FINRA barred John Stuart Hudnall, formerly of U.S. Bancorp Investments and BancWest Investment Services' San Francisco, California branches, for participating in an undisclosed and unapproved private securities transaction regarding a non-traded real estate investment trust (REIT) by selling and splitting an elderly client's $400,000 REIT investment.
OHO Disciplinary Proceeding #2013036412601
As first alleged in a May complaint, Hudnall (CRD #4200298) artificially split an 80-year-old customer's $400,000 REIT investment into two parts so as to circumvent a firm supervisory policy that would have triggered a review, pursuant to BancWest's concentration guidelines. At the time, investigators said that had the full transaction been disclosed to BancWest, it likely would have been disapproved due to excessive concentration since BancWest's supervisory manual specified that no more than 10% of a client's liquid net worth could be invested with a particular REIT sponsor, nor more than 20% invested in all REIT holdings combined.
In its decision to bar Hudnall, FINRA affirmed the aforementioned REIT allegations, noting that Hudnall recommended and sold the $400,000 Wells Core Office Income REIT investment to an 80-year-old BancWest customer, which he then split into two transactions of $40,000 and $360,000.
FINRA wrote that $400k "far exceeded" the 10% liquid net worth guideline for one sponsor.
The investigation states that in order to circumvent BancWest's supervisory review, Hudnall submitted only the $40,000 portion to BancWest for review, and executed the $360,000 portion of the REIT investment directly with the REIT's sponsor and away from the firm, generating a gross commission of $25,200 in connection with the $360k portion of the REIT investment.
In addition to finding that Hudnall participated in an undisclosed and unapproved securities transaction away from the firm, FINRA found that Hudnall made unapproved and undisclosed financial sales promotions to firm customer and then provided false information in response to FINRA information requests related to the investigation.
For instance, FINRA wrote that through BancWest representative Hudnall, and based on Hudnall's recommendations, another BancWest customer invested $127,000 in Jackson National Optimax 4 fixed annuities, for which Hudnall generated a gross commission of $6,985.
The findings state that Hudnall sold the Jackson National fixed annuities with a return-of-premium guarantee, which would allow the owner to surrender the annuity within the first few years of ownership and receive the return of their initial premium payment without incurring a surrender fee.
This same guarantee stated that if the surrender occurred within the first year of ownership, Jackson National would charge back the commission it paid the representative for the sale, but would not recapture the commission if the owner surrendered the annuity more than a year after purchasing it.
Hudnall reportedly made a promotional offer enticing certain clients to retain the Jackson National annuity for over a year by promising to pay 1% annual interest if the clients held their annuity for at least a year before surrendering it; this promotion was not part of the Jackson National fixed annuity product that Hudnall was selling, and Hudnall did not inform his clients that the 1% interest would be paid not by Jackson National, but by Hudnall himself, on checks drawn from his personal account.
Investigators wrote that not only did Hudnall fail to disclose this promotional offer or payments to BancWest, he purportedly answered "no" to a FINRA request for information that asked the question, "Did you ever provide cashier's checks to any Firm customers?" Four months after providing that answer, according to FINRA, Hudnall admitted that his prior response was false and that he had given checks to customers; later on, Hudnall admitted the checks were drawn in fulfillment of the unapproved promotional offer.
Hudnall's BrokerCheck report lists an additional settled dispute in which a customer alleged that his money was placed in an annuity without his knowledge.
If you have invested with former BancWest and US Bancorp broker John Stuart Hudnall of the Bay Area, or with any broker or financial adviser whose attempt to circumvent firm rules, selling away, or supervisory failures has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.