LPL Financial LLC (“LPL”) is a securities brokerage firm with offices in Boca Raton, Florida and elsewhere. It is regulated by Financial Industry Regulatory Authority (“FINRA”). LPL offered and sold to Claimants the investments at issue in this arbitration, namely, non-traded Real Estate Investment Trusts and Business Development Companies through Scott Lanza (“Mr. Lanza”) an individual registered with FINRA as an “Associate Member” of LPL. The brokerage firm LPL has been sued because it is vicariously liable for Mr. Lanza’s acts, omissions and other misconduct described more fully herein.
Who Is Scott Lanza?
Scott Lanza is a registered securities agent and investment advisor. Over his 25 year career, he has worked with six different stock brokerage and investment advisory firms. During the relevant period, 2014 through 2019, Scott Lanza was officially working with LPL, at its offices located in Boca Raton. During the same time period, he also had offices at Stonegate Financial, a bank that was located in Jupiter, Florida. The bank held them out as its financial wealth manager. Interestingly, there is no mention of that on his BrokerCheck report as an outside business activity or office where he did LPL business. Scott Lanza is currently a registered representative of IFP Securities, LLC in Boca Raton, Florida. To date, to customers, have filed two customer complaints against Scott Lanza, one complaint alleged negligence, breach of fiduciary duty, and breach of contract in connection with an advisory account that was settled for $70,000. The other complaint against LPL for Scott Lanza’s alleged misconduct is described below.
A Summary of the Allegations Against LPL For Scott Lanza’s Alleged Misconduct
The most recent arbitration arises out of a series of alleged explicit unsuitable recommendations by an LPL financial advisor, Mr. Lanza, that Claimants purchase and then hold Real Estate Investment Trusts (“REITs”) and Business Development Companies (“BDCs”) in Claimants’ LPL individual retirement accounts. As a result, Claimants’ retirement accounts were allegedly overly concentrated in risky illiquid securities when any reasonable financial advisor would know such was an unsuitable recommendation in light of the fact that Claimants would eventually need to make the Required Minimum Distributions (“RMDs”) from their individual retirement accounts. The excessive concentration in REIT and BDC securities made the accounts highly speculative and inconsistent with Claimants’ “conservative” and “low risk” investment objectives.
The Respondent, directly and indirectly through Mr. Lanza, also allegedly disseminated false and misleading information to Claimants about the nature, mechanics, and risks of purchasing and continuing to hold the REITS and BDCs Mr. Lanza selected and placed in Claimants’ retirement accounts. The LPL financial advisor’s alleged representations about the nature of the investments, as well as their pricing and performance, and continuous recommendation to hold the securities misled Claimants to believe they were invested in funds that were safe, sound and could be liquidated like any other investment offered and sold by broker-dealers.
In so doing, Respondent through its registered representative, allegedly committed fraud, breached its fiduciary duty to Claimants, breached its contracts and the FINRA Code of Conduct, and was allegedly negligent in advising Claimants on how to safeguard their investment capital. Respondent allegedly negligently failed to supervise its employees in connection with the management of Claimants’ retirement accounts. Respondent, through its registered representative, allegedly fraudulently concealed the misconduct. As a result of Respondent and its registered representative’s misconduct, Claimants suffered substantial damages in an amount to be determined at the final arbitration hearing.
The Relevant Facts
The Claimants are husband and wife and near retirement. They are still employed at the family business. For many years, they had a banking relationship with Stonegate Financial in Jupiter, Florida. Their Stonegate banking officer introduced Claimants to Mr. Lanza as head of the bank’s financial wealth management department to discuss management of the Claimants’ retirement account investments.
Shortly after they met with Mr. Lanza, Claimants agreed to give him access to their retirement accounts for the purposes of advising and managing them; Claimants signed forms appointing Mr. Lanza as their “Broker of Record.” Over many months, Mr. Lanza, built upon Stonegate’s reputation, personally gained Claimants’ trust and confidence, and eventually persuaded them to roll-over their 401K retirement plan assets into LPL Individual Retirement Accounts (“IRAs”) where he would select, monitor and manage the investments he made for them.
Mr. Lanza opened the LPL retirement accounts for Claimants and allegedly proceeded to make the investments in the funds he assured them to be safe investments and consistent with Claimants mantra: “I don’t care if I make money or not; I just don’t want to lose it.” In the securities industry parlance, the Claimants’ investment objective was to preserve their capital. Notwithstanding, in December 2014 and January 2015, Mr. Lanza proceeded to invest $385,000 of Claimants’ assets transferred from their 401K retirement plan in REITs and BDCs, which represented approximately 75% of the assets in their retirement accounts, respectively. There was no detailed explanation of the nature, mechanics, or risks of any of the investments he purchased for them. The Claimants were only given forms to sign and return without disclosure of the true nature, mechanics, or risks of the investments, particularly the liquidity risk and his personal conflict of interest in selecting and purchasing investments that would yield him the greatest amount of commissions. Mr. Lanza picked up their checks and the investments were made with Mr. Lanza’s assurance that he had selected the best investments for Claimants.
Many months later, Claimants became aware of a slight decline in one of his investments and contacted Mr. Lanza who explained the lower price related to senior secured loans being re-priced to secondary loans tied to the energy sector. He said, relatively speaking, it was only a small decline that would be recouped when the loans “with a face value on them and a maturity” were re-priced in the marketplace. Further, that the income generated and being reinvested at lower prices was averaging down his cost basis. Mr. Lanza allegedly assured Claimants that it was only a temporary decline, it had happened in the past, and “that rebounds can be quite sharp and is something not to be missed.” Mr. Lanza allegedly encouraged Claimants to be patient and wait for the rebound.
In or about November 2015 and continuing through November 2017, Mr. Lanza allegedly continuously made false and misleading statements to Claimants about not only the nature of the REIT and BDC investments, but the market value and returns on those investments. In fact, for a period of time LPL referred to the REITs and BCDs as equities, not alternative investments on its account statements. There was no indication that the investments were illiquid and could not be sold at or near the reported prices. Throughout that period, Mr. Lanza allegedly made explicit unsuitable recommendations that Claimants hold those investments. Mr. Lanza allegedly made his false and misleading statements and unsuitable hold recommendations to deter Claimants from making any attempt to sell and discover they were holding illiquid investments with a market value and returns much less than Mr. Lanza reported.
When Claimants questioned Mr. Lanza about his investments they allegedly always received positive, reassuring and lulling statements intended to cause Claimants to take no action and hold their investments. For example, Mr. Lanza said: “the investments are on stable ground, especially the energy fund as it continues to recover, so no changes necessary,” implying that changes could have been made, if necessary, when he knew otherwise. Later, Mr. Lanza wrote: “I’ve attached your YTD performance numbers…almost 3.25%, so on track for about a 6% year, and your 1 year return is over 12%, but that big number was mostly due to the recovery in Energy & Europe. I do expect some volatility here before the summers over, but nothing we need to make adjustments for as your accounts are already set up pretty defensively.” As late as October 2017, Mr. Lanza was allegedly telling Claimants “the 5% you are down now is minimal and is being clawed back each month as your distributions reinvest back into the fund” and “so, I would recommend a “wait and see” strategy until it gets above water sometime next year.”
Claimants allegedly relied upon Mr. Lanza’s false and misleading statements and unsuitable hold recommendations and other bad investment advice until sometime in December 2017, when LPL reassigned the Claimants’ retirement accounts to another advisor. Thereafter, slowly but surely, Claimants learned that they were misled by Mr. Lanza. It was not until 2018 that Claimants discovered that not only was there no market for the securities but that other brokerages would not even accept or hold them in accounts. At this point, Claimants became concerned about their ability to make their RMDs and comply with the tax law in the future.
In late 2018, Claimants began their search for a way to sell their REITs and BDCs to mitigate their damages. To date, they have only been partially successful in selling some of the REITs through a slow redemption process and third party tender offers. Claimants are seeking not only damages from Respondent on the investments they were able to sell but rescission or a measure of rescission damages with interest accruing at the legal rate on the full purchase price from the purchase date of the investments.
The Alleged Misconduct of LPL and Scott Lanza
The REITs and BDCs Were Not Safe, Conservative or Low Risk Investments
Claimants did not have any experience with REITs and BDCs prior to being introduced to Mr. Lanza by their banker. Throughout Claimants’ LPL account relationship, Mr. Lanza allegedly misrepresented the REITs and BDCs as “safe,” “conservative,” and “low risk” “funds.” Contrary to Mr. Lanza’s alleged representations, the REITs and BDCs were not “safe,” not “conservative,” and certainly not “low risk” income producing investments. They were not “Funds.” And they were definitely not “consistent with the preservation of capital.”
Mr. Lanza Over-Concentrated Claimants’ Accounts with REITs and BDCs
LPL and its agent, Mr. Lanza, allegedly knew or should have known that the REITs and BDCs were not suitable investments for Claimants’ retirement accounts. Mr. Lanza’s alleges “explicit” recommendations that Claimants purchase and hold a concentrated position (75%) were “unsuitable” recommendations. Respondent and its registered representative, Mr. Lanza, allegedly knew or should have known that you “do not put all of your eggs in one basket,” and they certainly knew or should have known you do not invest 75% of any investor’s assets in “illiquid” securities in any retirement account. However, the LPL financial advisor allegedly ignored the principles of sound asset allocation and diversification in Claimants’ retirement accounts. Claimants trusted and relied on Mr. Lanza for investment advice and allegedly did exactly what he recommended.
The Industry Rules and Standards of Professional Care Were Violated
The fiduciary standard imposed by Florida law applies equally to the financial advisor’s and broker-dealer’s entire relationship with their current and prospective clients by imposing on the broker-dealer and its agents the same duties that have been found to be imposed upon investment advisers in other jurisdictions, such as the “affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts,’ as well as an affirmative obligation to ‘employ reasonable care to avoid conflicts of interest and misleading’” their clients and prospective clients. Through its registered representative, Respondent breached many of its fiduciary duties to Claimants.
Moreover, the LPL financial advisor’s recommendations were also in violation of FINRA Rules of Conduct 2110, 2111 (f/k/a 2310) and 2120, which state:
2110. Standards of Commercial Honor and Principles of Trade
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
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2120. Use of Manipulative, Deceptive or Other Fraudulent Devices
No member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.
In this case, the alleged in continuous misrepresentations and misleading statements made by Mr. Lanza about his recommendations were a clear breach of FINRA’s suitability rule, which has long been applied to recommended “investments” and “investment strategies,” including explicit “hold” recommendations.
Mr. Lanza alleges misrepresented the REITs and BDCs as “safe,” “conservative,” and/or “low risk” investments and suitable for Claimants’ retirement accounts. Contrary to Mr. Lanza’s alleged misrepresentations, the concentration and illiquidity risks in Claimants’ retirement accounts were the highest and unsuitable for Claimants’ retirement risk tolerance, time horizon, and investment objectives. Further, by offering only the highest commission “illiquid” investments to Claimants for their retirement accounts, Mr. Lanza allegedly not only made “unsuitable” recommendations but acted in direct “conflict” of the “best interests” of his customers. Thus, LPL’s financial advisor’s alleged negligent actions, misconduct and omissions not only violated FINRA’s standards of commercial honor and principles of trade but also included the use of manipulative, deceptive, and fraudulent devices.
LPL Failed To Supervise Scott Lanza and Protect Claimants From Sales Practice Abuse
Pursuant to FINRA Rule 3010, LPL was obligated to design and implement a reasonable system of supervision to assure compliance with Federal and Florida law, as well as FINRA conduct rules and its own policies and procedures. LPL allegedly knew that the REITs and BDCs were only suitable as a small part of a diversified portfolio for some investors. It had policies, procedures, and computer systems in place to detect over-concentrations of securities by issuer, product, geographic location, etc. but allegedly failed to implement them when it came to the excessive quantity of REITs and BDCs in Claimants’ retirement accounts. Yet, according to the Claimants’ allegations, at no time did any supervisory or compliance personnel ever question the over-concentration of the illiquid securities in Claimants’ retirement accounts. Further, LPL allegedly took no corrective action to properly disclose and stem the flow of misinformation about the investments to Claimants and other clients.
LPL Is Liable For Scott Lanza and Its Own Alleged Misconduct
LPL is allegedly responsible for its own wrongdoings and vicariously liable for the negligent acts and omissions of Mr. Lanza and other employees, agents, registered representatives, or associated persons who engaged in the misconduct described herein under the doctrine of respondeat superior and/or principles of actual, apparent, and implied agency. Specifically, Respondent is allegedly vicariously liable for Mr. Lanza’s alleged continuous dissemination of false and misleading information and mismanaging Claimants’ retirement accounts by recommending that Claimants purchase and then hold an overly concentrated and unsuitable portfolio of REITs and BDCs in their retirement accounts. LPL is also directly liable for allegedly failing to supervise its financial advisors and other agents who managed Claimants’ retirement accounts. Had Respondent and its employees recommended and adhered to a diversified investment strategy of suitable, liquid securities, Claimants allegedly would not have been damaged. Claimants allege Respondent violated and/or is vicariously liable for Mr. Lanza’s common law fraud, constructive fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, violation of FINRA Conduct Rules, negligent management, negligent supervision of its employees, and fraudulent concealment of the misconduct.
 In fact, it has been determined that 91.5% of a portfolio’s performance is a direct result of asset allocation, whereas only 6.7% of the performance is linked to security selection and a mere 1.7% to market timing. This information is taken from a landmark 1991 article by Gary Brinson, Brian D. Singer, and Gilbert Beebower, “Determinants of Portfolio Performance II: An Update,” in which it was shown that asset allocation accounts for 91.5% of the performance of a portfolio, versus only 6.7% for security selection and only 1.7% for market timing. Financial Analysts Journal, May/June 1991.
 The phrase “investment strategy involving a security or securities” used in this Rule is to be interpreted broadly and would include, among other things, an explicit recommendation to hold a security or securities.