Mr. Brownlee has been barred from the brokerage business after getting his clients into a Ponzi scheme, according to a hearing panel decision recently issued by the Financial Industry Regulatory Authority (FINRA).
Mr. Brownlee persuaded some of his Allstate clients to invest heavily in Capital City Corporation (CCC), which claimed to be a vehicle for socially conscious, Christian investments. Instead, its officers, Ephren Taylor II and Wendy Connor, operated it as a fraudulent Ponzi scheme. According to the Securities & Exchange Commission (SEC) , Taylor and Connor’s Ponzi scheme took in over $12 million in investor funds.
Investors in Capital City Corporation ended up with ownership interests in bogus “sweepstakes machines” which supposedly earned high profits, but most of these machines simply did not exist.
According to FINRA, Mr. Brownlee recommended that his clients invest in this Ponzi scheme without conducting adequate due diligence. He “did not fully understand the CCC investments and had no reasonable basis to determine that these securities were suitable for customers.”
If Mr. Brownlee had conducted proper due diligence, he would have learned from publicly available documents that CCC was millions of dollars in debt. Even if he had not learned that this investment was a Ponzi scheme, it was obvious that CCC was a risky company, teetering on the edge of bankruptcy, and that it should not be a large piece of any investment portfolio.
Instead, Mr. Brownlee failed to do adequate due diligence. While his clients lost money in the CCC Ponzi scheme, Mr. Brownlee pocketed referral fees CCC paid him. He received fees totaling $12,692.
FINRA Rules require that financial advisors only recommend suitable investments to their clients. This requirement first obligates an advisor to know their client. A financial advisor needs to know his client’s investment objectives and risk tolerance, as well as the client’s investment time horizon, tax bracket, other sources of information, and other important characteristics of the client’s financial profile.
Knowing your customer is only part of the suitability equation; a financial advisor must then research an investment he wants to recommend. Some investments, like shares of a risky tech startup, are appropriate for some investors but not others. Investors who want to speculate might be a good fit for such an investment, while investors who are more worried about making sure they do not lose their money should stick with blue chip stocks and high quality bonds.
Some investments, like Ponzi schemes, are categorically unsuitable for anyone. A Ponzi scheme uses money from investors to pay investors a return. They are insolvent from inception and actually become more insolvent with each additional investor/victim.
If you have questions about investment losses, the securities litigation attorneys at Investor Defense Law LLP may be able to help, and offer free initial consultations.
Investor Defense Law LLP is a law firm dedicated to helping investors in California, Georgia and Washington State recover investment losses. We understand investment fraud and know how to sue investment advisors, brokerage firms, and financial advisors. To learn more, contact an investment fraud attorney at 800.487.4660.