The Investor’s Watchdog

The Investor's Watchdog

North Carolina General Securities Representative named in FINRA Complaint for Alleged Unsuitable REIT and BDC Recommendations

Wednesday, January 8, 2020

Mercer Hicks III, a registered representative currently associated with Southeast Investments, N.C., Inc. in Charlotte, North Carolina, was named respondent in a complaint filed by the Financial Industry Regulatory Authority (FINRA) Department of Enforcement for allegedly failing to conduct proper due diligence on investments that he recommended to customers, resulting in unsuitability claims.

Hicks’ FINRA BrokerCheck report reveals that he was discharged from his last two FINRA member firms. Hicks was associated with Cantella & Co., Inc. in Pinehurst, North Carolina from July 2001 to April 2009. He was permitted to resign after providing a client’s initials on a fee correction form related to a variable annuity contract, even though the client gave him verbal authorization to initial the forms. The firm stated, “While Cantella does not condone Mr. Hicks’ behavior, we do not feel that it was done in a malicious manner or with any intent to harm the clients; rather, he showed poor judgment.” Hicks then moved on to Capital Investment Group, Inc., also in Pinehurst, from April 2009 to April 2014. Capital discharged him for allegedly “misrepresenting himself as a client in dealing with an insurance company.”

According to the Complaint filed on December 20, 2019, Hicks recommended that five customers invest in speculative non-traded real estate investment trusts (REITs) and non-traded business development companies (BDCs) for which he also failed to understand the investments’ risks and features. The REITs and BDCs were only appropriate for investors who could afford a complete loss of their investments since some of the major risks of these alternative investments include illiquidity, restrictive redemption of shares, high front-end costs and non-guaranteed distributions.

The customers’ investment profiles indicated that they sought to preserve their capital or for their capital to appreciate. Hicks recommended 18 purchases of non-traded REITs and non-traded BDCs totaling $665,000 to five retired customers between 73 and 87 years old and received $46,550 in commissions for these purchases. Hicks recommended speculative investments including Business Development Corporation of America, American Realty Finance, American Realty Finance Retail Centers of America, American Realty Capital New York Recovery REIT, Inc., American Realty Capital Global Trust, Inc., Phillips Edison Grocery Center REIT II, Inc., American Realty Capital Hospitality Trust, Inc., Steadfast Apartment REIT, Inc. and American Realty Capital Healthcare Trust II, Inc.

One customer, for example, was a retired minister with an annual income between $50,000 and $74,999, liquid assets between $150,000 and $249,999 and a net worth of approximately $650,000. The customer had a conservative risk tolerance with an investment objective marked as preservation of capital. Hicks recommended that she purchase $25,000 in shares of Business Development Corporation of America (BDCA), a non-traded BDC. The prospectus for BDCA contained a disclosure that required North Carolina residents to have either a minimum liquid net worth and minimum gross income of $85,000, respectively, or a minimum liquid net worth of $300,000. The customer’s income of $50,000 is less than the required $85,000, thus making it an unsuitable investment based on her investment profile, including her financial situation, risk tolerance and investment objective.

Hicks failed to understand the risks and features associated with the REITs and BDCs, stating in his testimony with FINRA Department of Enforcement that he only “glance[d] over” prospectuses and left all other due diligence to “the compliance people for the firms [he] worked for.” Because Hicks lacked a reasonable basis to recommend the alternative investments to his customers, Hicks violated FINRA Rules 2111 and 2010.

FINRA Department of Enforcement is requesting relief to make findings of fact and conclusions of law that Mercer Hicks III committed the violations alleged in the complaint and order that sanctions and fines be imposed under FINRA Rule 8310(a) and 8330.

Oftentimes brokerage firms can be held liable for the brokers’ misconduct if they failed to supervise them while registered at the firm. If you lost money due to an unsuitable recommendation made by Mercer Hicks, you may be able to recover from him or the brokerage firms where he was registered during the time of the misconduct: Capital Investment Group, Inc. or Southeast Investments N.C., Inc. Since 1998, the experienced attorneys at ChapmanAlbin LLC have been fighting for victims of investment fraud and broker misconduct. Call us today at 1-877-410-8172 for a free consultation.

Author: Jason T. Albin

Jason Albin is an Attorney and Partner at ChapmanAlbin, the investor rights law firm. He has represented hundreds of investors who have lost money due to broker misconduct, unsuitable investment advice and fraud.​ Jason also represents individuals in “whistleblower” suits filed against unscrupulous companies that try to defraud the US federal and state governments.

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