Broker Barred in Senior Investor Case

FINRA listed "senior and vulnerable investors" as a focus in its 2016 priority letter, as we blogged about previously, and the conclusion of a recent enforcement action supports the agency's focus in this area.

David Escarcega's BrokerCheck report shows a few actions, all of which seem to involve senior investors, or at least it could be assumed that they did, as they all revolved around annuities and life insurance products. In August of 2014 FINRA began the investigation of Mr. Escarcega that would conclude with his being barred from the industry.

FINRA found that Mr. Escarcega made materially false and misleading statements (violating Rule 10b-5 of the Exchange Act, FINRA Rule 2020 and 2010) in selling clients debentures issued by GWG Holdings Inc., which buys life insurance policies and earns a profit when it collects more in death benefits than it paid out to acquire the contracts. GWG funds its activities by issuing debt, like the debentures at issue in this matter. For 12 clients, the debentures were found to have been an unsuitable recommendation (under Rule 2310, Rule 2111 and Rule 2010). Finally, it appears as though in some cases he falsely indicated the source of funds used to invest in the debentures, a record keeping violation (Rule 4511). Another accusation, that he distributed a GWG sales brochure to his clients, which incorrectly identified the debentures as backed by life insurance policies, when in fact the policies were not collateral for these securities (Rule 2210), was dismissed.

While Mr. Escarcega contended that the securities were performing exactly as they were supposed to perform, and clients had suffered no losses, they were found to be "high-risk securities suitable only for investors with sufficient financial resources who could afford to lose their entire investment." The prospectus associated with these securities indicated many risks, including a lack of liquidity in the debentures, among other factors. What seems to have caught FINRA's eye in this case, and perhaps what led to Mr. Escarcega being barred, was the profile of the clients involved. Specifically, FINRA notes that:

• Eleven of the 12 investors were retired at the time of their purchase of the debentures.
• Nine of the 12 investors were over 70 years old; the youngest was 61 and she was retired. The oldest investors were 81 years old at the time of their investments.
• Ten of the 12 investors selected "Balanced/Conservative Growth" as their investment objective on their account applications; the other two selected the most conservative investment objective available on the account application "Preservation of Principal/Income."
• According to their account applications, ten of the 12 investors had an "Average" understanding of investments generally.
• According to their account applications, nine of the 12 investors had an "Average" understanding of alternative investment products, like the GWG debentures. Three customers said they had a "Limited" understanding of alternative investments.
• All of the investors used a more secure investment to acquire some or all of the funds to buy their debentures.
• Customer concentration in the debentures as a percentage of their net worth ranged from 10 percent to 33 percent.

Mr. Escarcega was also ordered to pay $52,570 as a fine, equal to the commissions he earned from GWG for selling the debentures.