Broker ‘regularly lied’ about the commissions, FINRA says; firm charged with failing to supervise him
The Financial Industry Regulatory Authority has charged a broker with lying to members of a Native American tribe about commissions he received related to more than $190 million in nontraded real estate investment trusts and business development companies the tribe invested in over the course of three years, generating $11.4 million in commissions for his firm.
According to the FINRA complaint, from at least June 2011 through January 2015, Gopi Vungarala, through his firm, Purshe Kaplan Sterling Investments, “regularly lied” to his customer, ST, a Native American tribe, regarding investments he recommended.
Vungarala served as a registered rep for Purshe Kaplan Sterling and was also employed by the tribe as its treasury investment manager and participated in decisions regarding the tribe’s investments.
The complaint states that while Vungarala knew that ST “prohibited its employees, such as himself, from engaging in business activities that could constitute a conflict of interest with the tribe, or that could impair an employee’s ability to make impartial decisions on behalf of the tribe,” he recommended the tribe invest more than $190 million in nontraded REITs and BDCs over the course of three years, generating $11.4 million in commissions for PKS, $9.6 million of which went to him.
To induce the tribe to make the purchases, Vungarala “falsely represented to ST that he would not receive any commissions on purchases of the nontraded REITs and BDCs made in the tribe’s PKS accounts,” the complaint states.
Vungarala also allowed tribal leaders to believe “PKS would not receive any commissions on these transactions either, when he knew or should have known that this was their understanding,” the complaint states.
Vungarala was also aware of, but failed to disclose to ST, that the tribe was eligible to receive volume discounts on its nontraded REIT/BDC purchases based upon the fact that multiple trust accounts owned by ST purchased the same offerings through PKS.
“As a result, the tribe failed to receive more than $3.3 million in volume discounts to which it was eligible. All of these funds, instead, went to PKS and Vungarala in the form of commissions to the detriment of ST,” the complaint states.
FINRA also charged PKS with supervisory failures for failing to detect and halt Vungarala’s fraudulent conduct. PKS, based in Albany, New York, has approximately 1,250 registered reps and approximately 460 branches.
At the time ST became a PKS customer in July 2011, PKS “failed to perform an adequate review of Vungarala’s dual relationship with ST to determine whether this relationship heightened the risk of fraudulent conduct by Vungarala toward the tribe,” the complaint states.
Because it failed to conduct an adequate review of the risks inherent to Vungarala’s dual relationship with the tribe, PKS “likewise failed to establish sufficient procedures to mitigate any such risks,” FINRA says.
Also, from April 1, 2009, through at least Oct. 31, 2014, PKS failed to have adequate systems and procedures in place to supervise the sale of nontraded REITs and BDCs to ensure the proper application of volume discounts, the complaint states.
What’s more, from July 2011 through at least Jan. 15, 2015, PKS “failed to take reasonable steps to confirm Vungarala’s representations that ST did not want to take advantage of certain volume discounts to which it was eligible.”