Texas securities regulators last week fined a pair of Corpus Christi-based brokers for their alleged sale of notes backed by phony life settlements.
The Texas State Securities Board ordered Jimmy Wayne Freeman Jr. to pay $453,185 to reimburse investors who purchased notes that supposedly were backed by life settlements and guaranteed to pay a 10% simple-interest return for five years. In addition, his securities registration with Texas has been suspended for a year.
The second broker, Kris Bradford Rhoden, was ordered to pay $25,000 to partially reimburse investors who allegedly bought the life settlement notes from him. His securities registration with the state was suspended for five years.
Both men were representatives at PlanMember Securities Corp. According to regulators, the pair sold the notes to clients without notifying the broker-dealer.
Currently, Mr. Freeman and Mr. Rhoden aren't registered with a firm, following their resignation from PlanMember in July.
According to regulators, the brokers sold the products from June 2008 through February 2009, hawking the notes and a product called the Immediate Income Investment Plan.
That product consisted of a five-year note that was supposedly backed by life insurance policies and a five-year fixed biweekly income account.
Those products were issued by National Life Settlements LLC, which was shut by Texas regulators in 2009 after selling $28 million in unregistered investments — phony promissory notes supposedly backed by life settlements — to 300 investors, including retired teachers and state workers.
Thus far, the buyers have had about 70% of their money returned to them via a court-ordered receivership.
Securities regulators said that Mr. Freeman and Mr. Rhoden were Series 6 licensed, which permitted them to deal only with securities issued by open-ended investment companies — a category into which the life settlement notes don't fall.
PlanMember's supervisory procedures also barred private securities transactions and required approval from the firm for reps to participate in sales that were outside the norm.
NO APPROVALS
Mr. Freeman and Mr. Rhoden failed to get the written approval or to notify PlanMember of their outside business activities with National Life Settlements, which allegedly paid the men commissions for their sales of the notes, according to securities regulators.
Finally, the men failed to make a timely update of their U-4 forms to show that they were marketing the life settlement notes. Both used their personal e-mail accounts to communicate with PlanMember clients about the investments, regulators claim.
Mr. Freeman, who has already paid $55,000 to one of the investors, said that he had been under the impression that these notes were insurance products.
Indeed, his disciplinary order with the Texas State Securities Board indicated that he had received documents and other information from National Life Settlements claiming that the notes didn't constitute securities under applicable law.
“We were fooled,” Mr. Freeman said.
“We thought it was registered with the insurance department, and it wasn't,” he said. “We're just glad that this is over with.”
A call to Mr. Rhoden wasn't im-mediately returned, and an e-mail to him was returned undeliverable.
A call to Richard Ford, a spokes-man for PlanMember, wasn't immediately returned.
dmercado@investmentnews.com
