Securities Arbitration Lawyers BlogFINRA Suspends Broker Jeffrey Paul Dragon For Excessive UIT Trading
FINRA has suspended broker Jeffrey Paul Dragon (CRD# 1874038) for 21 months and sanctioned him $50,000 in relation to a series of customer complaints. He has since been subjected to a second customer dispute after being terminated.
Dragon was last employed by Berthel Fisher & Company Financial Services, Inc. (CRD# 13609) of Burlington, MA, from 03/02/2007 to 09/23/2016, when Berthel terminated his registration and employment.
His previous employers include:
- Merrill Lynch Pierce Fenner & Smith, Incorporated (CRD# 7691) of Wellesley Hills, MA, from 09/29/2003 to 02/07/2007
- Citigroup Global Markets (CRD# 7059), of New York City, from 04/11/1997 to 10/10/2003
- Citizens Investment Services, Inc., (CRD# 39550) of Dedham, MA, from 05/24/1996 to 04/23/1997
- GNA Securities, Inc, (CRD# 10465), of Richmond, VA, from 11/01/1995 to 06/12/1996
- John Hancock Distributors, Inc. (CRD# 468) of Boston, MA from 09/22/1988 to 11/16/1995
- John Hancock Mutual Life Insurance Company (CRD# 5181) from 09/22/1988 to 11/16/1995
Dragon, in his capacity as a broker-dealer with employer Berthel Fisher, recommended to a number of the firm’s customers’ investment in Unit Investment Trusts, or UITs. These trusts offer a fixed, unmanaged portfolio of mostly stocks and bonds. UITs are issued for a set period of time, and terminate on a specific date, usually 12 to 24 months after issue. They are designed to provide capital appreciation and/or dividend income in that finite period. However, these particular investors were a) seniors, b) unsophisticated investors unfamiliar with UITs or c) both. They were unaware of the particulars, relying on Dragon to give them complete information on UITs and on trading.
Dragon’s system was to encourage his customers to buy UITs during their initial offering periods, then liquidate them before the end of the term (within six months or less.) The proceeds from those sales were used to repeat the purchasing process, incurring new sales charges.
Like many investment firms, Berthel Fisher offer “breakpoint” discounts in trading commissions to investors for transactions over $50,000, and over $100,000. Dragon structured the sales and trades in order to deprive investors of these discounts, ensuring that none of the aggregate trade amounts reached the $50,000 mark. This meant that the below-breakpoint trades generated additional commissions that enriched both himself and the firm. The improper trading occurred from January 1, 2013 and December 31, 2015.
Additionally, Dragon was also involved in trading mutual funds in a similar fashion, structuring trades so that none reached the discount breakpoint.
Berthel Fisher’s internal processes did not adequately detect or address this kind of setup, neither in WSPs (written supervisory procedures) nor in any other system of checks and balances. The firm relied on the brokers to report their trades and any inadequacies, without proper oversight on the part of supervisors and managers.
As a result, the firm’s insufficient supervision allowed Dragon’s unsuitable UIT recommendations to go unrestricted through the two-year period he traded these UITs. Customers were charged more than $666,000 in improper sales charges for UITs, generating $417,000 in concessions. The firm’s supervisory system was also not designed to “review for and ensure the suitability” of mutual fund transactions.
Berthel Fisher terminated Dragon on 9/23/2016 after these allegations, because he “did not adhere to a term of his heightened supervision agreement, which required him to run all business, including fixed indexed annuities, through the firm’s commission grid.”
The firm admitted to the denial of these discounts that the customers should have received, and paid restitution to each customer in 2015.
Dragon was fined $50,000 for civil and administrative penalties, and suspended from 01/18/2018 through 10/19/2019. He is not currently affiliated or registered with any FINRA broker-dealer.
FINRA also issued sanctions against Berthel Fisher, including:
- Restitution to all affected customers, totaling $117,315.41 plus interest
- Fines to FINRA totaling $299,471.73, as “disgorgement of concessions received not otherwise part of restitution.”
- Retain and pay for an independent consultant, including support staff, to review the firm’s internal processes and staff training that govern all products and services offered to customers
- Work with the independent consultant to implement recommendations and suggest alternatives in the event of an unworkable process.
Dragon’s most recent customer dispute was filed on 9/28/2017, “alleging the investments she purchased in 2013 were unsuitable and were misrepresented to her by the representative. The client also alleges the firm failed to supervise the actions of the representative.” The customer is requesting damages of $66,150.00. That case is still pending.
His first customer dispute was filed on 06/16/2006, alleging that Dragon failed to follow instructions. The damage amount requested was $10,000, but was closed with no action.
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