As a financial analyst and legal expert with over a decade of experience spanning prestigious consultancy firms and legal practices, I’ve seen firsthand the intricate intersections between financial markets and legal regulations. My work has encompassed detailed financial analyses, thorough legal research, and crafting articles that illuminate topics from investment strategies to compliance laws for a wide readership.
In a recent case that caught my attention, Kyle Chapman (CRD# 6303483), formerly a broker with American Trust, allegedly made unsuitable recommendations to a customer to invest $50,000 in a speculative, unrated debt security called GWG L Bonds. According to FINRA’s findings, Mr. Chapman lacked a reasonable basis for the recommendation, which was neither in the customer’s best interest nor suitable given their moderately aggressive risk profile and non-speculative investment goals. He also allegedly made negligent misrepresentations and omissions when responding to the customer’s inquiries about the investment.
Seriousness of the allegations and impact on investors
The allegations against Mr. Chapman are serious, as unsuitable recommendations and misrepresentations can cause significant financial harm to unsuspecting investors. GWG L Bonds were inherently risky, illiquid products that even GWG Holdings’ own disclosures described as speculative investments only suitable for those with substantial financial resources and no need for liquidity. When the company defaulted on its obligations in 2022, stopped selling the bonds, and filed for bankruptcy, many investors were left holding the bag.
This case highlights the critical importance of financial advisors upholding their duties to clients and only recommending investments that align with each client’s unique risk tolerance, goals, and circumstances. It also underscores the need for robust due diligence and clear, accurate disclosures about investment risks. Investors rely on the expertise and integrity of their advisors to navigate complex financial markets. Misconduct erodes the trust that is essential to a well-functioning system.
The advisor’s background and regulatory history
Kyle Chapman entered the securities industry in 2014, registering with SagePoint Financial in Newport Beach, California. Over his 8-year career, he was also associated with firms like Cetera Advisors and WestPark Capital before joining American Trust in San Clemente in 2020, where he remained until 2022. He currently works as an investment adviser with Foundations Investment Advisors in Henderson, Nevada while suspended from acting as a broker.
The recent FINRA action resulted in a 3-month suspension, $5,000 fine, and order to pay $1,471 in disgorgement. This appears to be the first disclosure on Mr. Chapman’s FINRA BrokerCheck report.
Explaining the GWG L Bond and relevant FINRA rules
GWG L Bonds were unrated, unregistered debt securities issued by GWG Holdings to fund its secondary market life insurance policy acquisition business until 2019. After that, the company shifted focus to “providing liquidity” for alternative assets but continued selling L Bonds to investors, marketing them as a way to participate in this new strategy. However, the underlying risks remained high. The bonds lacked security or collateral, and the company repeatedly warned that they were only suitable for investors who could absorb total loss.
FINRA Rule 2111 requires brokers to have a reasonable basis to believe a recommended transaction or investment strategy is suitable for the customer, based on the customer’s investment profile. Rule 2010 demands that brokers observe high standards of commercial honor and just and equitable principles of trade. Recommending risky, illiquid products without fully weighing suitability factors or disclosing material risks can violate these rules, as FINRA found in Mr. Chapman’s case.
Key takeaways for investors
If you lost money investing in GWG L Bonds or other unsuitable products based on your advisor’s recommendations, you may have potential recovery options. Documenting your interactions with the advisor, understanding the terms of any settlements or judgments, and consulting with an experienced securities attorney can help you assess the best path forward.
More broadly, this case is a potent reminder to thoroughly vet any proposed investment, ask detailed questions, carefully review disclosures, and make sure recommendations truly match your financial situation and objectives. Don’t hesitate to get a second opinion or walk away if anything seems amiss. Even advisors with clean records can engage in misconduct, so constant vigilance is key.
As the Greek philosopher Heraclitus wisely said, “If you do not expect the unexpected, you will not find it.” In the world of investing, a healthy dose of caution and independent scrutiny can make all the difference in safeguarding your financial future.
Fact: According to a Forbes article, investment fraud costs Americans approximately $50 billion per year. Common red flags include unsolicited offers, pressure to act quickly, promises of guaranteed or outsized returns, and a lack of clear documentation. Always research your advisor’s background and the proposed investment thoroughly before making any decisions.
