We all trust financial advisors to guide us through the turbulent waves of the financial markets. But what happens when the very same people we trust are allegedly involved in unsuitable investment activities? I’ll guide you through a recent case involving an investment company, and in doing so, shed light on the importance of investor vigilance, regulatory compliance, and proper due diligence.
Allegation’s Seriousness, Case Information, and How it Affects Investors
Cova Capital Partners LLC came under the scrutiny of The Financial Industry Regulatory Authority (FINRA) which reportedly sanctioned the broker-dealer with a censure and a fine of $30,000. The firm, based in Syosset, New York, operates in various sections of finance, including private placements and retail sales of equity securities.
FINRA alleges that, between June 2018 and December 2021, Cova made unsuitable recommendations to retail customers. The case highlights three private placements they offered without conducting due diligence. According to the regulator’s findings, the firm sold:
- Over $2 million in pre-IPO shares of Company A without verifying the issuer’s rights to these shares or assessing markups charged.
- Over $1.7 million in a separate private placement without researching the issuer’s CEO, a person with a history of regulatory violations.
- Over $9 million in pre-IPO shares of Company B without probing SEC charges against individuals associated with the funding source.
This accusation shines a spotlight on the importance of due diligence and the severe implications of ignoring it. To contextualize this, according to the SEC, around 5% of US households fall victim to financial fraud every year. Wealth advisors and firms, like Cova Capital Partners, play a critical role in preventing such cases from spiraling.
The Financial Advisors Background, Broker Dealer, and Any Past Complaints
Cova Capital Partners LLC is a FINRA-registered broker dealer. Its business presence spans the financial market, and their portfolio includes services like private placements, private investments in public equity, and retail sales of equity securities. Presently, they find themselves in hot water due to an allegation by like FINRA.
Explanation in Simple Terms and the FINRA Rule
Cova wasn’t just accused of allegedly making unsuitable investment recommendations; they’re also accused of failing to maintain a robust supervisory system. According to FINRA, this lack of supervision and adherence to written policies led to the violation of FINRA Rules 3110 and 2010.
This ties back to Regulation Best Interest (Reg BI), a rule compelling broker-dealers and representatives to act in the best interest of their retail customers when recommending securities transactions or investment strategies. Ignoring this obligation results in a breach of this fundamental securities law.
Consequences and Lessons Learned
As a result of the alleged actions, Cova now stands accused of violating Exchange Act Rule 15/-l(a)(1) and FINRA Rules 2111 and 2010. The case against them serves as a stern reminder of the importance of careful risk management and the depth of due diligence necessary before recommending products to clients.
Firms who are found to supervise investments inadequately can be held responsible for investment losses, according to a potential FINRA Arbitration lawsuit.
It brings to mind a quote by world-renowned investor Warren Buffett – “Risk comes from not knowing what you’re doing.” This is true not just for individual investors, but for financial advisors and firms as well. Regulatory compliance, proper research, and in-depth understanding of investment products is paramount.
In this complex world of finance, firms and investors alike must strive for clarity, understanding, and above all, justice when unsuitable investment allegations surface. We can all learn from these challenging situations and strive for a safer, transparent, and trustworthy financial market.
