Pasadena-Based Financial Firm Charged By SEC May Spend Over $1 Million for Legal Defense

Pasadena-based financial firm Western International Securities which was charged by the Securities and Exchange Commission with alleged violations of its Regulation Best-Interest fiduciary rule may end up spending as much as $1 million or more on its legal defense, according to a report by Financial Advisor.

“The cost for this kind of defense can range anywhere from $100,000 upwards to $3 million. It’s dependent on how aggressively Western fights this action and who the lawyers are that they hire,” Andrew Stoltmann, founder of Chicago-based Stoltmann Law, told Financial Advisor.

“I’m certain that Western worked to negotiate a settlement and a potential fine or penalty on the front end and simply didn’t like the amount the SEC asked for,” added Stoltmann.

In the civil case filed on June 15 before the United States District Court for the Central District of California, the SEC alleged Western and five brokers violated SEC’s Regulation Best Interest (Reg BI) when they recommended and sold $13.3 million worth of high-risk bonds known as L Bonds to retirees and other retail investors.

Reg BI, established under the Securities Exchange Act of 1934, requires firms and their registered brokers to act in the best interest of a retail customer when making a recommendation of a securities transaction.

Firms and brokers are considered compliant with Reg BI’s Best Interest Obligation only if they comply with four component obligations: the Disclosure Obligation, the Care Obligation, Conflict of Interest Obligation, and the Compliance Obligation.

The complaint alleged that the defendants failed to comply particularly with the Care Obligation by recommending so-called L Bonds to at least seven retail customers “without a reasonable basis to believe L Bonds were in those customers’ best interests.”

The complaint alleged that the seven retail customers invested amounts ranging from $20,000 to a collective $250,000 invested by a married couple who were 61 and 67 years old.

“These recommendations violated Regulation Best Interest in several ways,” the SEC said. “Western and its registered representatives… failed to exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs associated with L Bonds.”

The complaint also listed as defendants Western’s registered brokers Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham, and Thomas Swan.

The SEC alleges the registered brokers did not understand key risks associated with L Bonds and GWG at the time they recommended them to retail customers.

The complaint is the first from the SEC related to Reg BI.

According to the Financial Advisor report, one issue that is likely to come up should the complaint proceed to jury trial, is “the many arbitrations that have been filed against firms and reps who have sold the junk bonds in question.”

According to the SEC, GWG Holdings’ L bonds were “high risk, illiquid, and only suitable for customers with substantial financial resources.”

This year, GWG reportedly defaulted on its bond interest and principal payments and filed for bankruptcy.

In a statement, Western said it will defend itself against the SEC’s allegations. “The firm takes its clients’ best interests very seriously and believes it complied with Reg BI and the regulatory guidance available during the pertinent timeframe.”