SEC Charges Pasadena Financial Firm, Five of Its Brokers With Regulation Violations

The Securities and Exchange Commission has charged Pasadena-based Western International Securities and five of its registered brokers for failing to exercise due diligence in dealing with their retail customers.

From July 2020 through April 2021, Western reportedly sold an aggregate of $13.3 million of L Bonds.

In the civil case filed on June 15 before the U.S. District Court for the Central District of California, the SEC alleged Western International Securities and the five brokers violated SEC’s Regulation Best Interest (Reg BI) when they recommended and sold an unrated, high-risk debt security known as L Bonds to retirees and other retail investors.

L Bonds were corporate bonds offered by Dallas, Texas-based GWG Holdings, Inc. 

The SEC characterized L Bonds as “high risk, illiquid, and only suitable for customers with substantial financial resources.” 

Western International Securities did not exercise reasonable diligence, care, and recommended L Bonds to at least seven particular customers without a reasonable basis to believe the bonds were in their customers’ best interests, according to the SEC.

The complaint claims that between July of 2020 and April of 2021, Western’s registered brokers “recommended and sold approximately $13.3 million in L Bonds” to retail customers. 

“These recommendations violated Regulation Best Interest in several ways,” the SEC said. “Western and its registered representatives… failed to exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs associated with L Bonds.” 

The complaint also listed as defendants the names of Western’s registered brokers: Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham, and Thomas Swan. 

The SEC alleges the registered brokers did not understand key risks associated with L Bonds and GWG at the time they recommended them to retail customers. 

Regulation Best Interest (Reg BI), established under the Securities Exchange Act of 1934, requires firms and their registered brokers to act in the best interest of a retail customer when making a recommendation of a securities transaction. 

Firms and brokers are considered compliant with Reg BI’s Best Interest Obligation only if they comply with four component obligations: the Disclosure Obligation, the Care Obligation, Conflict of Interest Obligation, and the Compliance Obligation. 

The complaint alleged that the defendants failed to comply with the Care Obligation under Reg BI by recommending L Bonds to at least seven retail customers “without a reasonable basis to believe L Bonds were in those customers’ best interests.” 

“Among other things, these customers had moderate-conservative or moderate risk tolerances, investment objectives that did not include speculation, limited investment experience, limited liquid net worth, and/or they were retired,” the complaint reads. “The Registered Representative Defendants nevertheless recommended L Bonds to these seven customers without reasonable bases for doing so.” 

The L Bonds referred to in the complaint paid fixed interest rates of between 5.5 percent and 8.5 percent, depending on the maturity period of the bond. GWG Holdings offered maturity periods of two, three, five, or seven years. 

The SEC complaint included descriptions of the retail customers that Western and its brokers recommended L Bonds to. Their ages and profiles ranged from a 54-year-old restaurant worker to a 75-year-old retiree, whose common characteristics are that they had limited knowledge of investments in general and a limited knowledge of bonds, and planned to use the interest accrued from the L Bonds primarily for personal purposes. 

The complaint alleged that the seven retail customers invested amounts ranging from $20,000 to a collective $250,000 invested by a married couple who were 61 and 67 years old.  

Among other things, the SEC is seeking court action to “order defendants to pay disgorgement of any unjust enrichment they received as a result of the misconduct alleged, together with prejudgment interest thereon,” and to “order defendants to pay civil penalties” under the Securities Exchange Act.