## Facts

- Wall Street Strategies, Inc. (WSSI) was a FINRA member firm. Garry N. Savage, Sr. served as WSSI’s president, chief executive officer, and chief compliance officer.
- WSSI personnel recommended GWG Holdings, Inc. “Renewable Secured Debentures,” a high-yield, illiquid investment tied to GWG’s business of acquiring life-insurance policies in the secondary market and collecting policy benefits over time.
- Savage conducted due diligence before recommending the debentures to certain customers, including meeting with GWG representatives, reviewing GWG’s due-diligence materials, reviewing a valuation of the life-insurance portfolio associated with the debentures, and researching GWG’s lender. He understood the investment to be speculative and high-risk, but believed it could fit some clients’ needs.
- FINRA Enforcement opened an investigation after an executive at another broker-dealer received and forwarded a solicitation letter on “ALTERNATIVE INVESTMENTS COMPANY” letterhead. The letter invited recipients to a dinner meeting and attached GWG debenture materials.
- Enforcement filed a complaint alleging, among other claims, that WSSI and Savage made unsuitable recommendations of GWG debentures to nine customers in violation of NASD Rule 2310 and FINRA Rules 2111 and 2010.
- As an example of the suitability theory, Enforcement alleged Savage’s recommendation to customers RB and PB (a couple in their seventies) was unsuitable because their account documents reflected limited investment knowledge, moderate risk tolerance, and objectives that included principal preservation and long-term growth. The documents also reflected significant assets and liquidity.
- RB testified that he had decades of experience investing in stocks, bonds, mutual funds, and CDs; he discussed the prospectus and risks with Savage; the couple could set objectives investment-by-investment; and he wanted interest income similar to what CDs had paid.
- Savage testified that he met with RB regularly, knew the couple’s financial position and liquidity, discussed the speculative nature and risks of the debentures, and believed the investment was suitable based on their assets, liquidity, and objectives.
- Enforcement also charged WSSI, Savage, and Louis Karl Kittlaus (a registered representative associated with WSSI) with distributing misleading sales literature or communications about the GWG debentures in violation of NASD Rule 2210 and FINRA Rule 2010.
- The solicitation letter attributed to Kittlaus emphasized returns and certainty and included statements suggesting large gains and reduced market fluctuation risk. It also described the debentures as “secured” in a manner the panel found inaccurate because the life-insurance policies were not direct collateral and the security interest was subordinate to other creditors.
- Enforcement further charged WSSI and Savage with supervisory failures and inadequate written procedures under NASD Rules 3010(a) and (d) and FINRA Rule 2010, based on the alleged sales-literature and suitability misconduct.

## Issues

1. Whether WSSI and Savage made unsuitable recommendations of GWG Renewable Secured Debentures to customers, in violation of NASD Rule 2310 and FINRA Rules 2111 and 2010.
2. Whether Kittlaus violated NASD Rule 2210(d)(1)(A), (B), and (D) and FINRA Rule 2010 by distributing a solicitation letter and related materials containing false, exaggerated, unwarranted, or misleading statements about GWG debentures.
3. Whether WSSI and Savage were responsible for distributing or approving misleading sales literature about the debentures, in violation of NASD Rule 2210 and FINRA Rule 2010.
4. Whether WSSI and Savage failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to achieve compliance with FINRA and NASD rules, in violation of NASD Rules 3010(a) and (d) and FINRA Rule 2010.

## Decision

- The Extended Hearing Panel found Kittlaus liable for violating NASD Rule 2210(d)(1)(A), (B), and (D) and FINRA Rule 2010 based on misleading statements and an unbalanced presentation of risks and rewards in his solicitation letter and related materials.
- The panel sanctioned Kittlaus with a \$25,000 fine, a two-year suspension from associating with any FINRA member firm in any capacity, and a requirement that he requalify by examination before again becoming registered.
- The panel dismissed all remaining charges against WSSI and Savage, finding Enforcement did not prove by a preponderance of the evidence that they made unsuitable recommendations, distributed misleading sales literature with Kittlaus, or failed to maintain a reasonable supervisory system.

## Legal Principles

- FINRA Enforcement must prove alleged rule violations by a preponderance of the evidence in an Office of Hearing Officers disciplinary proceeding.
- Suitability under NASD Rule 2310 and FINRA Rule 2111 generally requires (a) a reasonable basis to recommend the product based on a broker’s understanding and diligence, and (b) customer-specific suitability based on the customer’s financial situation, objectives, risk tolerance, and other profile information.
- In evaluating customer-specific suitability, panels may weigh account forms alongside credible hearing testimony about the customer’s actual experience, liquidity, and investment goals, as well as the registered person’s disclosures and ongoing knowledge of the account.
- NASD Rule 2210 requires that communications be fair and balanced, provide a sound basis for evaluating the facts, and not contain false, exaggerated, unwarranted, or misleading statements or claims.
- Projected returns and statements implying certainty of outcome, reduced risk, or “security” must be supported and accompanied by material explanations and risk information; misleading descriptions of collateral or priority of security interests can violate communications standards.
- Firm liability for sales-literature violations and supervision under NASD Rule 3010 requires evidence linking the firm or its supervisors to the creation, approval, use, or failure to control the communication or practice at issue; absent sufficient proof, charges are dismissed.

## Conclusion

In this FINRA disciplinary action involving GWG Renewable Secured Debentures, the Extended Hearing Panel sanctioned registered representative Louis Karl Kittlaus for misleading public communications that overstated returns and safety and misstated the nature of the debentures’ security, but dismissed Enforcement’s suitability, sales-literature, and supervision claims against Wall Street Strategies, Inc. and its president/CEO/CCO, Garry N. Savage, Sr., for failure of proof.


Department of Enforcement v. Wall Street Strategies, Inc., Disc. Proceeding No. 2012033508702 (2015)