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A former registered rep convinced nine clients to invest more than $2.3 million in illiquid alternative investments while falsifying information about their risk tolerance and even whether they were accredited investors, according to the Financial Industry Regulatory Authority.
Luke Johnson is charged with steering the investors into the “unsuitable recommendations” while pocketing more than $132,000 in commissions, according to the disciplinary proceeding filed Wednesday. His recommendations included a number of private placements with GPB Holdings, whose founder and CEO was indicted in 2021 for securities fraud.
Johnson began in the industry in 2000 at Baird, according to his BrokerCheck profile. After brief stints at other firms, including Northwestern and Summit Brokerage Services, he landed at the Arizona-based Coastal Equities in 2012, where he lasted until 2019 (the actions described in the FINRA charges allegedly took place during his time at Coastal).
Starting in April 2015 and for the following three years, Johnson allegedly pushed a number of investors towards illiquid alts, despite their profiles. The customers go unnamed in the charges, though they include a number of elderly retirees and a couple in their late 40s, each with Coastal accounts for their 401(k)s. Johnson acted as the registered rep for all of them, according to FINRA.
Beginning in April 2015, Coastal mandated that only 35% of a customer’s liquid net worth could be placed in alternative investments and outlawed new alt recommendations or purchases if they would push customers over that limit.
In response, Johnson (or his assistants acting on his orders) would falsify the clients’ reported liquid net worth on the firm’s customer account information forms and alt investment documents. Johnson also allegedly “falsified these customers’ reported risk tolerance, liquidity needs, annual income and/or their status as an accredited investor” on subscription agreements and account forms, according to FINRA.
“Johnson dramatically inflated his customers’ net worth and liquid net worth and dramatically understated the percentage of his customers’ assets invested in alternative investments in order to circumvent Coastal’s concentration policy and Coastal’s supervisory oversight,” the charges read.
In total, Johnson recommended about $1.05 million in “limited partnership interests” for a number of GPB limited partnerships, including GPB Holdings, GPB Automotive Portfolio and GPB Waste Management.
But in 2021, the SEC charged GPB and the b/d marketing its securities with a Ponzi-like scheme that raised more than $1.7 billion.
The commission argued CEO David Gentile and Jeffry Schneider (the owner of GPB’s placement agent) lied to investors about where its 8% annualized distribution payments were coming from, telling investors the money came from portfolio company profits while, in reality, they used investor funds.
The Justice Department charged Gentile, Schneider and former GPB Managing Partner Jeffrey Lash with securities and wire fraud for their alleged roles in the scheme, with each facing as much as 20 years in prison. Seven state regulators simultaneously filed regulatory actions against GPB, including New York, New Jersey, Georgia and Illinois, among others.
Regulators and litigants have also gone after brokers who allegedly sold GPB private placements. According to one law firm, Advisor Group broker/dealers alone faced more than $19 million in customer claims from making GPB recommendations.
In December of last year, Coastal Equities settled charges with FINRA that it failed to alert clients that the firm solicited customers to purchase GPB limited partnership interests, even after GPB Capital alerted brokerage firms selling its products that its audited financial statements would be delayed “pending the completion of a forensic audit.”
According to FINRA, the firm also failed to supervise an unnamed rep who recommended customers purchase about $15 million in GPB-related investments. Coastal agreed to a censure and $150,000 fine to settle the charges.
Representatives for Coastal did not respond to a request to comment prior to publication.
In addition to the GPB-related recommendations, Johnson pushed clients to purchase shares in a number of non-traded Real Estate Investment Trusts (REITs), including American Realty Capital Hospitality Trusts and MVP REIT. Non-traded REIT risks include illiquidity and high front-end costs, which made them unsuitable for Johnson’s clients, according to FINRA.
Coastal fired Johnson in Nov. 2019 after he allegedly “failed to follow firm policy by failing to timely forward a customer complaint to his supervisor and compliance, and by inconsistently stating a customer’s liquid net worth on client disclosure documents,” according to BrokerCheck.
Johnson hasn’t registered with any firms since then, though he still has a number of pending customer disputes, according to his BrokerCheck profile. The former rep couldn’t immediately be reached for comment.
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