The Financial Industry Regulatory Authority has filed a complaint against Southeast Investments broker Mercer Hicks III, aka Toby Hicks, alleging that he made unsuitable investment recommendations to five senior customers who purchased shares of non-traded real estate investment trusts and non-traded business development companies.
In addition, FINRA claims that Hicks failed to conduct reasonable due diligence on the REITs and BDCs and failed to understand the risks and features associated with the investments before recommending them to his customers.
According to his BrokerCheck profile, Hicks said of the charges, “I deny the allegations and intend to vigorously defend myself.”
When Hicks first recommended non-traded REITs and BDCs to the five clients in 2014, their ages ranged between 73 and 87 years old, and three were widows.
Between June 2014 and July 2017, FINRA said that he recommended 18 purchases totaling approximately $665,000 and received a 7 percent commission from each sale, totaling approximately $46,550.
The prospectuses and subscription agreements for the investments stated that the securities involved a high degree of risk, were speculative, not suitable for persons who require immediate liquidity, guaranteed income, or seek short-term investments, and was only appropriate for those investors who could afford a complete loss of their investments.
Hicks purportedly admitted to FINRA in on the record testimony that he merely “glance[d] over” prospectuses and left due diligence to “the compliance people for the firms [he] worked for.”
FINRA claims that his clients’ account documents indicate that they were seeking capital preservation or appreciation and had either conservative or moderate risk tolerances. FINRA also alleges that three clients were over-concentrated in light of their financial situations, risk tolerances and investment objectives., and four clients did not meet the minimum suitability requirements because their annual income and net worth were below the requirements outlined in the prospectus.
“Hicks finds his customers primarily by cold calling telephone numbers on club directories he obtains around his North Carolina community,” stated FINRA in the complaint. “Most of his customers are senior retirees with limited financial resources and knowledge.”
Hicks previously recommended that four of his senior customers invest in variable annuities, which had guaranteed income riders, FINRA said. In 2014, however, he allegedly began recommending that these customers liquidate some or all of their variable annuities, and at times incurring withdrawal penalties, to invest in non-traded REITs and BDCs, the complaint states.
For example, one customer was a client of Hicks for approximately eight years prior to her death in August 2018 at the age of 86.
Between June 2014 and July 2017, he recommended and made eight non-traded REIT purchases totaling $459,270 in American Realty Capital Global Trust, American Realty Finance Retail Centers of America, Phillips Edison Grocery Center REIT II, American Realty Capital New York Recovery REIT, American Realty Capital Hospitality Trust, Steadfast Apartment REIT.
FINRA alleges that funds for five of these investments came from withdrawals from a variable annuity he recommended in July 2010, which had a guaranteed lifetime income benefit.
According to Southeast’s account documents, her annual income was between $50,000 and $100,000, her liquid assets were more than $500,000, and her net worth was more than $500,000. Her investment objective was marked as capital appreciation, her risk tolerance was moderate, and her investment knowledge was listed as good.
Account documents from 2017 reflect an annual income of $75,000 and much greater amounts for her net worth ($1.6 million) and liquid net worth ($1.1 million) than reflected on the June 2014 account forms.
Hicks recommended Business Development Corporation of America to two of his senior customers. According to FINRA, “at the time Hicks recommended the investment, he believed that BDCA was a REIT and did not understand there was a distinction between a REIT and a BDC. Hicks also was unaware at the time he recommended the investment that BDCA invested in the debt and equity of middle market companies, as opposed to making real estate-related investments.”
Hicks entered the securities industry in 1972 and holds FINRA Series 1, 24, 63, 65, and SIE licenses.