Agency accused of flip flopping
By COCO SALAZAR
4/1/2004

The National Association of Securities Dealers (NASD) announced it suspended two mortgage brokers and filed a complaint against another for making unsuitable recommendations to customers -- allegedly urging the borrowers to use cashout proceeds to purchase investments.

The regulatory agency reported it enforced the separate actions against the three brokers because in each of the cases the customers could not purchase the investments without the mortgage proceeds. NASD said its concern is when they buy investments under these conditions and rely on the expected returns to make their monthly mortgage payments, they could default on their home loans if their investments decline.

"A recommendation by a securities firm or a broker that an investor mortgage his home to buy securities raises all kinds of regulatory red flags," said vice chairman Mary Schapiro, in a written statement. "NASD will always ask whether it is appropriate to recommend that you risk your home to seek investment returns."

Under federal law, virtually every securities firm doing business with the U.S. public is a registered member of the NASD, which writes rules to govern their behavior, examines them for compliance and disciplines those that fail to comply, according to its Web site. More than 653,000 registered securities representatives come under its jurisdiction.

One broker, James A. Kenas, of Idaho was suspended 6 months for violating NASD's suitability rule, reported the regulator. NASD said it found that Kenas, formerly a registered representative with WMA Securities Inc., recommended his customers purchase approximately $80,000 in mutual fund shares, when the only funds available to those customers for the purchases were the cashout proceeds.

NASD charged in a complaint that Jamie A. Engelking, a registered representative from Denver formerly associated with First Union Securities, recommended his customers purchase a variable annuity using 50% of the equity on their home -- about $397,000 and the only funds available for the investment. According to the complaint, the customers were seeking to increase their retirement income and net worth and agreed to Engelking's recommendation with the idea being that the returns on the investment would cover their monthly mortgage payments. However, the investment did not generate enough net yield to cover the payments and the principal rapidly depleted -- in less than two years the variable annuity was worth $184,187, said NASD.

After the customers complained, Wachovia, which had merged with First Union, issued them a settlement check of nearly $261,000, said NASD. While Engelking allegedly retained about $8,000 in commission from the sale of the variable annuity and $800 for the mortgage referral, he did not contribute to the settlement, added the regulator.

Engelking and Kenas did not return calls from messages left by MortgageDaily.com. However, a close source to Kenas said that NASD's actions were unfair.

Steve C. Morgan of Loveland, Colo. was another mortgage broker suspended for 6 months, NASD said. The registered representative, formerly associated with Washington Square Securities at the time of conduct in 2000, "at various times presented to and discussed with customers a home equity management program involving the use of a portion of the equity in their home to purchase a variable annuity and allocate the investment 35% in fixed income-based sub-accounts and 65% in equity-based sub-accounts," according to NASD findings. Although the retired couple agreed to Morgan's recommendation, NASD said Morgan had no "reasonable grounds for believing" the customers were financially able to buy the variable annuity without the mortgage proceeds -- $224,500 -- or that they'd be able to meet their mortgage commitment should the investment not perform at the levels needed to avoid depletion of principal. Morgan received a commission credit of approximately $5,700 for the variable annuity purchase, according to NASD.

In addition to the suspension, Morgan must pay restitution of more than $15,000 to the customers before reentering the securities business, the regulator reported.

In settling the charges, the agency said, Kenas and Morgan neither admitted nor denied the allegations.

In a phone interview, Morgan said that although he could not divulge details about the case, he is disillusioned with the way NASD treats people and has no plans to reenter the securities business unless he is "forced" to for career purposes.

"The one thing that kind of irritated me was that [NASD] said that it was not an approved strategy and I have paperwork that shows it was an approved strategy by the NASD at the time it was done," said Morgan.

"Its easy to say three years later that they didn't approve it," he added.

According to Morgan, "the customer was fully aware at the time of what he was doing ... they had a drastic need of income, they were presented several different strategies and that was one strategy that they chose. They understood the risks involved and were willing to take the risks at the time and we even have signed paperwork that showed that they were willing to take that risk."

Unfortunately, said Morgan, the timing of the transaction was off since "we started three years of bear market and the strategy didn't work as we had planned.

"Literally, I have no rights when it comes to securities-related products," he added. "Everything that goes down is my fault is what I'm finding, regardless...what the client agrees to and signs. That's what's been very eye opening to me is that nobody takes responsibility," even the people that developed and promoted the strategy get out completely fault free, Morgan went on.

The mortgage broker said he worked in the securities business for seven years, but is now working in the insurance industry.

In an e-mailed statement to MortgageDaily.com, NASD said that while it regulates all brokerage firms doing business with public customers, the firms and the registered representatives, "based on NASD rules, recommend and execute transactions that they deem suitable for their customers."

"We do not approve strategies" as these are the "responsibility of the representative and the firm," reiterated spokeswoman Nancy Condon in a phone interview. She pointed out that if it were otherwise, NASD would not take action against the investment dealers.

According to Morgan, the NASD is "getting so much pressure from the FCC to go out and police their people, now they're going several years back trying to find things, its just been horrible the things that they do to you."

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