Finra dings Hightower with $353,000 penalty over alt sales

Finra penalized Hightower Securities, the broker-dealer arm of the eponymous aggregator of registered investment advisors, $353,200 at the end of last month as a result of alleged violations of industry rules in selling alternative investments, namely GPB Capital Holdings private placements and an alternative mutual fund, the LJM Preservation & Growth Fund.

Hightower's main office is in Chicago, and, according to the Financial Industry Regulatory Authority Inc., it has about 565 registered reps in 69 branch offices.

Prior to 2018, both GPB private placements and the LJM mutual fund were widely sold by brokerage firms.

Last year alone, Finra penalized 15 broker-dealers a total of $3.7 million for sales of GPB Capital Holdings private placements dating back to the spring of 2018. 

Hightower agreed to the settlement with Finra and the regulator's findings without admitting or denying them.

"We are pleased to have resolved these matters and will continue to follow fiduciary best practices and regulatory standards for our clients’ investments," a Hightower spokesperson said.

From May 2018 to June 2019, Hightower failed to tell more than a dozen investors in GPB private placements that GPB had not filed its audited financial statements with the Securities and Exchange Commission, a violation of industry rules, according to Finra.

Meanwhile, from March 2016 to February 2018, Hightower came up short in its supervision of certain reps' sales of the LJM Preservation & Growth Fund, according to Finra. The firm failed to have the compliance systems and procedures in place to conduct due diligence on such products and ensure both the firm and its reps sufficiently understood the risks, Finra said, including the fact that the fund pursued a risky strategy that relied, in part, on purchasing uncovered options.

GPB Capital, a New York-based alternative asset management firm founded in 2013, served as the general partner for limited partnerships formed to acquire income-producing companies such as auto dealerships and trash businesses. GPB eventually raised $1.8 billion from investors but missed deadlines in 2018 to file audited financial statements with the SEC. In 2021, the SEC charged senior executives at GPB Capital with fraud and running a Ponzi-like scheme.

According to Finra, LJM was an alternative mutual fund that launched in January 2013. It was marketed as selling volatility by seeking to profit from the volatility premium, or the difference between implied volatility — investors’ forecast of market volatility reflected in options pricing — and realized, or actual, market volatility.

Hightower was fined $100,000 as part of the settlement, and will pay $133,600 in partial restitution to the GPB clients and $119,600 to two clients who bought the LJM fund, which collapsed during a bout of market volatility in February 2018.