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Investor Loses $300,000 in Unapproved Securities-Based Loan Strategy

Attorney Advising Disclaimer

A customer who allegedly lost $300,000 investing with former Wells Fargo Advisors and LPL Financial broker John Dougherty filed a lawsuit alleging that a series of unsuitable recommendations pertaining to the outside business activity, which itself was unauthorized, resulted in damages.

The lawsuit alleges Dougherty persuaded the customer to invest $300,000 in Jamaica Cures, LLC, a medical marijuana grower based in Jamaica, and an outside business activity not approved by Dougherty's firms. AdvisorHub noted that Dougherty disclosed he also invested and served on the Jamaica Cures board.

Furthermore, Dougherty allegedly recommended the customer take out a securities-based loan (SBL) as part of an overall investment strategy.

Securities-based loans (SBLs) use securities as collateral for loans.  Unlike margin lending, the loan proceeds can be used for anything except buying more securities or engaging in options strategies at the brokerage firm. Worse, an SBL strategy always exposes a client to the potential for margin calls if the securities in the brokerage account used to secure the loan fall below the borrowing requirements. Plainly, margin calls have a tendency to wipe out large portions of a client's assets. 

Brokerage firms push SBLs as they keep a client's assets at the firm plus gives the firms streams of income from the interest on the loan payments.

This investor's situation highlights the double-whammy of the risk of forced liquidation plus the risk of investing in a broker's outside business activity.  Dougherty, by combining an SBL with selling away or engaging in unapproved outside business activities, amplified the risk to his client's principal.

Importantly, brokerage firms frequently claim they have no responsibility for a broker's undisclosed business activities using the excuse "we had no way to know what the broker was doing."  Brokerage firms have an affirmative duty to supervise their brokers which includes investigating if they are engaged in outside business activities. 

FINRA barred the former Wells Fargo Advisors and LPL Financial broker, John Dougherty, for refusing to cooperate with an investigation into allegations he engaged in undisclosed outside business activities and private securities transactions.

LPL Financial's termination reason was simple: "Engaged in outside business activity without Firm approval. Participated in private investments without Firm approval."

If you invested with an LPL Financial broker or any registered representative who recommended risky investments away from the firm, with these unauthorized and unsuitable private placements resulting in damages through losses, excessive commissions or other fees, 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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