The SEC issued an order dismissing this review proceeding after Patatian requested dismissal of his application for review. As a result, a National Adjudicatory Counsel (NAC) decision issued on September 28, 2023, became final. The NAC decision barred Patatian from association with any FINRA member in all capacities and ordered him to pay disgorgement of commissions in the amount of $458,418.07, plus prejudgment interest. The NAC affirmed the findings and modified the sanctions imposed by the OHO. The sanctions are based on findings that Patatian recommended unsuitable purchases of non-traded real estate investment trusts (REITs) to his customers without meeting his reasonable-basis suitability obligations. The findings also state that Patatian violated his customer-specific suitability obligations when he recommended the non-traded REITs to certain customers, who each required liquidity and desired a less risky investment. The customers testified consistently that Patatian did not discuss the risks associated with REITs, and he promised the customers they would get their money back in periods of time ranging from one to five years. The relevant prospectuses, however, warn that the REITs are highly risky and could remain illiquid for seven years or more. While the customers acknowledged that they signed risk disclosures, most testified that Patatian had them sign the disclosures and member firm client agreements as blank forms and they all simply signed and initialed where Patatian indicated without reading the documents because they trusted him. The findings also state that Patatian recommended unsuitable variable annuity surrenders to customers. When Patatian recommended that some of the customers surrender their variable annuities, he did not consider, or select the option to withhold, applicable taxes, and did not disclose the tax consequences to the customers.
As a result, the customers incurred substantial tax bills, including underpayment penalties. Patatian admitted that he believed that the surrender of a variable annuity and the purchase of a REIT qualified as a tax-free 1035 exchanges and the record supports that he told certain customers that this provision applied. In addition to taxes, one of the customer’s surrenders also resulted in a substantial surrender penalty that Patatian did not consider in making the surrender recommendation. The findings also include that Patatian made unsuitable recommendations to
certain customers that they exchange their variable annuities for new variable annuities because the recommendations were based on faulty cost comparisons and Patatian’s failure to secure intended optional death benefits. The NAC also found that Patatian impersonated a customer in a telephone call with an insurance company after he recommended that his customers, a married couple, surrender a variable annuity they held to invest the proceeds in a non-traded REIT.
At the time, Patatian was not the agent of record for the annuity. As part of his impersonation, Patatian provided the customer’s date of birth and the last four digits of his social security number to the insurance company. The NAC further found that Patatian caused his firm to maintain inaccurate books and records by inflating customers’ investment experience and net worth on important firm documents in order to make the REIT investments appear suitable. Patatian’s falsification of these records enabled and concealed his suitability violations. The NAC did not believe it was appropriate to order Patatian to offer rescission under the circumstances here and thus dismissed that portion of the OHO’s sanctions. Further, the restitution requested by FINRA and ordered by the OHO was paid by the firm during the pendency of Patatian’s appeal and thus ordering Patatian to do so would result in a double recovery by the customers. The NAC therefore eliminated the order that Patatian pay restitution.