Securities Arbitration Lawyer Blog
The Financial Industry Regulatory Authority (“FINRA”) has sanctioned Geneos Wealth Management, Inc. (“Geneos Wealth Management”) for failing to reasonably supervise brokers’ recommendations of the LJM Preservation & Growth Fund. Geneos Wealth Management was also sanctioned for negligently omitting to tell investors in an offering related to GPB Capital Holdings, LLC that the issuer failed to timely make required filings with the SEC, including audited financial statements. On March 18, 2022, FINRA and Geneos Wealth Management entered into a Letter of Acceptance, Waiver, and Consent (“AWC”) whereby Geneos Wealth Management accepted the following sanctions:
- a censure;
- a $150,000 fine;
- restitution of $250,710.41 plus interest to customers who purchased the LJM Preservation & Growth Fund; and
- a signed certification that Geneos Wealth Management has established and implemented policies, procedures, and internal controls reasonably designed to address and remediate the issues identified in the AWC.
Iorio Altamirano LLP is investigating claims on behalf of Geneos Wealth Management’s customers who invested in the LJM Preservation and Growth Fund.
The law firm is also investigating claims on behalf of Geneos Wealth Management’s customers who invested in offerings issued by GPB Capital Holdings, LLC.
Customers that receive a partial recovery of losses through FINRA’s restitution order may still be entitled to additional recovery.
If you are a customer of Geneos Wealth Management or a customer at another firm (including Cambridge Investment Research, Inc. and J.W. Cole Financial, Inc.), and your broker recommended that you invest in the LJM Preservation and Growth Fund or a limited partnership offering issued by GPB Capital Holdings, LLC, we are interested in speaking with you. Such investors are advised to contact New York securities arbitration lawyers August Iorio and Jorge Altamirano of Iorio Altamirano LLP at august@ia-law.com, jorge@ia-law.com,or toll-free at (855) 430-4010 for a free and confidential evaluation of your account.
Geneos Wealth Management
Geneos Wealth Management, Inc. is a full-service broker-dealer. The firm has been a FINRA member since 2002 and is headquartered in Centennial, Colorado. Geneos Wealth Management operates as an independent contractor model and has approximately 340 brokers and 180 branch offices throughout the United States. According to FINRA, the firm’s brokers sold approximately $2.5 million worth of the LJM Preservation and Growth Fund to customers.
LJM Preservation and Growth Fund
The LJM Preservation and Growth Fund was an alternative mutual fund launched in January 2013. The Fund was sold to customers in the following investment classes: Class A: (LJMAX), Class C: (LJMCX), Class I: (LJMIX).
The FINRA AWC describes the LJM Preservation and Growth Fund as follows:
LJM marketed itself as “selling volatility” by seeking to profit from the “volatility premium”—the difference between implied volatility (investors’ forecast of market volatility reflected in options pricing) and realized (actual) market volatility. To achieve this goal, LJM invested primarily in purchased (long) and sold (short) call and put options on the S&P 500 futures index. LJM did not hold any underlying stock as a part of its strategy. In its prospectus, LJM disclosed that “[i]n the aggregate, the Fund is typically ‘net short’ in the portfolio of contracts that it holds, which means the Fund holds more uncovered option contracts than covered.” The prospectus also disclosed the limited upside, and unlimited downside, risk associated with uncovered options.
According to the AWC, in July 2017, Morningstar issued a Fund Report for LJM that described the fund as “[a]n aggressive option seller with above-average returns and low correlation with equity markets, but high risk.”
In late January 2018, the LJM Preservation and Growth Fund had $805M in assets under management. By early March 2018, it dropped to $9.8M.
LJM Partners and an affiliate saw losses of 80 percent or more. This compelled LJM to liquate the fund.
GPB Capital Offerings
GPB Capital is a New York-based alternative asset management firm founded in 2013. GPB Capital serves as the general partner for limited partnerships formed to acquire income-producing companies. From 2013 through 2018, GPB Capital launched several limited partnerships. As relevant here, one of those limited partnerships was GPB Automotive Portfolio, LP (“GPB Automotive Portfolio”). GPB Automotive Portfolio was formed in 2013 to acquire and operate automotive dealerships.
GPB Automotive Portfolio raised capital by selling limited partnership interests to retail investors. GPB Capital sold the limited partnership interests through, among other channels, broker-dealers. The securities GPB Capital sold, including those GPB Automotive Portfolio issued, were not registered. Instead, the partnership interests were sold to accredited investors pursuant to Regulation D of the Securities Act of 1933. GPB Automotive Portfolio raised more than $600 million from investors between July 2013 and June 2018.
FINRA Letter of Acceptance, Waiver, and Consent No. 2019061764701
FINRA and Geneos Wealth Management entered into an AWC on March 18, 2022, following FINRA’s allegations that Geneos Wealth Management failed to reasonably supervise representatives’ recommendations of an alternative mutual fund—the LJM Preservation & Growth Fund, and negligently failed to tell investors material information concerning a GPB Capital offering in 2018.
Geneos Wealth Management Did Not Have a Reasonably Designed Supervisory System with Respect to the Approval and Recommendation of Alternative Mutual Funds
First, FINRA concluded that Geneos Wealth Management had no system or procedures to determine whether a new mutual fund constituted a “complex product” or was an alternative mutual fund, such that heightened due diligence of the product may be appropriate. Rather, in reviewing and approving new alternative mutual funds, the firm subjected them to the same standards as traditional mutual funds, which did not evaluate the potential risks and rewards associated with the strategy of the funds.
Second, FINRA alleged that Genos Wealth Management did not have any written supervisory procedures advising firm principals on how to supervise recommendations of alternative mutual funds.
Third, the firm used an electronic trade review system to assist with the supervision of the trading activity of the firm’s financial professionals. However, the system was not modified to account for risk factors associated with alternative mutual funds, such as LJM, that would warrant heightened principal review. As a result, certain of Geneos Wealth Management’s LJM transactions may not have been identified for additional suitability review, even for customers with low-risk tolerances.
According to the AWC, Geneos Wealth Management signed a selling agreement with LJM’s distributor in March 2015. Geneos Wealth Management followed its typical review process for mutual funds and did not review LJM’s investment and trading strategy prior to signing the selling agreement. The firm did not impose any limitations that were specific to sales on the sale of LJM. Starting in late April 2015, the firm’s affiliate – a registered investment advisor that builds portfolio models – reviewed LJM (including its investment and trading strategy) to determine whether to add it to one of its portfolio models, which it did in September 2015. Geneos Wealth Management’s first sale of LJM to retail customers occurred on November 9, 2016, and the last occurred on February 6, 2018. During that time, Geneos representatives sold approximately $2.5 million in shares of LJM to over 80 customers, including four customers with low-risk tolerances. One representative was responsible for more than 60% of the total LJM sales.
On February 5, 2018, the S&P 500 fell 113 points (around 4.1%), which contributed to an unprecedented increase in market volatility, as measured by the CBOE Volatility Index (VIX). On February 5, 2018, the VIX more than doubled from 17 to 37, which at that time was the largest one-day rise in its history. As a result of the market’s increased volatility, the prices of the short option positions sold by LJM increased dramatically. On February 5 and 6, 2018, LJM lost about 80% of its value. On February 7, LJM announced that it was closing itself to new investors, and on March 29, 2018, LJM was liquidated and dissolved. Investors who held shares as of February 6, 2018, lost approximately 80% of their investment.
Based on the above, Geneos Wealth Management violated FINRA Rules 3110 and 2010.
Geneos Wealth Management Negligently Failed to Tell Investors Material Information Concerning a GPB Capital Offering in 2018
Geneos Wealth Management first learned of GPB Capital in or around February 2015. In May 2015, following due diligence conducted by it, Geneos Wealth Management approved a different GPB Capital limited partnership for sale by the firm’s registered representatives, and it approved GPB Automotive Portfolio for sale in September 2015.
On July 10, 2017, GPB Capital filed a lawsuit in New York against one of its former operating partners who had allegedly failed to acquire certain automotive dealership interests (the New York Litigation). In connection with the New York Litigation, the former partner asserted various counterclaims against GPB Capital and alleged that GPB Capital had falsified financial statements to conceal that GPB Capital was defrauding its investors. GPB Capital denied the former partner’s allegations, and the litigation remains pending.
On April 27, 2018, GPB Capital released what it characterized as important updates regarding the audited financial statements for certain of its limited partnerships, including GPB Automotive Portfolio. The letters, which were sent to many broker-dealers that sold GPB Capital-related investments, including Geneos Wealth Management, stated that GPB Capital was in the process of registering certain classes of securities issued by certain limited partnerships, including GPB Automotive Portfolio, with the SEC. As part of that process, GPB Automotive Portfolio was required to file audited financial statements. The letters further stated that the delivery of GPB Automotive Portfolio’s audited financial statements (which were due to be filed by April 30, 2018) would be delayed pending the completion of a forensic audit. Specifically, GPB Capital disclosed that it and its auditors “determined that it would be prudent to hire a third-party firm to complete a forensic audit in order to endeavor to put [the former partner’s] counterclaims and other allegations to rest.” The offering documents for GPB Automotive Portfolio were not timely amended to disclose that the partnership would be delayed in filing its audited financial statements with the SEC. While Geneos Wealth Management learned of the delays and GPB Capital’s stated intention to complete a forensic audit, Geneos sold a limited number of limited partnership interests in GPB Automotive Portfolio after that announcement.
Geneos Wealth Management made at least three sales of limited partnership interests in GPB Automotive Portfolio between April 27, 2018, and June 26, 2018, totaling $165,000. Geneos earned a total of $11,550 in commissions from these three sales.
In connection with these three sales, however, Geneos Wealth Management representatives did not inform the customers that GPB Automotive Portfolio had not timely filed its audited financial statements with the SEC or the reasons for the delay. The delays in filing audited financial statements were material information that should have been disclosed.
By negligently omitting material facts, Geneos Wealth Management violated FINRA Rule 2010.
How to Recover Losses or Obtain a Free Consultation
If you are a Geneos Wealth Management customer or a customer at another firm, and your broker recommended that you invest in the LJM Preservation and Growth Fund or an offering by GPB Capital, contact securities arbitration law firm Iorio Altamirano LLP for a free and confidential consultation to review your legal rights.
Customers that receive a partial recovery of losses through FINRA’s restitution order may still be entitled to additional recovery.
Contact New York securities arbitration lawyers August Iorio and Jorge Altamirano of Iorio Altamirano LLP at august@ia-law.com, jorge@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. We have experience representing institutional investors in pursuing claims to recover financial losses arising out of wrongful conduct by financial advisors and brokerage firms.