribe. However, it wasn’t until October 2014, when someone from the tribe confronted Vungarala, that he disclosed that the tribe was paying the firm commissions for the sales. Another two months passed before Vungarala disclosed to the tribe that it was also paying commissions to him.
FINRA determined that between 4/2009 and 10/2014, the firm did not keep up and enforce a supervisory system or written supervisory procedures that were adequate enough to make sure compliance was always in effect when BDCs and nontraded REITS were sold. The SRO said that Purshe Kaplan Securities failed to have procedures that were reasonably designed enough to note whenever accounts qualified for volume discounts. FINRA accused Purshe Kaplan Sterling of failing to provide proper guidance to representatives or their supervisors about how to ensure that these discounts were properly applied.
Purshe Kaplan Sterling is not denying or admitting to the securities findings even though it is settling the case.
Read the FINRA Action (PDF)