Erez Law is currently investigating Aegis Capital Corp. related to the sale of variable interest rate structured products (VRSPs) by registered representatives to the firm’s retail investors.
Aegis Capital Enters Into Content Agreement with SEC
In July 2022, Aegis Capital entered into a consent agreement with the U.S. Securities and Exchange Commission related to the firm’s sale of VRSPs. The firm has agreed to stop selling these high-risk investment products, as part of the agreement. The SEC censured the firm and sanctioned the firm to pay disgorgement in the amount of $165,828 plus prejudgment interest of $55,037 and a civil money penalty in the amount of $2,300,000.
The order also relates to Aegis Capital’s supervisory failures relating to unauthorized trading and material misstatements and omissions made by registered representatives of Aegis Capital related to the sale of VRSPs.
The order found that 11 Aegis Capital registered representatives in Aegis Capital’s Melville, New York branch office and three Aegis Capital registered representatives in Aegis Capital’s Boca Raton, Florida branch office recommended VRSPs to 48 customers. It was found that these investments were unsuitable when considering each customer’s investor profile and account information.
It is alleged that Aegis Capital’s brokers touted the investment guaranteed fixed interest rate payment guarantee as a key feature and benefit when recommending VRSPs to the firm’s customers. However, most investors only receive guaranteed payments for one to three years, while the investment has maturity periods of 15 years or more. However, it was found that after the initial few years of the guaranteed fixed interest rate payment, there is no guarantee of a return; in fact, investors are then at risk of losing their entire investment principal and there may be little or no secondary market for the securities.
According to the SEC order, the managing director of the Boca Raton, Florida branch office of Aegis Capital allegedly made at least 1,000 unauthorized trades in the non-discretionary accounts of seven customers, between September 2015 and May 2019. It was found that the broker registered representative “made material misstatements and omissions about the VRSPs to customers, falsely stating, in substance, that the Customers were guaranteed to receive their full invested principal at maturity from investing in VRSPs that, in fact, did not guarantee principal protection.”
The SEC found that between January 2015 and May 2019, Aegis Capital failed reasonably to implement its:
- Written Supervisory Procedures;
- structured products procedures, including the training requirements for structured products;
- and policies and procedures concerning unauthorized trading, all with a view to preventing and detecting Aegis RRs’s violations of Sections 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
The SEC also found that:
- Aegis Capital failed to create and keep current certain required records relating to customer accounts, including the customer’s annual income net worth, and the account’s investment objectives.
- 14 Aegis Capital’s registered representatives recommended VRSPs to 48 customers, of which they were unsuitable based on the customer’s profile.
- The firm established procedures prohibiting the sale of structured products, including VRSPs, to customers who did not have “high” or “maximum” risk tolerances and an investment objective of “aggressive growth/aggressive income” or “speculation.”
- The branch managers of the Melville, New York and Boca Raton, Florida branches of Aegis Capital were assigned responsibility for implementing the firm’s policies and procedures, including the firm’s WSPs and structured products procedures.
- Aegis Capital designated supervisors in each of its branch offices to conduct daily reviews of trade orders to monitor for Aegis Capital’s registered representatives compliance with these suitability requirements and to conduct additional suitability analysis as needed.
- Aegis Capital added additional requirements to the structured products procedures that it had established, which prohibited registered representatives from selling structured products to customers who did not have a minimum investment objective of “Aggressive Growth/Aggressive Income” and a minimum risk tolerance of “High Risk or Maximum Risk.”
- The firm established a firm-wide requirement that certain frequently-traded, non-discretionary customer accounts are required to have on file “Active Trading Letters” that are signed by Aegis Capital registered representatives, designated supervisors, and customers.
Aegis Capital’s WSPs in effect specifically prohibited unauthorized trading by its registered representatives. According to the SEC, “Aegis failed to develop reasonable systems to implement its policies and procedures in the Melville Branch and Boca Branch with a view to preventing and detecting Aegis RRs’s violations of the customer-specific suitability requirements for recommendations of VRSPs, unauthorized trading, and misstatements and omissions about the VRSPs.”
Aegis failed to develop reasonable systems to implement its policies and procedures and to monitor whether supervisors reasonably conducted reviews of trade orders for suitability and reasonably reviewed recommendations of VRSPs, according to the SEC.
The SEC found the following:
- The supervisors failed to reasonably review trade orders or the related recommendations for suitability purposes.
- Aegis failed to develop reasonable systems to implement its structured products procedures that were in effect in the two branch offices.
- Aegis failed to develop reasonable systems to implement its policies and procedures to prohibit unauthorized trading.
- Aegis failed to develop reasonable systems to implement its structured products training requirements, including requiring training on the characteristics and risks of structured products and the suitability considerations and requirements concerning such investments.
- Aegis failed to make and keep current a record indicating that it had furnished to customers copies of their account records or alternate documents with the required information at intervals no greater than three years.
- Aegis failed to make and keep current a record indicating that the firm had furnished to each customer a copy of the updated customer account record or alternative document when changes were made to account objectives.
What are VRSPs?
Offered for a given period of time, VRSPs offer guaranteed fixed interest rate payments. They are “principal-at-risk” securities, meaning that customers “can lose some or all of their invested principal if the VRSPs’ respective reference securities indexes fail to perform within pre-determined ranges at maturity.”
According to the SEC, “VRSPs are complex, structured securities, typically issued by large well-known financial institutions, that offer guaranteed periodic fixed-interest rate payments, typically for one to three years. After the fixed-interest rate periods end, however, the VRSPs make periodic variable- interest rate payments, but only if a spread exists in which the long-term Constant Maturity Swap (“CMS”) rate is greater than the short-term CMS rate and certain reference securities indexes, such as the S&P 500 and/or the Russell 2000 stock indexes, do not decline by more than a specified percentage. Consequently, once the fixed-interest rate payment periods end, the Customers are not guaranteed to receive any further interest payments from the VRSPs. The prospectuses for several of the VRSPs at issue expressly disclosed the risk of non-payment of interest, stating, for example, that, “there can be no assurance that [investors] will receive a contingent interest payment on any interest payment date” and that “the securities are not a suitable investment for investors who require regular fixed income payments, since the contingent interest payments are variable and may be zero.”
Aegis Capital VRSP Investment Fraud Options
Brokers are required to determine the suitability of investments for their clients in light of the customer’s investment profile, which takes into account the customer’s financial situation and needs, age, liquidity needs, investment objectives, investment time horizon and risk tolerance.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Aegis Capital may be liable for investment or other losses suffered by its customers.
Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If you have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.
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Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If you have experienced investment losses, please call us at 888-840-1571 or complete our contact form below for a free consultation.
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