FINRA ordered Purshe Kaplan Sterling Investments to pay $3.4 million in restitution to a Native American tribe that paid excessive sales charges on fraudulent non-traded real estate investment trust (REIT) and business development company (BDC) purchases. Purshe Kaplan will also pay a $750,000 fine for related supervisory failures relating to the violative REIT and BDC sales, and the firm's inability to detect and prevent a broker's fraud resulting from an inadequately investigated conflict-of-interest situation. In its decision to fine and order restitution from Purshe Kaplan Sterling Investments, FINRA also implicated Gopi Krishna Vungarala, a Purshe Kaplan representative who sold the aforementioned REITs and BDCs.
OHO Disciplinary Proceeding #2014042291901
In fact, FINRA found that Vungarala did more than simply sell the REITs and BDCs, writing that Vungarala "regularly lied to his customer, ST, a Native American tribe, regarding investments he recommended."
The report indicates that Vungarala, who concurrently served as the tribe's Treasury Investment Manager, "fraudulently induced" his clients to invest hundreds of millions of dollars in REITs and BDCs without disclosing that he and Purshe Kaplan received commissions on such REIT and BDC sales; FINRA wrote that Vungarala's misconduct persisted, in part, due to Purshe Kaplan's own deficient supervision that "led it to fail to detect and prevent Vungarala's fraud."
The findings state that over the course of three years, Vungarala recommended the tribe invest over $190 million in non-traded REITs and BDCs, generating $11.4 million in commissions for Purshe Kaplan, of which Vungarala personally received $9.6 million.
Although Purshe Kaplan's policies and procedures prohibited employees from engaging in certain potential conflicts of interest situations, Vungarala purportedly pushed on with the misconduct while falsely representing to the tribe that he would not receive any commissions on the REIT/BDC purchases, and furthermore failed to apply more than $3.3 million in volume sales charge discounts to which the tribe was eligible, even though Vungarala allegedly knew the tribe was entitled to the discounts.
Unsurprisingly, investigators concluded that Vungarala failed to disclose to the tribe that it was eligible to receive volume discounts because he sought to increase his own commissions. Nefariously, when a second tribe employee asked Vungarala why he was not requesting the additional REIT/BDC volume discounts, Vungarala misrepresented that the tribe was not eligible for these discounts, even though Vungarala purportedly knew that the tribe was, in fact, eligible to receive the discounts.
FINRA concluded that Purshe Kaplan's deficient supervisory procedures prevented it from detecting and halting Vungarala's fraudulent activities. For instance, the firm reportedly failed to adequately review Vungarala's dual relationship with the tribe (as Treasury Investment Manager) and Purshe Kaplan (as a representative), and accordingly failed to mitigate potential risks that could result from this conflict of interest situation.
All in all, the $3.4 million restitution order represents the dollar amount overcharged by Vungarala and Purshe Kaplan to the tribe in commissions: Though the firm charged the tribe $11.4 million in commissions, investigators calculated that the firm was only entitled to $8.0 million.
Purshe Kaplan permitted Vungarala to resign in 2016 following the allegations.
If you have invested with Purshe Kaplan Sterling Investments, ex-representative Gopi Krishna Vungarala, or with any broker or financial adviser whose unchecked conflict of interest has led to an overcharging situation—whether through overpayment due to a failure to apply sales charge discounts, or via excessive commissions—misrepresentations, or false and fraudulent conduct such as a failure to disclose the potential conflict relationship, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.