SEC charges Centaurus Financial for unsuitable recommendations of VRSPs
The Securities and Exchange Commission (SEC) today announced that dually registered broker-dealer and investment adviser Centaurus Financial, Inc., branch manager Ricky A. Mantei, and registered representative Atul Makharia agreed to settle charges in connection with the unsuitable recommendation of variable interest rate structured products (VRSPs) to certain Centaurus retail brokerage customers.
According to the SEC’s order, the VRSPs are complex, structured securities with maturity periods of fifteen years or more issued by large well-known financial institutions. The VRSPs initially offer guaranteed fixed-interest-rate payments, typically for a period of one to three years, and then convert to variable interest-rate payments. During the variable rate period, the VRSPs can cease making interest payments. Furthermore, according to the order, investors can also lose some or all of their invested principal at maturity if the VRSPs’ referenced securities indexes decline more than a specified percentage at maturity.
The SEC’s order finds that, between June 2016 and July 2019, Makharia and seven other registered representatives from Centaurus’ Lexington, South Carolina branch office made recommendations of VRSPs to ninety-four retail customers for whom the recommendations were unsuitable in light of each of the specific customers’ financial situations and needs.
According to the SEC’s order, Makharia made fifty of these unsuitable recommendations to thirty customers. The SEC’s order further finds that Centaurus failed to implement, and Mantei failed to follow, Centaurus’ customer-specific suitability procedures and that Centaurus violated the broker-dealer books and records provisions of the federal securities laws.
The SEC’s order finds that Centaurus violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (“Securities Act”) and Section 17(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 17a-4(e)(5), 17a-4(f)(2), and 17a-3(a)(17)(i)(B)(3) thereunder, Makharia violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Mantei caused Centaurus’ and Makharia’s violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.
The SEC’s order also finds that Centaurus and Mantei failed reasonably to supervise the CFI RRs within the meaning of Section 15(b)(4)(E) of the Exchange Act and Section 203(e)(6) of the Investment Advisers Act of 1940 with a view to preventing or detecting the CFI RRs’ violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.
Without admitting or denying the findings in the SEC’s order, Centaurus, Mantei, and Makharia agreed to cease and desist from future violations of the charged provisions. Centaurus also consented to a censure, and agreed to pay disgorgement of $4,876 plus prejudgment interest of $623 and a civil penalty of $750,000, and to retain an independent compliance consultant.
Mantei agreed to pay disgorgement of $92,650 plus prejudgment interest of $11,842 and a civil penalty of $206,000, and to limitations that prevent him from acting in a supervisory capacity for six months. Makharia agreed to pay a civil penalty of $35,000 and to associational and penny-stock suspensions of six months.