Luke Michael Johnson, a former broker with Coastal Equities, has been thrust into the spotlight following allegations of inappropriate investment recommendations. He purportedly persuaded investors to allocate over $2.3M into alternative and illiquid investments, allegedly breaching their risk tolerance levels and overconcentrating their portfolios.
The range of investments in question is broad, including several placements by GPB Capital Holdings LPs, a firm whose operations have been called into question amid allegations of a $1.7B Ponzi scam. Johnson also allegedly recommended American Realty Capital Hospitality Trust, MVP REITs I and II, Priority Income Fund, MacKenzie Realty Capital, and more.
Details have emerged that Johnson allegedly inflated customer’s reported net worth, risk tolerance levels, and income to sidestep his brokerage firm’s policy on the amount to invest in alternative investments. Alarmingly, retirees seem to have suffered, with one forced back into part-time work due to losses.
A Closer Look at Luke Michael Johnson’s Financial Advisory Record and Coastal Equities
Johnson’s former employer, Coastal Equities, faced consequences for allegedly failing to supervise him appropriately. The Financial Industry Regulatory Authority (FINRA) mandated the firm pay a fine of $150K. Moreover, Johnson’s FINRA record declares that his license was suspended for 18 months due to his questionable activities. Johnson’s commission from these sales adds up to a staggering $132,900K.
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Breaking Down the FINRA Rule
FINRA’s primary mission is to safeguard investors by ensuring the brokerage industry operates fairly and honestly. A critical part of this involves limiting the percentage of an investor’s net worth that can be placed into riskier, illiquid investments.
The rules are in place to balance an investor’s portfolio and limit their risk exposure. Supposedly, Coastal Equities had a policy preventing customers from investing over 35% of their liquid net worth in alternative investments. However, it seems that Johnson allegedly inflated figures to bypass this regulation.
Consequences and Lessons to Be Learned
The allegations against Johnson are a stark reminder to investors of the importance of diligence before investing. Low-liquidity investments, such as the ones Johnson recommended, are often high-risk and shouldn’t make up a significant percentage of any investor’s portfolio. Investors must be informed about the true risk and impact on the portfolio before exploring alternative investment avenues.
Brokerage firms, in turn, need to implement robust systems to effectively monitor their brokers’ conduct. Coastal Equities has already faced financial penalties for its oversight, and the allegations against Johnson highlight the importance of robust supervision in financial advisory services.
This instance underlines the necessity of immediate action for affected customers if their investment advice seems suspicious. Investors must consider every aspect, such as their risk tolerance, liquidity needs, and, most importantly, their chosen financial advisor’s reputation and track record.
