Purshe Kaplin Sterling Investments , based in Albany, New York, and its stockbroker Gopi Krishna Vungarala, of Midland, Michigan, were charged by Financial Industry Regulatory Authority (FINRA) Department of Enforcement in a Complaint alleging misrepresentation and omission of a material fact in connection with the sale of securities ; failure to disclose volume discounts ; failure to supervise Vungarala?s dual relationship with a customer; and the sale of non-traded REITS and BDCs for application of volume discounts . Department of Enforcement v. Purshe Kaplin Sterling Investments et al., No. 2014042291901 (Feb. 4, 2016).

According to the Complaint, from at least June 2011 through January 2015, Vungarala is alleged to have made false statements on a consistent basis to one of the firm?s customers, ST, with respect to investments that Vungarala had recommended. Throughout this time, Vungarala had reportedly served as the treasury investment manager for ST, a Native American tribe, in addition to serving in the capacity of the tribe’s registered representative . As treasury investment manager, Vungarala was reportedly a participant in the tribe’s investment decisions.

FINRA alleged in the Complaint that ST was fraudulently induced by Vungarala to make hundreds of millions of dollars of investments into business development companies (BDCs) as well as real estate investment trusts (REITs) without being informed of commissions which would be paid to Vungarala and his firm (which were in the vicinity of seven percent), as well as being deprived of the fact that certain volume discounts were available to the tribe. The Complaint alleged that the firm had failed in a supervisory capacity to detect and prevent the fraud committed by Vungarala.

The Complaint stated that employees of ST, which included Vungarala, were prohibited from partaking in business matters that could present a conflict of interest with ST or potentially disrupt the employee?s ability to act impartially. Vungarala reportedly knew about such prohibitions, and yet engaged in investment recommendations in Vungarala’s capacity as treasury investment manager. The Complaint alleged that Vungarala raked in $9,600,000 in commissions of the $11,400,000 that PKS generated as a result of ST’s investment of $190,000,000 in REITS and BDCs, pursuant to Vungarala’s recommendations. FINRA alleged that the tribe was told, or led to believe by Vungarala, that neither Vungarala nor his firm would not make commissions on ST’s purchases, and this prompted ST to make the investment decisions.

The Complaint further alleged that ST was eligible to benefit from volume discounts on the aforementioned purchases, yet did not know this information because Vungarala failed to disclose such information to the tribe, despite Vungarala?s awareness of such discounts. Consequently, according to the Complaint, the tribe lost out on volume discounts amounting to greater than $3,300,000, where this money ended up in the hands of PKS and Vungarala via commissions.

FINRA alleged that Vungarala violated Securities Exchange Act of 1934 Section 10(b), Rule 10b-5, as well as FINRA rules 2020 in connection with the aforementioned omissions and representations. FINRA alleged that PKS failed to adequately investigate Vungarala?s dual relationship with the tribe in order to ascertain the extent of potential fraud forward the tribe. As such, the firm was alleged by FINRA to have failed in establishing reasonable measures in order for such risks to be mitigated.

Additionally, FINRA alleged that from April 1, 2009 through October 31, 2014, PKS had inadequate supervisory procedures which would ensure that volume discounts were properly applied with respect to non-traded REITs and BDCs. The Complaint alleged that the firm made inadequate efforts to verify Vungarala?s claim that the tribe was not interested in the volume discounts. FINRA alleged that PKS, as a result of the aforementioned conduct, violated NASD Rule 3010(a) and 3010(b), FINRA Rule 3110(a) and 3110(b), and FINRA Rule 2010.

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