Securities Arbitration Lawyer Blog
Financial Industry Regulatory Authority (“FINRA”) Office of Hearing Officers has barred stockbroker Mercer (“Toby”) Hicks III from the securities industry for making unsuitable investment recommendations to five elderly customers ranging in age from 73 to 88 years old. The recommendations involved non-traded Real Estate Investment Trusts (“REITS”) and a Business Development Company, Business Development Company of America (“BDCA”). Mr. Hicks apparently targeted retirement communities in and around Southern Pines, North Carolina, for potential clients.
Mr. Hicks, a veteran broker of nearly 50 years, has been associated with Southeast Investments, N.C. Inc. since April 2014.
If you or a loved one were a customer of Mercer Hicks III, contact New York securities arbitration law firm Iorio Altamirano LLP for a free and confidential consultation.
Iorio Altamirano LLP represents investors nationwide that have disputes with their financial advisors or brokerage firms, such as Southeast Investments, N.C.
FINRA Disciplinary Proceeding No. 201705287301
FINRA’s investigation began in September 2017, then a nephew of one of Mr. Hicks’ customers called FINRA’s Senior Helpline. The customer was 90 years old, suffering from dementia, and needed to sell her shares to help pay for the cost of her nursing home care. Mr. Hicks had sold the customer two REITs, one when she was 87 years old and the second when she was 88.
In April 2018, the Senior Helpline received another call. This time, the call came from the son of an 85-year-old woman who had 90 percent of her investment in non-traded REITS.
A complaint was filed by FINRA’s Department of Enforcement in December 2019. In responding to the complaint, Mr. Hicks denied the allegations generally but admitted that he made the recommendations. He also admitted that he recommended that four of the customers liquidate investments in variable annuities, which he had previously recommended to them, and reinvest the funds in the REITS and BDCA.
From June 2014 through July 2017, Mr. Hicks recommended eight non-traded REITs to four of his customers and recommended BDCA to two of them. The total invested by the five customers came to nearly $665,000.
A REIT is an entity that allows investors to invest in income-producing real estate. A REIT uses investors’ capital to purchase a portfolio of properties, such as office buildings, hotels, and apartments. There are two types of publicly available REITs: traded and non-traded. Traded REITs are bought and sold on a national securities exchange. Non-traded REITs are not. All of Mr. Hicks recommended REITs were non-traded. Non-traded REITs are not liquid until the REIT liquidates assets or lists its shares on an exchange. These events are not guaranteed or may not occur for more than ten years after an investor purchases shares. A non-traded REIT may allow investors to redeem their shares, but redemption opportunities are limited. The REIT may require that shares be redeemed at a discount, so an investor who redeems shares does not recover the amount invested. A REIT has the discretion to terminate a share-redemption program without notice. Non-traded REITs often charge high fees and may make distributions to investors from their offering proceeds—the investors’ money—reducing the value of shares and the cash available to the REIT to purchase assets. Non-traded REITS are risky investments and are not suitable for investors who need illiquidity.
Business development companies are entities that invest in the debt and equity of small and medium-sized businesses that are not able to acquire capital easily. Non-traded business development companies are not publicly traded and are illiquid, risky investments. Business Development Company of America (BDCA), a non-traded business development company, is a finance company that invests in middle-market companies. As stated on the first page of its prospectus, an investment in BDCA is speculative with “a high degree of risk, including the risk of a complete loss of investment.” The prospectus also warns that investors “should not expect to sell” their shares, and if they are able to do so, they will “likely receive less” than they paid for them.
The BDCA prospectus contains a section describing the company’s suitability standards. It makes clear that BDCA is a high-risk investment. It states that BDCA’s stock is “suitable only as a long-term investment for persons of adequate financial means who have no need for liquidity in this investment.” It specifies that BDCA “will not sell shares” to residents of certain states “unless they meet special suitability standards.” For North Carolina residents to qualify, they must have, at a minimum, both liquid assets of $85,000 and gross income of $85,000, or a minimum liquid net worth of $300,000.
FINRA’s Office of Hearing Officers’ decision also concluded the following findings of fact:
- Hicks and FINRA stipulated that both BDCA and the non-traded REITS that Mr. Hicks recommended were illiquid and exposed investors to a high level of risks.
- Hicks, who was first “introduced” and “exposed” to non-traded REITs and BDCA in 2013, failed to understand non-traded REITs and BDCA.
- Hicks’ understanding of non-traded REITS was seriously flawed. When he recommended BDCA, for example, he testified that he “did not understand the risks, that’s for sure. Mr. Hicks considered non-traded REITs to be conservative or moderate investments.
- Hicks testified that he believed that BDCA was a REIT, but it was not.
- Hicks only read a few pages of a REIT’s prospectus and did not know what, if any, due diligence Capital Investment (his prior employer) or Southeast Investments performed to ascertain suitability of the non-traded REITs and BDCA investments he recommended.
The decision also included a summary of each of Mr. Hicks’ unsuitable recommendations. The following is a summary of each customer and the unsuitable recommendations:
Customer 1:
A retired minister, born in 1933, lives alone in Whispering Pines, North Carolina. Hicks made two investment recommendations to the customer. In 2010, Mr. Hicks recommended a variable annuity. In December 2014, Mr. Hicks recommended BDCA. The customer made two withdrawals from her variable annuity and purchased $25,000 worth of shares of BDCA. The customer had a stated investment objective of “preservation of capital” and risk tolerance of “conservative.” Mr. Hicks also indicated that her investment knowledge was “low.” According to account opening documents. Mr. Hicks stated that the client had a liquid net worth was between $150,000 to $249,999, under the minimum required to invest in BDCA in North Carolina. In late 2020 or early 2021, the customer required that Mr. Hicks liquidate her share so that she could reinvest her funds. He was not able to do so because the shares were illiquid. As of the date of the hearing, the customer was still unable to liquidate her shares.
Customer 2:
A retired school nurse, born in 1934, residing in Pinehurst, North Carolina. The customer, who is also a widow, suffers from severely impaired hearing and high blood pressure. Over the years, Mr. Hicks recommended a variable annuity, BDCA, and an ARC-sponsored non-traded Realty, Realty Finance Trust, Inc. Despite being satisfied with her annuity, in late 2014, when she was 80 years old, Mr. Hicks recommended withdrawing $27,600 from her annuity account to purchase non-traded shares of BDCA, and she did so. Hicks completed the suitability section of the paperwork associated with the BDCA purchase. He characterized her investment objectives as “income,” her risk tolerance as “moderate,” and her investment purpose as “save for retirement,” although she was already retired. However, when interviewed by FIRNA, Mr. Hicks stated that the customer’s risk tolerance was “conservative” and that he had overestimated her net and liquid assets. According to her daughter, the customer had liquid assets of between $50,000 and $100,000, not $100,000 to $50000.
In June 2015, when the customer was 81-year-old, Mr. Hicks made his third recommendation, and she invested $15,000 in non-traded REITS ARC Finance. The account application again misstated her risk tolerance and liquid net worth. Mr. Hicks did not inform the customer of the risks listed in the prospectus, including that the company had no established sources of financing. He did not inform the customer that, according to the prospectus, ARC Finance was an emerging-growth company; investing in it involved “a high degree of risk,” and investors should purchase shares only if they could afford a complete loss.
Mr. Hicks conceded that the customer did not meet ARC Finance prospectus’ minimum suitability thresholds, and the customer did not meet the North Carolina suitability requirements investing with BDCA. Mr. Hicks did not tell the customer this at the time of the recommendations and did not warn her of the risks of investing in BDCA.
Customer 3:
A retired civil servant, born in 1927, living in a nursing home in Pinehurst, North Carolina. The customer began to suffer from dementia in 2017. In July 2014, when the customer was 87 years old, Mr. Hicks recommended that she invest $37,900 in a non-traded REIT, American Retail Centers of America, Inc. (“ARC Retail”). According to Mr. Hicks, the customer made the investment within an IRA, and he filed out her IRA application.
In June 2015, Mr. Hicks recommended, and the customer purchased, shares of another non-traded REIT, American Realty Capital New York City REIT, Inc. (“ARC NYC”) for $12,500.
Mr. Hicks admitted that he did not speak to the customer when filling out the application forms to determine whether the customer met the minimum suitability standards.
The two investments in non-traded REITS, totaling $50,400, constituted 50% of her liquid assets before she made the investments.
The customer’s nephew was able to eventually liquidate the REITS at discounted prices.
Customer 4:
A retired high school teacher and widow, born in 1941, who lives in a retirement home in Burlington, North Carolina. The customer received an inheritance in 2012 when one of her four daughters had passed away. Shortly thereafter, Mr. Hicks contacted her by a cold call. The customer’s prior investing experience was limited to a retirement account. In 2013, Mr. Hicks recommended two variable annuities. In 2014 and 2015, Mr. Hicks recommended five more investments in non-traded REITS, including American Realty Capital Healthcare II, Inc., ARC Retail, and ARC NYC. The total amount invested was nearly $88,000. Hicks admitted to not describing the REITs as high risk, and if he had, she would not have invested in them. Mr. Hicks viewed the customer as a conservative investor with low investment knowledge. Mr. Hicks did not inform the customer that she did not meet the minimum suitability requirements described in the prospectus because he was not aware of the requirements. Mr. Hicks also improperly inflated his representations of the customer’s net worth and liquid assets in account documents and that he made unfounded assumptions that changes had occurred to improve her financial situation.
Customer 5:
A retired housewife, born in 1932. She lived in Pinehurst, North Carolina, from 2009 until her death in August 2018. Hicks acquired the customer after a cold call. In 2010, he recommended a variable annuity. In 2012, he recommended that the customer purchase a second variable annuity. Starting in April 2014, when the customer was 81 years old, Mr. Hicks began to recommend non-traded REITs. Over a three-year period, Mr. Hicks recommended eight investments in six different non-traded REITS, five sponsored by ARC: ARC Retail, ARC NYC, American Realty Capital Global Trust, Inc, American Realty Capital Hospitality Trust, and Phillips Edison Grocery Center REIT II, Inc. He also recommended one other non-traded REIT, Steadfast Apartment REIT III. The customer funded these investments by withdrawals from her variable annuities and incurred penalties. She was 84 years old in July 2017 when she made her last REIT purchase for $124,000, bringing her total investments in non-traded REITS to $459,272. There were numerous discrepancies on the application forms regarding the customers’ liquid net worth.
Mr. Hicks acknowledged that when he recommended non-traded REITS to the customer, he did not warn her of the high degree of risk involved, and he did not know that investing in them involved a high level of risk, even though the first few pages of each prospectus contain virtually identical warnings making the high risk and illiquidity of investing crystal clear. He also admitted that he did not warn the customer of the risk that she was overconcentrating her assets in illiquid non-traded REITs.
The customer’s health began to decline in 2015 when she began to experience seizures. A seizure likely caused a fall, resulting in a severe head injury in February 2018. She was hospitalized and then, unable to care for herself, transferred to a skilled nursing facility. A month after the customer was hospitalized, the customer’s daughter sought to liquidate some of her mother’s REIT holdings to pay for additional treatments and found she could not. The customer passed away in August 2018.
FINRA’s Office of Hearing Officers concluded that Hicks failed to comply with the requirement that he tailor his recommendations to ensure they were suitable to each customer’s financial situation, needs, and investment objectives.
The panel of hearing officers also concluded that Mr. Hicks did not conduct reasonable due diligence to assess the suitability of BDCA and the non-traded REITs. He did not know that BDCA was a business development corporation. He did not understand what it invested in. He did not understand the risks of investing in BDCA. Nonetheless, he recommended it to customers. His lack of understanding when making the recommendations violated the suitability rule.
Financial Advisor Mercer Hicks III (CRD No. 245170)
Mercer Hicks III had 48 years of experience in the securities industry and has been associated with 15 different firms, including one firm that has been expelled by FINRA.
According to his BrokerCheck report, Mr. Hicks’ employment has been terminated three times by brokerage firms after allegations of wrongful conduct. In 2014, he was discharged from Capital Investment Group, Inc. for allegedly misrepresenting himself as a client in dealing with an insurance company in violation of firm policy and industry standards. In 2009, he was “permitted to resign” after Mr. Hicks submitted a signed variable annuity contract that contained incorrect fees. The firm requested that the forms be fixed and initialed by the client. Mr. Hicks allegedly signed the forms himself. In 1997, Mr. Hicks was fired for not following firm policy when processing an “LOA.”
Mr. Hicks’ public disclosure report with FIRNA also discloses that he has been the subject of numerous tax liens and a civil judgment.
Supervisory Duties
Brokerage firms like Southeast Investments, N.C. Inc. must properly supervise financial advisors and customer accounts. Brokerage firms must also establish and maintain a reasonably designed system to oversee account activity to ensure compliance with securities laws and industry regulations. When a brokerage firm fails to sufficiently supervise its financial advisors or the investment account activity, it may be liable for investment losses sustained by customers.
How to Recover Financial Losses or Obtain a Free Consultation
If you have lost money with financial advisor Mercer Hicks II or Southeast Investments, N.C., Inc., contact New York securities arbitration attorney August Iorio of Iorio Altamirano LLP. August Iorio can be reached at august@ia-law.com or toll-free at (855) 430-4010 for a free and confidential evaluation of your account.
Iorio Altamirano LLP is a securities arbitration law firm based in New York, NY. Iorio Altamirano LLP pursues FINRA arbitration claims nationwide on behalf of investors to recover financial losses arising out of wrongful conduct by stockbrokers and brokerage firms.