Purshe Kaplin Sterling Investments headquartered in Albany, New York, was censured and fined $750,000.00 by Financial Industry Regulatory Authority (FINRA) Department of Enforcement, and ordered to pay $3,373,303.68 in restitution according to an Office of Hearing Officers’ Order Accepting Offer of Settlement containing findings that the firm failed to supervise a registered representative’s dual relationship with a customer, and failed to supervise volume discounts pertaining to the sale of non-traded real estate investment trusts and business development. Department of Enforcement v. Purshe Kaplin Sterling Investments et al., No. 2014042291901 (Feb. 21, 2017).

According to the Order, from June of 2011 to January of 2015, Vungarala repetitively made false statements to firm customer and Native American tribe, ST, in regards to Vungarala’s recommended investments. During this period, Vungarala reportedly worked in the capacity of ST’s treasury investment manager while also maintaining the designation as ST’s Purshe Kaplin Sterling Investments registered representative. In Vungarala’s treasury investment manager role, he reportedly partook in investment decisions which the tribe made.

The Order stated that ST had been fraudulently induced by Vungarala to make investments into business development companies and real estate investment trusts; ST was reportedly not made aware of the nearly seven percent in commissions which Vungarala and Purshe Kaplin Sterling Investments charged. In addition, the Order stated that ST was not apprised about volume discounts which applied in ST’s circumstances.

Particularly, the Order revealed that as a staff member for ST, Vungarala was prohibited from partaking in business which presented conflicts of interest with ST. Despite having known about these prohibitions, Vungarala continued to make investment recommendations in products offered by Purshe Kaplin Sterling Investments. According to the Order, $11,300,000.00 in commissions had been accumulated by Purshe Kaplin Sterling Investments based on ST’s $190,000,000.00 investment in real estate investment trust and business development company products, wherein $9,600,000.00 of the $11,300,000.00 in commissions had been earned by Vungarala. However, FINRA stated that ST’s investment decisions were based on the notion that Vungarala nor Purshe Kaplin Sterling Investments would make commissions on ST’s purchases.

According to the Order, ST was eligible for volume discounts on investment purchases. Yet, ST was evidently not made aware of volume discounts based upon Vungarala’s omissions, even though Vungarala was aware of applicability of discounts in ST’s circumstances. The Order stated that ST had not been provided at least $3,300,000.00 in volume discounts, which enabled Purshe Kaplin Sterling Investments and Vungarala to accumulate $3,300,000.00 in extra commissions.

FINRA found that Purshe Kaplin Sterling Investments did not adequately investigate Vungarala’s dual relationship with ST in order to detect and prevent fraud having been committed by Vungarala in handling ST’s accounts. Particularly, FINRA stated that the firm was put on notice for Vungarala’s unethical conduct, particularly due to Vungarala having a position on the buy and sell side of transactions consummated in ST’s Purshe Kaplin Sterling Investment accounts. Consequently, the firm was found by FINRA to have failed to establish reasonable supervisory measures to mitigate the risk, which resulted in the firm’s conduct being deemed violative of FINRA Rules 2010, 3110(a) and 3110(b), and NASD Rule 3010(a) and 3010(b).

Moreover, FINRA stated that from April 1, 2009 through October 31, 2014, Purshe Kaplin Sterling Investments’ supervisory procedures were deficiently designed to make sure that volume discounts had been properly applied for purchases of non-traded real estate investment trusts and business development companies. Further, from July of 2011 to January of 2015, the firm reportedly failed to verify Vungarala’s claim that ST was not interested in pursuing the volume discounts, and failed to act upon inquiries from both the real estate investment trust issuer into the applicability of discounts for the tribe not being taken advantage of, and the tribe’s concerns concerning Vungarala’s commissions. Purshe Kaplin Sterling Investments’ conduct in this regard was found by FINRA to be violative of NASD Rule 3010(a) and 3010(b), and FINRA Rules 2010, 3110(a) and 3110(b).

Guiliano Law Group

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