Management of Native American Tribe's Investment Portfolio Prompts FINRA Bar

November 24, 2020

Sometimes, the regulation of Wall Street takes on the appearance of a car crash on the highway -- we should just drive by and avert our eyes, but, for whatever, reasons, we're often compelled to slow down and view the gruesome carnage. Be that as it may, a FINRA Decision rendered in 2017 and the attendant SEC Opinion rendered in 2020, present us with what seems a burning wreck of a career. The rep and his family had their personal struggles, which makes the outcome even more poignant; however, it's hard to argue against FINRA's imposition of a Bar and the SEC's ratification of same. 

FINRA OHO Decision

In 2014, FINRA purportedly conducted a national review of its member firms to determine whether customers, who had purchased non-traded Real Estate Investment Trusts ("REITs"), had received volume discounts when applicable. Apparently, FINRA found that a Michigan-based Native American tribe had not received volume discounts while being serviced through Purshe Kaplan & Sterling Investments, Inc. ("PKS") and its registered representative Gopi Krishna Vungarala. FINRA Department of Enforcement, Complainant, v. Gopi Krishna Vungarala, Respondent (Extended Hearing Panel Decision, Office of Hearing Officers ("OHO"), Disciplinary Proc. No. 2014042291901 / October 25, 2017)
The OHO Decision discloses that Respondent Vungarala was represented by Sharron E. Ash, Esq., Brian S. Hamburger, Esq., and Irwin Pronin, Esq. of the Hamburger Law Firm, LLC. As set forth in the Syllabus to the OHO Decision:

Respondent, Gopi Krishna Vungarala, was employed by a Native American tribe to manage its investment portfolio. He persuaded the Tribe to invest in Real Estate Investment Trusts and Business Development Companies through a broker-dealer firm where he told the Tribe he "parked" his registration. As a result, he received over $9 million in commissions. Through false and misleading statements, he led the Tribe to believe that he did not receive commissions on the Tribe's transactions and that he had no conflict of interest. In so doing, he willfully committed fraud, as charged in the First Cause of Action, for which he is barred and ordered to disgorge the $9,682,629 in commissions that he obtained by the fraud, plus pre-judgment interest. 

Respondent also misled the Tribe regarding its eligibility for volume discounts, failing to disclose to the Tribe that it was eligible to receive more than $3.3 million in volume discounts. He personally benefited, because the discounts would have reduced his commissions. He willfully committed fraud, as charged in the Second Cause of Action, for which he is separately barred. He would be ordered to disgorge the $2.8 million in commissions that he obtained by this fraud, but these monies are included in the order to disgorge all his commissions. 

Respondent is ordered to pay costs. 

By way of background, the OHO Decision offers this, in part [Ed: footnotes omitted]:

From June 1998 to June 2003, Vungarala was a financial analyst and credit manager for Dow Chemical. After approximately a year of unemployment, Vungarala became a registered representative with American General Securities Inc. in September 2004. At the same time, he became an agent for AIG American General Life Insurance Company. In December 2007 he left that position, and in January 2008, he became a registered representative with PKS and an investment adviser representative with Sutterfield. Throughout the events at issue, Vungarala was registered with PKS. He resigned as a registered representative with PKS two weeks before the hearing in this matter. 

Although he denies it, Vungarala was experiencing financial difficulties when he joined PKS. In October 2008, about nine months after Vungarala joined PKS, and about a month before he started working for the Tribe, the State of Michigan entered a tax lien against him for $1,256.53. After he paid the tax amount in full the State released the lien on June 15, 2009. Vungarala has a son with special needs, and he and his family went through a difficult time with the costs of treatments and the time and energy required to care for his son. Vungarala testified that he had withdrawn all the funds from his and his wife's 401(k) accounts to meet these demands. Before the Tribe hired Vungarala, he had been registered with PKS about 11 months, but he had few clients and did not have a large book of business. He testified that he was unable to focus on obtaining new clients because of his son's illness, and that the only clients he had were his church and 401(k) plans for two county governments.

at Page 6 of the OHO Decision

FINRA NAC Decision

Vungarala appealed the OHO Decision to FINRA's National Adjudicatory Council, and he was represented by Sharron E. Ash, Esq., and Brian S. Hamburger, Esq. FINRA Department of Enforcement, Complainant, v. Gopi Krishna Vungarala, Respondent 
(National Adjudicatory Council ("NAC") Decision, Office of Hearing Officers, Disciplinary Proc. No. 2014042291901 / October 2, 2018)

In affirming the OHO Decision, the NAC offered, in part, this rationale:

We affirm the Hearing Panel's findings, which are supported by the record and the Hearing Panel's extensive credibility findings. The Hearing Panel found three Tribal employees, who were extensively involved with the Tribe's non-traded REIT and BDC investments, credibly and consistently testified that, among other things, Vungarala falsely informed the Tribe that he would not make money on the Tribe's investments that he recommended, and he never disclosed that he would receive commissions on these investments. In contrast, the Hearing Panel found not credible Vungarala's testimony that he expressly and clearly disclosed that he would receive commissions on the Tribe's investments and that the Tribe rejected volume discounts after Vungarala explained them. Indeed, the Hearing Panel found that Vungarala's testimony "was repeatedly evasive, inconsistent, and misleading," and it was "easy to see how he confused" members of the Tribe in connection with these matters. Vungarala has not demonstrated that substantial evidence in the record exists to overturn the Hearing Panel's credibility determinations, which are corroborated by documents in the record and various actions of the Tribe.

We also reject Vungarala's numerous arguments on appeal. For example, he argues that the Tribe knew (or had to have known) that Vungarala was earning commissions on the Tribe's non-traded REIT and BDC purchases, and was aware that it was eligible for volume discounts, because it is a sophisticated, institutional investor with a multi-step investment process. While at first glance the Tribe appears to be sophisticated, the weight of the evidence shows that the individuals most involved with the Tribe's investment process related to non-traded REITs and BDCs were not sophisticated, relied heavily upon Vungarala for his advice and guidance, and did not know that Vungarala was earning commissions on the Tribe's investments or that it could receive millions of dollars in discounts on its purchases. Further, contrary to Vungarala's assertions, neither a customer's alleged sophistication, nor disclosures in prospectuses and other documents concerning fees, costs, and volume discounts, absolve Vungarala of his fraudulent misrepresentations and omissions. 

Similarly, we reject Vungarala's claim that the commissions he received as the Tribe's registered representative-while also serving as the Tribe's full-time investment manager and advising it to purchase all of the securities at issue-were not material and he had no duty to disclose this information to the Tribe. Vungarala was not merely the Tribe's registered representative (the implications of which the Tribe did not fully understand). Rather, he also served as the Tribe's trusted, full-time employee hired to provide it with objective investment advice. Vungarala's dual role presented conflicts of interests, and a reasonable investor would have considered important Vungarala's receipt of significant commissions in connection with each recommended non-traded REIT or BDC in deciding whether to invest. Under the circumstances, Vungarala had a duty to disclose this information to the Tribe. 

We further reject Vungarala's various claims that the proceedings below were unfair because, among other things, the Tribe did not provide FINRA with all relevant documents and access to all relevant witnesses. It is well-established that FINRA lacks subpoena power over customers such as the Tribe, and FINRA's Department of Enforcement ("Enforcement") acted well within its prosecutorial discretion in bringing a case against Vungarala based upon the evidence it had (including evidence turned over to it by the Tribe). And despite Vungarala's suggestions to the contrary, he has not pointed to any evidence showing that Enforcement failed to produce to him any documents in its possession pursuant to FINRA's rules. 

Finally, we affirm the bars the Hearing Panel imposed on Vungarala for his egregious misconduct. Vungarala intentionally made numerous misrepresentations and omissions of material facts during a several-year period. He profited handsomely from his misconduct, and the Tribe-which trusted Vungarala and depended upon him for objective investment advice- suffered financial harm as a result of its lost volume discounts. Vungarala has taken no responsibility for his actions, and instead believes that he was a better steward of the funds he received in commissions than his employing broker-dealer would have been. Vungarala is unfit to continue in the securities industry, and barring him is necessary to protect the investing public. We also affirm the Hearing Panel's order that Vungarala disgorge the approximately $9.6 million in ill-gotten gains that he received from his misconduct. 

at Pages 1 - 2 of the NAC Decision 

SEC Opinion

On November 1, 2018, Vungarala appealed the FINRA NAC Decision to the Securities and Exchange Commission and was represented by Sharron E. Ash, Brian S. Hamburger, and Frank E. Derby, of the Hamburger Law Firm, LLC. In the Matter of the Application of Gopi Krishna Vungarala for Review of Disciplinary Action Taken by FINRA (Opinion, SEC, '34 Act Rel. No. 90476; Admin. Proc. File No. 3-18881 / November 20, 2020)
The SEC sustained FINRA's disciplinary action against Vungarala. In part, the SEC made this finding concerning Vungarala's scienter (his mental state when he embraced his intention to deceive, manipulate, or defraud) [Ed: footnotes omitted]: 

Vungarala knew he would earn lucrative commissions on the Tribe's investments in nontraded REITs and BDCs. He also knew that he was subject to the Tribe's Investment Policy, which required that he disclose any personal financial interest that could be related to the performance of the investment portfolio. Vungarala did not only fail to disclose his commissions; he affirmatively misrepresented to the Tribe that he would not receive any commissions and continued to mislead the Tribe even after he had received the commissions and the Tribe questioned him about who received commissions on its purchases. Under the circumstances, Vungarala must have been aware of the risk that the Tribe would be deceived. 

Although a motive is not necessary to establish scienter, we agree with the NAC that Vungarala had a motive to deceive the Tribe. Vungarala felt underpaid and mistreated by the Tribe and considered himself to be working "pro bono." We find that Vungarala acted intentionally, or at least recklessly, when he misled the Tribe about his commissions.

at Page 12 of the SEC Opinion

Making matters worse for Vungarala, the SEC agreed with FINRA that [Ed: footnotes omitted]:

[V]ungarala violated Exchange Act Section 10(b), Exchange Act Rule 10b-5, and FINRA Rules 2020 and 2010. The NAC also found that Vungarala's violations subject him to a statutory disqualification under Exchange Act Section 3(a)(39). That section provides that a person is subject to a statutory disqualification if he has willfully violated any provision of the Exchange Act. Because we agree with the NAC that Vungarala acted at least recklessly when he made misrepresentations and omissions about his receipt of commissions and the Tribe's eligibility for volume discounts, we find that he acted willfully. 

 We find further, as we must under Exchange Act Section 19(e) to sustain FINRA's disciplinary action, that the provisions Vungarala willfully violated-Exchange Act Section 10(b), Exchange Act Rule 10b-5, and FINRA Rules 2020 and 2010-are, and were applied in a manner, consistent with the purposes of the Exchange Act. Section 10(b) is part of the Exchange Act, and Rule 10b-5, which implements Section 10(b), is consistent with the Exchange Act's purpose of protecting investors from fraudulent conduct. FINRA Rule 2020 is consistent with the purposes of the Exchange Act because it protects investors by prohibiting the same conduct as Exchange Act Rule 10b-5. FINRA applied Exchange Act Section 10(b), Exchange Act Rule 10b-5, and Rule 2020 in a manner consistent with the purposes of the Exchange Act because a preponderance of the evidence supports FINRA's findings that Vungarala committed fraud. FINRA Rule 2010 is consistent with the purposes of the Exchange Act because Exchange Act Section 15(b)(6) requires that FINRA's rules "promote just and equitable principles of trade."40 FINRA's application of Rule 2010 to Vungarala's conduct furthered the objective of preventing conduct inconsistent with just and equitable principles of trade.

at Page 15 of the SEC Opinion

On appeal, Vungarala argued that FINRA's imposition of a Bar was excessive and oppressive. In rejecting that argument, the SEC noted, in part, that [Ed: footnotes omitted]:

FINRA's Sanctions Guidelines state that an adjudicator should "strongly consider barring an individual" in response to intentional or reckless misrepresentations or omissions of material fact. We agree with the NAC that a bar is warranted here because Vungarala "engaged in egregious misconduct by repeatedly misleading the Tribe over an extended period, for his own personal gain." Vungarala abused his position of trust as the Tribe's investment manager. His misconduct occurred repeatedly over more than three years. When Tribe members asked direct questions about his commissions and the Tribe's eligibility for volume discounts, Vungarala lied to them and then tried to confuse them with vague answers. As a result of his misconduct, he made over $9.6 million in undisclosed commissions and cost the Tribe at least $3.3 million by forgoing volume discounts for which the Tribe was eligible. As the NAC stated, Vungarala "has demonstrated that he is unfit to continue in the securities industry and the bars from the securities industry are necessary to protect investors from future misconduct at his hands." A bar "will protect the public from [Vungarala's] willingness to place his own financial interests ahead of those of his customer." Under these circumstances, with due regard for the public interest and the protection of investors, a bar is not excessive or oppressive but a necessary remedial measure. 

FINRA's Sanction Guidelines state that a sanction less than a bar should be considered "where mitigating factors predominate." Although Vungarala challenges his liability and argues that imposing a bar is punitive, he does not raise any mitigating factors that suggest a sanction less than a bar should be imposed for the violations we have sustained. 

Instead, Vungarala argues that the imposition of a lifetime bar on a registered representative is an impermissibly punitive penalty. But, as we recently explained, FINRA bars are not penalties where they are imposed "to protect the public."  We adhere to that reasoning here. As discussed above, it is necessary to bar Vungarala to protect the public, and the bar is therefore remedial. We therefore reject Vungarala's argument that the bar FINRA imposed on him is impermissibly punitive.

at Pages 19 - 2- of the SEC Opinion
Bill Singer's Comment

When we consider the likely strains placed upon Vungarala's family attendant to caring for a son with special needs, it's difficult not to have some sympathy for him. Unfortunately, Vungarala also comes off as angry at the Tribe for the terms of his compensation, and that places his actions in a far less sympathetic context:

Vungarala's employment contract and position description gave him responsibility for "perform[ing] all investment transactions" for the Tribe's investment portfolio, "develop[ing] and implement[ing] investment strategies" for the investment portfolio, and "manag[ing], evaluat[ing], and monitor[ing] the investment portfolio." From 2008 through mid-2011, Vungarala traded on behalf of the Tribe through Charles Schwab & Co. At that time, he had authority to invest without seeking prior approval from the Tribe. The Tribe initially paid Vungarala a salary of $99,500, which it subsequently increased to $120,000, with the potential for a 10% bonus if the Tribe's portfolio return exceeded the market return for the fiscal year. At Vungarala's request, the Tribe reimbursed him for the cost of renewing his securities licenses and his errors and omissions insurance. Vungarala testified that, upon being hired, he had no expectation of being paid commissions in connection with recommending the Tribe's investments. 

At some point, Vungarala learned that the Tribe's previous outside financial adviser earned more than $1 million a year. In comparison, Vungarala believed his salary amounted to him working "pro bono." Vungarala also believed that the Tribe treated him poorly because he was not a tribal member, and felt that his office was too small and that his colleagues treated him as an underling.

at Page 3 of the SEC Opinion

If you're being paid $120,000 but your predecessor was paid over $1 million, that may well be a tough pill to swallow. You can renegotiate your deal, or at least try. You can resign. You can do lots of things, but what you shouldn't do is what Vungarala did. Moreover, let's not lose sight that despite his unhappiness with his salary:

[V]ungarala obtained $9.6 million in commissions as a result of his misconduct-the Tribe invested $190 million in REITs and BDCs without taking advantage of volume discounts across accounts, PKS earned commissions of $11.4 million, and Vungarala received 85% of those commissions. . . .

at Page 20 of the SEC Opinion