Kovack Securities Cited for Failing to Supervise Short-Term Mutual Fund Trades, Suitability Issues

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FINRA fined Brian Kovack's firm Kovack Securities in Woodland Hills, California over $200,000 for failing to supervise brokers at the firm who unsuitably recommended and traded mutual funds and other securities, including several cases of brokers since barred from the industry for their misconduct perpetrated while at Kovack Securities and upon Kovack customers.

Long-term investors might remember Brian Kovack as the then-FINRA Board of Governors candidate who in 2015 said he will represent firms, not investors, decrying the scourge of what he described as "frivolous" disputes, complaints, and claims filed by "upset clients."

Despite these anti-investor statements, Kovack successfully joined the Board of Governors and served as a Governor, making this particular situation an uneasy reality in which one branch of FINRA—Enforcement—has issued discipline to an entity belonging to someone who, essentially, was a FINRA insider. It should then come as little surprise that despite the firm's disciplinary history—including a pattern of poor and deficient supervision and failure to maintain accurate books and records.

In its decision to fine and censure Kovack Securities (AWC #2018060177801), investigators shined a spotlight on the case of ex-Kovack Securities broker Mark Charles Koehler, who recommended over $2.1 million in A share mutual fund purchases, resulting in unnecessary sales charges.

FINRA barred Koehler in 2017, noting that Koehler unsuitably and excessively traded Class A mutual funds in accounts belonging to his clients. FINRA also issued a $1.4 million fine to Cetera Advisor Networks of El Segundo—the firm Koehler worked with before joining Kovack Securities (Koehler remained with Kovack until FINRA permanently barred him). Those findings alleged that Koehler excessively traded several customer accounts through "hundreds" of short-term Class A mutual fund transactions.

Investigators wrote that in addition to causing unnecessary and excessive sales charges, the Class A mutual funds themselves were likely unsuitable for Koehler's clients because the funds were designed to be held for long periods and that Koehler recommended more frequent trading.

A BrokerCheck search for barred brokers that were registered with Kovack Securities returns 58 results, effectively corroborating a Securities Litigation & Consulting Group (SLCG) study that ranked Kovack Securities 11th on a list of brokerage firms with the greatest proportion of customer complaints to total brokers at the firm (behind Aegis Capital Corp, Newbridge Securities Corp, Western International Securities, National Securities Corp, Summit Brokerage Services, Financial West Investment, Independent Financial Group (IFG), Calton & Associates, Centaurus Financial, and Wunderlich Securities).

Kovack Securities, which is a subsidiary of Kovack Financial Companies and sibling of Kovack Advisors, has California offices located in, amongst others, Fresno, Grover Beach, Orange, Sacramento, Santa Barbara, Willows, Woodland Hills, and Yreka, and a handful of brokers at these locations have previously settled customer complaints and/or have been disciplined by FINRA for various degrees of misconduct.

For instance, Christospher Cook Hartman (CRD #1850747) of Kovack Securities' Santa Barbara branch previously settled an unsuitable investments claim, Doug James Lagerstrom (CRD #2177433) of Kovack Securities in Woodland Hills reached a $250,000 settlement with a customer who claimed he recommended and sold investments unsuitable for senior citizens, Hung T. Sam (CRD #6065447) of Kovack Securities in Orange consented to a FINRA penalty for borrowing $230,000 from a customer without authorization and in violation of policy, and Keith Landon Kelt (CRD #267357) of Kovack Securities in Santa Barbara settled a complaint alleging losses due to improper account management.

We previously wrote about Hung Sam's sanction here: Hung Sam Cited for Borrowing From Wells Fargo Customer Without Authorization (5/19/21). Several other disciplined ex-Kovack brokers, including Shlomo Strugano (forgery investigation) and Anthony Diaz (over 50 disclosures) were since barred from the industry.

FINRA concluded its report by reiterating that Kovack Securities failed to meet supervisory obligations standards, despite several notices from FINRA about the firm's obligation regarding suitability with mutual fund switches.

If you invested with any broker or investment adviser at Kovack Securities or Kovack Advisors who unsuitably recommended you purchase unsuitable products or trade and switch mutual funds excessively, resulting in unnecessary sales charges commissions or other losses, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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