SEC Charges Brokers With Fraud for Sales of Unsuitable Investments Through Refinanced Subprime Mortgages

Earlier this month, the SEC announced that it charged five World Group Securities, Inc. brokers with fraud, alleging that the brokers sold unsuitable securities, mostly variable universal life insurance products, that were paid for through the customers refinancing their mortgages into "subprime adjustable rate negative amortization mortgages."  According to the SEC, the brokers recommended that the customers, who could not afford to purchase the VUL policies, refinance their fixed-rate home mortgages into a subprime mortgage.  The brokers then received high commissions on both the sale of the VUL policy and of the sale of the mortgage, the SEC stated.

The SEC's press release on the matter noted that "each defendant was a mortgage broker as well as a registered representative and collected compensation from the mortgage refinancings as well as the sales of securities. In making the sales, the brokers allegedly misrepresented the expected returns from the securities, the liquidity of VULs, the nature of the VULs, and the terms of the new mortgages while failing to disclose material facts about the products. The defendants also allegedly falsified client account forms and order tickets relating to the securities sales."

The case was filed in the US District Court in Los Angeles.  The SEC will seek penalties against the defendant brokers including an injunction against violation of the securities laws, disgorgement and civil penalties.