Colorado Regulators Say Two Stockbrokers Defrauding Customers with Structured CD Products
Structured CD products remind us of the Eagles’ number one hit, Hotel California. There is a line in that song that says, “You can check in anytime you want but you can never leave.” A structured CD has many similarities. They are easy to buy but there isn’t always a market when you go to sell. For investors who need access to their money, they can be a terrible investment.
Centaurus Financial is a leading independent broker dealer. Based in Anaheim California, the company boasts over 650 brokers and 18,000 clients. We were always impressed with them for the link to the BrokerCheck website that allows the public to see a brokerage firm’s or individual broker’s compliance history. You won’t find that on the website of a boiler room operation.
That doesn’t mean Centaurus doesn’t hire some bad apples. Currently the Colorado Division of Securities is investigating the company for its failure to supervise brokers in South Carolina. Brokerage firms are responsible for the conduct of their agents. When a company like Centaurus expands and begins opening satellite offices, it gets harder for the company to monitor conduct of far away offices.
Colorado began an investigation earlier this year against two Centaurus brokers, Cindy Chiellini and Ricky Mantei. Both are based in South Carolina although Chiellini was licensed to sell securities to Colorado residents. Mantei is her supervisor.
The state says its investigation is centered on Structured CD products.
What is a Structured CD and Are They Bad?
A structured CD is a derivative, or an investment, whose value is based on the performance of underlying assets. Those underlying assets could be stocks, bonds, commodities or more exotic assets such as foreign currencies. Although they share a similar name, they are nothing like a traditional CD. Typically, these investments have a 10 or 20 year term.
Some brokers don’t tell customers these products have a limited resale value. Buy a stock and you can sell it at anytime. There isn’t the same ready market for structured CD investments, however. That makes them illiquid and hard to sell or value.
Because you can get stuck holding one for 20 years, they aren’t suitable for the average investor and certainly not for someone nearing retirement or needing access to their money.
We were floored when we read that Chiellini had 24 pending complaints. Her boss, Ricky Mantei, has 10. Compare this to the average broker who goes their entire career with nothing on their disciplinary record. In fact, just a fraction of one percent of brokers have multiple complaints.
Two dozen? That is unheard of. Any goodwill we had of Centraurus evaporated when we read the reports about their two agents.
Centaurus Financial Fails to Supervise Its Brokers
We will start our investigation with Cindy Chiellini. As of the date of this post she is still with Centaurus. [If Centaurus wants to respond, we will certainly give them space on this blog to do so.]
Stockbrokers’ disciplinary and related history is public and available on the BrokerCheck platform maintained by the Financial Regulatory Authority (FINRA). As of November 2nd, Chiellini had 30 disclosures making her in the bottom .1% of brokers as measured by reportable events. Twenty-six are pending (1 regulatory investigation by Colorado and 25 customer complaints).
As to the Colorado investigation, Chiellini says, “I vehemently deny any wrongdoing and assert that all of the allegations, to the extent that they relate to me or my activities, are completely without merit and I will vigorously defend this matter to the fullest extent of the law. None of the clients who reside in the State of Colorado have complained and all remain clients of thef irm.”
She is innocent until proven guilty and this is the first regulatory blemish on her record.
What about customer complaints?
In July 2018, a customer complained that Chiellini processed “unauthorized / unsuitable trades.” Chiellini said word for word the same thing in response, “I vehemently deny any wrongdoing and assert that the allegations are completely without merit.” Except this time Centarus paid $65,000.00 to settle the claims.
Another customer complained in February 2019 and again, Chiellini “vehemently denied” wrongdoing. And once again her employers paid to settle. The product at issue included a CD.
In December 2016, another customer complained. We know in this case the product was a structured CD. The allegation was that it was not a suitable investment. Chiellini “vehemently denied” wrongdoing once again and her former employer, J.P. Turner, paid $70,000 to settle.
She did have one complaint in 2018 over an unsuitable CD that was dismissed or withdrawn.
Since then she has racked up 25 pending complaints, many of which involve a structured CD product. In every case, Chiellini denies any wrongdoing… excuse me, “vehemently denies” any wrongdoing.
We are interested to see what happens. If history repeats itself, most of these former clients will receive a big check from Centaurus.
What about Ricky Mantei?
Mantei has been in the securities business for 36 years. During that tenure he has racked up 18 disclosures. Like Chiellini, that puts him way down on the list of the bottom 1% of brokers as measured by disclosable events.
He has two pending regulatory actions, one from FINRA and one from Colorado. Both involve structured CD products. And like his subordinate, Cindy Chiellini, he “vehemently denies” the allegations. (We wonder if they were sitting in the same room while responding to their many complaints.)
His pending and prior complaints often involve allegations of unsuitable investments and structured CD investments. And he vehemently denies all.
We understand that everyone has a right to defend themselves. But as my grandfather would say, where there is smoke there is fire. Never have we seen so many allegations of unsuitable investments involving structured CDs. And lest you think they are all frivolous, with both brokers, their present and former employers have frequently paid out on these “meritless” claims.
Did You Lose Money on a Structured CD?
We have nothing against structured CDs. If you are a sophisticated investor looking for a long term play or an institutional investor, they may be perfect. But selling these investments to retirees or folks needing access to their money is a recipe for disaster.
Banks and brokerage firms love these investments because they generate huge commissions and fees. They also often are much riskier than a traditional bank CD which offers a flat interest rate. Because they are tied to another investment such as a foreign currency, they involve more risk.
An analysis by the Wall Street Journal in 2016 found that compared to traditional CDs, structured CDs often paid lower returns and with more risk. People who had to sell often did so at a loss (if they could even find a buyer.)
According to the Journal,
“Of the 325 Barclays CDs reviewed by the Journal… more than half of those returns were lower than an investor would have earned from an average five-year conventional CD. Of the 118 structured CDs that were issued at least three years ago, only one-quarter posted returns better than those of an average five-year conventional CD. And roughly one-quarter produced no returns at all as of June 2016.”
Leave it to Wall Street to re-engineer CDs so that brokers make more money and customers get less.
Even FINRA publishes warnings to investors. Says the regulator,
“Beware of promotions about certificates of deposit (CDs) promising interest rates that are substantially higher than current averages. FINRA has observed offers for “low-risk” products with outsized returns. Investors should be wary of unsolicited emails and calls that offer outsized interest from financial institutions, including banks and brokerage firms, particularly those with which you have not had a business relationship.
“In one instance of suspected email fraud, the pitch appeared to come from a large U.S. bank that supposedly was promoting a CD offered by an international banking partner. At a time when most CDs at U.S. banks and credit unions were offering just over one percent for a comparable term, this pitch offered a CD with a 15 percent yield, and contained instructions on how to wire funds.”
If the above sounds familiar, you may be the victim of a scam. If you can’t sell or can only sell at a loss, you may be eligible for compensation.
Claims against brokers and brokerage firms are handled by arbitration before FINRA. We accept these cases on a contingent fee basis meaning we only get paid if we win. Most cases are resolved in 14 months or less (much shorter than the average court case).
Worried that the arbitration panel is stacked by brokers? As an investor, you can insist on a public panel of arbitrators.
To learn more, contact us online, by email brian@mahanylaw.com or by phone at 202-800-9791. Cases accepted nationwide. We generally accept cases with a loss of $200,000 or more but depending on the brokerage firm, we can often take smaller cases. We also invite you to visit our stockbroker fraud page for more information.
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