SEC Settles Charges with Centaurus Financial for “Unsuitable Recommendations”
The Securities and Exchange Commission announced that broker-dealer and investment adviser Centaurus Financial Inc., branch manager Ricky A. Mantei, and registered representative Atul Makharia agreed to settle charges in connection with the unsuitable recommendation of variable interest rate structured products to ninety-four retail customers.
The SEC describes VRSPs as “principal-at-risk” securities, which means that investors can lose some or all their invested principal if the VRSPs’ referenced securities indexes, such as the S&P 500 and/or Russell 2000 stock indexes, decline more than a specified percentage at maturity, in most cases, 50%. The prospectuses for several of the recommended VRSPs expressly warn: “There is no minimum payment at maturity. Accordingly, investors may lose up to their entire initial investment in the securities.”
Between June 2016 and July 2019, Atul Makharia and seven other registered representatives from Centaurus FinanciaI’s Lexington, South Carolina branch office recommended VRSPs to customers for whom such investments were considered unsuitable by the SEC in light of each of the specific customers’ financial situations and needs.
The SEC reports that Makharia and the other Centaurus registered representatives made these recommendations even though they knew, or reasonably should have known, among other factors, that the specified customers to whom these VRSPs were recommended were at or approaching retirement age; had an annual income of less than $100,000; in most cases, had a net worth of less than $500,000; had a low or moderate risk tolerance; had investment objectives that included, or were limited to, “income” and sought periodic interest payments; had moderate or high liquidity needs; had an investment time horizon of less than fifteen years; and were unwilling to risk losing all or some of their principal invested in the VRSPs.
Additionally, the SEC reports that from at least June 2016 to July 2019, Centaurus failed to make and keep certain required records relating to certain customer accounts. During this time period, Centaurus electronically recorded certain customer account information required, including the customer’s name, tax identification number, address, telephone numbers, date of birth, employment status, annual income, net worth and investment objectives.
Allegedly, in some instances, Centaurus failed to maintain and preserve this information for at least six years in violation of SEC rules. Further, Centaurus failed to make and keep current a record indicating that, for each change in a customer’s account investment objectives, Centaurus furnished the customer with a copy of the updated account record or alternative document containing the information required.
Without admitting or denying the findings in the SEC’s order, Centaurus, Mantei and Makharia agreed to cease and desist from future violations of the charged provisions. Centaurus also consented to a censure and agreed to pay disgorgement of $4,876 plus prejudgment interest of $623 and a civil penalty of $750,000, and to retain an independent compliance consultant.
Mantei agreed to pay disgorgement of $92,650 plus prejudgment interest of $11,842 and a civil penalty of $206,000, and to limitations that prevent him from acting in a supervisory capacity for six months. Makharia agreed to pay a civil penalty of $35,000 and to associational and penny-stock suspensions of six months.
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