Unveiling The Seriousness of Lion Street’s Alleged Misconduct and What it Means for Investors
I’d like to lead with a thought-provoking quote by the great American investor, Warren Buffett, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”. It sadly reminds us of the recent allegations of misconduct against Lion Street Financial, LLC, a licensed brokerage firm. According to publicly available information obtained from the Financial Industry Regulatory Authority (FINRA), in the latter half of 2024, the Securities and Exchange Commission (“Commission”) proceeded with public administrative and cease-and-desist action against Lion Street for non-compliance with Regulation Best Interest (“Regulation BI”).
Allegedly, Lion Street did not exercise necessary diligence or show due responsibility in connection with the recommendation of high-risk corporate bonds named “L Bonds” offered by GWG Holdings, Inc. (GWG). This incident not only compromises the firm’s reputation but directly affects the financial certainty of its investors. High-risk investments may yield high rewards but they equally carry the risk of losing the entirety of the invested funds. They are generally considered appropriate for investors with substantial financial resources who can afford the lack of liquidity in the investment.
Digging into the Past: Broker Dealer and Background
Delving into the background of Lion Street and the implicated financial advisor’s history could shed light on the gravity of the matter at hand. Before entrusting your financial wellbeing to any firm or advisor, it is vital to do a thorough background check into their past dealings. Fundamentally, the responsibility of upholding transparency and trustworthiness lies with the firm and its advisors. A good reputation and a solid track record are attributes of a reliable and competent advisor — FINRA BrokerCheck can serve as a valuable tool in this process.
Regrettably, according to a Pew Research Center study, 10% of financial advisors have been involved in disputes with their clients or have faced disciplinary actions. The complaints raised against these advisors essentially revolve around the same issues—improper advice regarding high-risk investments, misconduct, embezzlement, etc. This is a familiar narrative, and the allegations against Lion Street seem to be following the same pattern.
Understanding the Implications and FINRA Rule
While allegations of misconduct should be enough cause for concern, it is also crucial to understand the underlying regulations that have been violated — in this case, Regulation Best Interest (“Regulation BI”). Essentially, Regulation BI establishes a standard of conduct for brokerage firms and their registered representatives. It necessitates them to act in the best interest of the customer regarding any recommendation concerning a security or investment strategy.
In breaching Regulation BI, the charges against Lion Street imply that the firm did not demonstrate reasonable diligence, care, or the necessary skills to understand the potential risks, rewards, and costs linked to the mentioned recommendations. Consequently, Lion Street‘s failure to adhere to the obligations of Regulation BI has resulted in this predicament — an enforcement action imposed by the Commission.
Consequences and Lessons to Be Learnt
In the aftermath of this scandal, Lion Street has been reprimanded and ordered to cease and desist. Further, the firm has been directed to pay a handsome amount in disgorgements, prejudgment interest, and civil penalties to the SEC. This disturbing scenario should serve as a wake-up call for both investors and firms — reinforcing the importance of due diligence, financial integrity, and compliance with legal regulations.
As an investor, it’s imperative to fully understand the nature of high-risk investment products like L Bonds before making any investment decisions. Never hesitate to ask questions about fees, potential risks, and how a specific investment aligns with your overall financial goals and risk tolerance.
In conclusion, maintain vigilance, perform thorough research, and recognize that your financial security and future are in your hands. The present situation faced by Lion Street and its investors underscores the essence of Warren Buffett’s words: “Risk comes from not knowing what you’re doing.”
