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Purshe Kaplan Sterling: Did Inadequate Broker Supervision Lead to Major Losses?

Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

Secretary of the Commonwealth of Massachusetts William Galvin recently filed a complaint alleging that brokerage Purshe Kaplan Sterling Investments did not adequately supervise its brokers who were dually registered as Investment Advisors. According to Massachusetts, Purshe Kaplan’s advisors allegedly recommended leveraged exchange-traded funds (ETFs), complex financial instruments that require careful management. As a result, Purshe Kaplan Sterling investors allegedly lost over $2 million.

The Massachusetts complaint had two components:

  1. Purshe Kaplan Sterling Investments allegedly did not provide adequate supervision of brokers who were dually registered as Investment Advisors. If it had adequately supervised their brokers, the supervisors allegedly would have caught clear signs of unsuitable investments that were too risky for their customers.
  2. The brokers in question allegedly did not adequately manage the risky investments, which require careful supervision and comprehension of complex trading strategies.

Purshe Kaplan Sterling: Duty to Supervise

Purshe Kaplan Sterling has a reputation as a friendly brokerage house for brokers who dually register as investment advisers. (Read more about the difference between brokers and investment advisers here.) Massachusetts alleges that the brokerage firm failed to maintain a supervisory system designed to supervise the dually registered individuals. FINRA requires firms to supervise their brokers under Rule 3110.

In the complaint, Massachusetts specified that these brokers also registered as investment advisers with Harvest Group Wealth Management. Purshe Kaplan Sterling allegedly failed to review any of the transactions the Harvest Group brokers executed in 2019. In 2020, Purshe Kaplan Sterling representatives allegedly only reviewed one transaction executed by a Harvest Group broker.

As a result of this alleged failure to supervise, Harvest Group Wealth Management allegedly sold investors unsuitable, leveraged ETFs. Leveraged exchange-traded funds are designed to multiply the returns on ETFs, but they can easily lose money. In this case, Galvin alleges that Massachusetts investors lost more than $2.3 million.

Purshe Kaplan Sterling has taken a Utah couple to court in an attempt to stop their failure to supervise dispute from entering FINRA arbitration. The broker-dealer alleges that the couple did not have an investment contract with the investors seeking to recover damages after working with a PKS representative who was barred by the SEC for fraud. Securities attorney Jonathan Kurta explained to Financial Advisor that PKS has a track record of failing to supervise RIAs, and that brokerage firms need to supervise their representatives’ transactions regardless of whether they went through the broker-dealer. 

What Are Exchange-Traded Funds?

Exchange-Traded Funds (ETFs) are popular investment vehicles that can come with relatively low fees but similar advantages as a mutual fund. ETFs have a selection of underlying securities, and investors can choose ETFs that go after low-risk, blue-chip stocks. Due to their low costs, ETFs can offer easy diversification for the everyday investor.

ETFs can be low risk, but they might choose riskier stocks, like oil and gas investments. They may also employ risky trading strategies, as in the case of a leveraged ETF.

What is a Leveraged ETF?

Leveraged ETFs are a type of non-traditional ETF. “Leverage” means debt. To maximize potential benefits, leveraged ETFs use borrowed money in an attempt to maximize their returns. Leveraged ETFs may also be inverse, meaning they seek to deliver gains that are the opposite of a stock index’s performance. This adds another layer of complexity and even more risk.

Non-traditional ETFs may use complicated investing strategies to accomplish their objectives. For instance, they might use futures—a type of speculative contract that predicts the future price of a commodity.

What Happened to Purshe Kaplan Sterling Investors?

Both brokers and investment advisers have a duty to recommend investments that fit their customer’s needs. If they had known the risks that leveraged ETFs posed, Massachusetts alleges that the investors would not have approved the strategy. One investor mentioned in the complaint only had medium risk tolerance, and yet Harvest Group brokers invested nearly half of their IRA in a leveraged ETF.

Furthermore, brokers have an obligation to understand how an investment works. Purshe Kaplan Sterling brokers should have understood that leveraged ETFs require active management. Non-traditional ETFs reset on a daily basis and are meant to be closely monitored. If they begin to lose money, the advisor should intervene to prevent compounding losses. It is possible for investors to lose their entire principal investment in a single day.

In this case, Massachusetts alleges that investors held their leveraged ETF positions for more than a year—a far longer period than could possibly benefit the investor. According to the complaint, the dually registered Harvest Group brokers failed to review the funds on a monthly or even quarterly basis.

FINRA Alert: Leveraged and Inverse ETFs

FINRA released an investor alert concerning leveraged and inverse ETFs in 2009. There is no excuse for Purshe Kaplan Sterling brokers to not understand the risks associated with these types of investments. The investor alert also highlighted the brokerage firm’s duty to supervise brokers’ recommendations of these types of trades.

According to FINRA, brokers should provide investors with the following information when they recommend a non-traditional ETF:

  • There is a risk that an investment might not meet its daily objective.
  • Leveraged or inverse ETFs might not be as tax efficient as traditional ETFs.
  • Non-traditional ETFs can also come with higher costs than regular ETFs.
  • The techniques used to achieve the leveraged ETF’s goals. Investors should fully understand how these investments might use futures, swaps, or other complex products.

Kurta Law Can Help

Stock fraud lawyers at Kurta Law can work with you to recover your investment losses. You do not have to wait for a regulator to get involved. If your broker recommended a leveraged or inverse ETF that resulted in losses, you may have a case for FINRA arbitration—many brokerages require investors to resolve their disputes through arbitration rather than a civil case. Call our attorneys today for a free case evaluation and expert advice on what steps to take next.


Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.