Geneos tagged with $400,000 penalty over alternatives sales

The fine and restitution to customers stem from sales of two alternative investments, the LJM Preservation & Growth Fund and private placements issued by GPB Capital Holdings.

Geneos Wealth Management Inc. on Friday agreed to a $400,000 settlement with the Financial Industry Regulatory Authority Inc. related to sales of two alternative investments, the LJM Preservation & Growth Fund and private placements issued by GPB Capital Holdings.

Geneos, an independent contractor broker-dealer, is based in suburban Denver and has 340 affiliated registered reps.

Between November 2016 and February 2018, Geneos failed to reasonably supervise brokers’ recommendations of the LJM fund, which collapsed during a bout of market volatility in February 2018, according to the Finra settlement. And from April to June 2018, the firm negligently omitted to tell three investors in an offering related to GPB Capital that GPB had failed to timely make required filings with the Securities and Exchange Commission, including filing audited financial statements.

Geneos consented to Finra’s findings without admitting or denying them. As part of the settlement, Geneos will pay a fine of $150,000 and restitution to some customers who bought the LJM fund of $251,000, plus interest.

“The unfortunate events that triggered the downfall of LJM Preservation and Growth Fund were not related to Geneos in any way,” firm CEO Ryan Diachok wrote in an email. “Likewise, despite the recent positive developments relating to GPB, including the sale of GPB Automotive for over $800 million, Geneos agreed to the [settlement] with Finra to act in the best interests of its customers and to resolve the matter with Finra and move on.”

According to Finra, LJM was an alternative mutual fund that launched January 2013. It was marketed
as selling volatility by seeking to profit from the volatility premium, or the difference between implied volatility — investors’ forecast of market volatility reflected in options pricing — and realized, or actual, market volatility.

Geneos had no system or procedures at the time to determine whether a new mutual fund constituted a complex product or was an alternative mutual fund, such that heightened due diligence of the product may be appropriate, according to Finra. It also did not have any written procedures advising firm principals on how to supervise recommendations of alternative mutual funds, according to Finra.

GPB Capital, a New York-based alternative asset management firm founded in 2013, served as the general partner for limited partnerships formed to acquire income-producing companies such as auto dealerships and trash businesses. GPB eventually raised $1.8 billion from investors but missed deadlines in 2018 to file audited financial statements with the SEC. Last year, the Justice Department claimed GPB Capital Holdings had been running a fraud.

According to Finra, Geneos made three sales of the GPB private placements after the firm missed its deadline with the SEC and those delays should have been disclosed. “Geneos representatives did not inform the customers that [GPB] Automotive Portfolio had not timely filed its audited financial statements
with the SEC or the reasons for the delay,” according to Finra.