Before and after Regulation BI, broker-dealers get suitability questionnaires from their clients. Knowing your clients’ risk tolerance, liquidity needs, investment goals, and investment experience are keys to giving good investment advice. Certainly there has been a lot of concern about the changing standard from “suitability” to “best interest.” Rightly so.
When I see a Reg BI case I always hope it might be interesting. When the case against Tony Barouti came out, I dove in to see where the standard might be.
It’s not. It’s an egregious case that would have been brought under any standard.
This table of the bond purchase tells it all:
| Customer Age | Date | Bond Amount | Bond Term | Annual Income | Liquid Net Worth | Concentration |
| 73 | 2020 | $120,000 | 7 years | $65,000 | $305,000 | 39% |
| 81 | 2020 | $50,000 | 5 years | $80,000 | $320,000 | 16% |
| 70 | 2020 | $180,000 | 7 years | $50,000 | $250,000 | 72% |
The bond in question is the notorious L Bond, issued by GWG. The business model was buying life insurance policies in the secondary market. They are illiquid. As described in the prospectus: “L Bonds are only suitable for persons with substantial financial resources and with no need for liquidity in this investment.”
These investors are not even close to being suitable for this investment.
The only thing more egregious is how Mr. Barouti’s compliance department let these transactions go through.
Sources:
- In the matter of Tony Barouti IA Release 6905