One allegation to be raised in the arbitration cases against Jeffrey Forrest ofWealthWise LLC is that the investment advisermay have mismarked order tickets when purchasing San Luis Trust Bank shares on behalf of his clients.
Both the Securities and Exchange Commission and the Financial Industry Regulatory Authority have previously ruled that inaccurately representing stock purchase orders violates securities law and is an act that constitutes fraud.
Marking a stock purchase as “unsolicited” – meaning the client requested the trade and the broker did nothing other than execute the trade purchase – is often used to hide unsuitable recommendations, said Jim Eccleston, an attorney at Chicago-based Shaheen, Novoselsky, Staat, Filipowski&Eccleston and an expert on securities law.
Unsuitability does not reflect on the quality or potential of an investment, in this case San Luis Trust Bank shares. It is a subjective analysis based on an individual investor’s risk tolerance, needs and investment objectives.
Securities rules dictate that when an investment adviser recommends a stock to his clients-which is defined as any advice, suggestion or statement that influences a customer to purchase, sell or hold a security-he must designate the trade as “solicited.”
While supervisors at broker dealers are required to oversee all of the trading activity of their registered advisers, trades that are marked unsolicited are typically not studied as closely, Eccleston said. The lawyer is not involved in the arbitration cases against WealthWise and Associated Securities.
Many clients involved in the arbitration cases have records that indicate the trades were marked unsolicited, though the investors allege that Forrest introduced the investment ideas to them.
“We didn’t know about the bank until Jeff told us about it at a general review meeting of our investments. He told us that it was a great opportunity,” said Sherri Parkinson, a claimant in the first arbitration case who lives in San Luis Obispo with her husband and two children. The couple purchased the bank shares in 2005.
Forrest declined to answer questions for this article.
What is known, based on written documents by Forrest, is that the adviser considered the San Luis Obispo-based bank a compelling investment opportunity.
“From time to time in my career I’ve come across a handful of significant investment opportunities, which I feel have superb risk-reward ratio. Two previous ones include Kennedy Club LLC as well as San Luis Trust Bank. APEX is the third,” he wrote in a WealthWise letter sent to many of his clients between the late summer and fall of 2005. At the time, he was explaining the APEX Equity Options Fund to potential investors.
About the same time, in a client letter dated September 2005 to existing San Luis Trust Bank shareholders, Forrest told clients – in large, bold type – that the bank stock was “on sale…buy more!!”
He predicted the stock would increase from $16 a share, where it was trading at the time, to $26 a share a year later. He noted several positive financial performance indicators and explained why he thought the shares were “undervalued.”
The stock closed Friday at $8.50, a 52-week low. The shares hit a 12-month high of $13 last December. The NASDAQ index of bank stocks is off more than 20 percent year-to-date.
Many of Forrest’s clients, both in the months leading up to the letter and, more importantly, in the months following, bought shares in the one branch bank.
A handful of investor account statements, provided to The Tribune on the condition of anonymity, reflect purchases in San Luis Trust shares between December 2004 and December 2005.
Every purchase, 30 in all, was identified as “unsolicited” by Forrest, according to the statements.
“What this suggests is that somehow the stars aligned and all of his (Forrest’s) customers independently said to their adviser that ‘I want to buy this thinly traded, local stock,’ ” said Eccleston.
The lawyer said that the broker-dealer supervisor, Associated Securities, should have been reviewing the trades “if they had any doubt at all that these were unsuitable purchases.”
“The number of unsolicited trades should have raised a red flag,” said Eccleston. “It’s highly suspect, and it is a clear red flag to regulators.”