Sunset Financial Fined $200,000, plus $84,253 in Partial Restitution Ordered for Supervisory Failures

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FINRA fined Sunset Financial Services, Inc. $200,000 and ordered disgorgement of $84,253 in gross dealer concessions and due diligence fees for alleged supervisory failures related to private placement transactions.

FINRA Case #2011026915701

According to FINRA'S findings, from 2008 through 2011, Sunset Financial failed to establish and maintain an adequate supervisory system, thereby failing to comply with securities laws and regulations such as the Securities Act of 1933 and multiple NASD/FINRA rules.

FINRA found that Sunset Financial's private placement sales—specifically those of a investment fund created by a bridge loan lender which invested in short-term mortgages primarily in Arizona and California—lacked supervisory oversight that could have detected several "red flags," including a 2008 third-party due diligence report that highlighted an increased default rate for the loan portfolio of Sunset Financial's fund.

Notably, The CEO of the investment fund was the son of a Sunset registered representative and Firm supervisor.

After failing to adequately address this red flag, the fund suspended redemptions and stopped accepting new investors due to "financial difficulties." Several months later, the fund suspended its monthly distribution payments to investors.

Throughout this period of difficulty, the investigation states, Sunset Financial "failed to adequately follow up on [the 2008 report's] red flag" and did not re-evaluate the fund's appropriateness or suitability for investors.

In 2009, the same sponsor launched a second investment fund, it retained the same fund manager that oversaw the financially-plagued first fund.

Though the firm was allegedly aware that a third-party provider was in the process of researching and creating a due diligence report for this second fund, Sunset Financial nonetheless allegedly placed the new fund on its approved list, without waiting for the report to be completed.

The investigation states that Sunset Financial also failed to conduct any enhanced due diligence on the second fund, even though the fund retained the same executive management from the first fund that had run into financial troubles that necessitated the suspension on fund redemptions and monthly distribution payments—all red flags that FINRA believes Sunset Financial should have, yet failed to identify and/or react to.

Sunset Financial was formally charged with inadequate supervision of due diligence on private placements, inadequate supervision of suitability, inadequate supervision of sales materials and inadequate supervision if internal use materials. In consenting to FINRA's findings, Sunset Financial neither admitted nor denied the findings.

If you have invested with Sunset Financial Services, Inc. or with any firm or broker whose failure to supervise or conduct adequate due diligence, or whose unsuitable recommendations have adversely affected your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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