On December 21, 2010, the Financial Industry Regulatory Authority's ("FINRA's") Department of Enforcement filed a disciplinary Complaint against Raymond Blunk; and thereafter, on October 18, 2011, without admitting or denying the allegations in the Complaint, Blunk submitted an Offer of Settlement, which the self-regulatory organization accepted. FINRA Department Of Enforcement, Complainant, v. Raymond Blunk, Respondent (Order Accepting Offer Of Settlement, Disciplinary Proceeding No. 2007008935009, October 21, 2011).
Blunk, who has held Series 6, 7, 63, and 65 registrations, entered the securities industry in 1989, and during the relevant period, was registered in 2002 with InterSecurities, Inc. (now Transamerica Financial Advisors, Inc.) , working out of Carmel, Indiana. He conducts business through Total Financial Group, which offers various financial services, including retirement financial, estate, insurance, and long-term care planning.
FINRA's Complaint alleged that between February 2004 and March 2007, in response to Blunk's recommendation, several of his customers obtained nine purported non-recourse loans worth about $1.8 million from a non-broker dealer through a "Stock to Cash" program that involved the customers' pledging stock as collateral. The loans, with terms of two to five years, resulted in proceeds that the customers used to purchase insurance products through Blunk. In connection with the Stock to Cash program, Blunk allegedly represented:
Apparently, once enrolled in the Stock to Cash program, Blunk's customers received 90% of the value of their stock and did not pay any interest (unless they sought to recover stock they had pledged). The customers believed that their potential out-of-pocket loss would be limited to 10% of the value of the pledged stock. Additionally, the lending entity purportedly created documentation confirming that it had retained the customers' pledged securities as collateral for a hedging strategy whereby cash was generated through options transactions. At the end of the loan term, customers supposedly had four options:
Notwithstanding the various representations, the pledging of stock by the customers actually conveyed full ownership of their stock to the lending entity conducting the Stock to Cash program - in fact, upon receipt of the securities, the lender routinely sold the securities and often transferred the proceeds into its own bank account.
SIDE BAR: Consequently, the customers weren't so much lending their shares as collateral as they were transferring ownership to the supposed lender, which then sold the securities. Such transactions often have unintended tax consequences and should not properly be marketed as "loans."
Although the lending entity's ability to perform its contractual obligations under the Stock to Cash program was largely dependent on the success of supposed hedging strategies, it was not always performing such activities. Unfortunately, by Spring 2008, the lending entity was unable to undertake payments to customers with profitable portfolios, and essentially resorted to a Ponzi scheme in which money from new customers was used to pay obligations to existing customers. Further, the lender diverted funds earmarked for expenses to non-operational needs. In early 2009, the lending entity ceased all payments to customers and its lending ended in Spring 2009.
FINRA alleged that Blunk did not undertake adequate due diligence in familiarizing himself with the nature and operations of the Stock to Cash program, and, wrongly relied on information provided by individuals marketing the program. Pointedly, FINRA alleged that Blunk mistakenly assumed that the lending entity was a broker-dealer that held his customers' stock in custodial accounts. FINRA charged that Blunk was obligated to:
have a reasonable basis for recommending that his customers pledge their stock to this lender to participate in the Stock to Cash program. A broker must understand the potential risks and rewards, as well as ensure that the customer understands the risks. In order to do so, the broker must obtain adequate information about the product or investment, and cannot rely solely on the unexamined representations of those promoting it. There is a particularly high need for substantial due diligence in dealing with unregistered and unregulated entities and products, such as the Stock to Cash program Blunk recommended to his clients. . .
FINRA alleged that Blunk violated NASD Conduct Rules 2310 and 2110 (now FINRA Rule 2010), and in response to his Offer of Settlement, suspended him for 25 calendar days and fined him $15,000.