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FINRA Bans Advisor Recommending Risky Investments to Seniors

FINRA Bans Advisor Recommending Risky Investments to Seniors

A Phoenix-based financial advisor was booted from the industry this week after a disciplinary panel found he invested a number of elderly clients into high-risk securities by falsely touting the safety of the investments.

A Financial Industry Regulatory Authority disciplinary panel barred dually registered David Joseph Escarcega from the securities industry and fined the Strategic Financial Partners advisor $52,270, the exact amount he received in ill-gotten commissions earned off the unsuitable recommendations.

The panel found Escarcega placed a dozen investors, a majority of whom were seniors and retirees, into debentures, a type of high-risk debt instrument that is only suitable for clients who can afford to lose the entire investment. The clients, which he solicited through a series of investment seminars titled “Finding Safety in an Unstable Economy,” certainly did not qualify.

The investment at issue, GWG debentures, is an asset not secured by physical assets or collateral, but instead backed only by the issuer’s reputation and trustworthiness. The GWG debentures paid investors up to a 9.5 percent return on a seven-year investment.

The panel found that Escarcega was an experienced broker, in the industry since 2001, and knew that these were risky investments, despite his claims otherwise to clients.

“Escarcega knew that his customers sought safety in their investments, and accordingly, pitched his securities seminars around the notion,” the panel said. “The panel finds Escarcega intentionally or recklessly misrepresented and omitted material facts about the debentures.”

According to the panel, although Escarcega classified the debentures as an alternative investment, he did not follow state securities regulations regarding the restrictions placed on the sale of these types of products. In fact, Escarcega allegedly ignored the investor net worth restrictions and in some cases, even falsified paperwork in order to make it appear clients were suitable investors.

For example, in Arizona, investors must have a minimum net worth of $350,000 ($400,000 when combined with a spouse) to invest in a debentures and the investment cannot exceed 10 percent of the client’s net worth. But on Escarcega’s recommendation, at least six clients invested more than 10 percent of their net worth in GWG debentures.

The panel also found Escarcega falsely inflated one couple’s net worth and failed to disclose in another instance that the $100,000 investment in debentures was a product switch.

While Escarcega argued that none of his clients have suffered losses from their investments in the GWG debentures, the panel found this did not mitigate the unsuitable nature of the recommendations or the alleged fraud Escarcega committed.

Escarcega did not respond to a request for comment on Friday. 

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