Native American Tribe's Investment Portfolio Proves Costly for Purshe Kaplan & Sterling Investments

Respondent, Gopi Krishna Vungarala, was employed by a Native American tribe to manage its investment portfolio. He persuaded the Tribe to invest in Real Estate Investment Trusts and Business Development Companies through a broker-dealer firm where he told the Tribe he "parked" his registration. As a result, he received over $9 million in commissions. Through false and misleading statements, he led the Tribe to believe that he did not receive commissions on the Tribe's transactions and that he had no conflict of interest. In so doing, he willfully committed fraud, as charged in the First Cause of Action, for which he is barred and ordered to disgorge the $9,682,629 in commissions that he obtained by the fraud, plus pre-judgment interest. 

Respondent also misled the Tribe regarding its eligibility for volume discounts, failing to disclose to the Tribe that it was eligible to receive more than $3.3 million in volume discounts. He personally benefited, because the discounts would have reduced his commissions. He willfully committed fraud, as charged in the Second Cause of Action, for which he is separately barred. He would be ordered to disgorge the $2.8 million in commissions that he obtained by this fraud, but these monies are included in the order to disgorge all his commissions. 

Respondent is ordered to pay costs. 

From June 1998 to June 2003, Vungarala was a financial analyst and credit manager for Dow Chemical. After approximately a year of unemployment, Vungarala became a registered representative with American General Securities Inc. in September 2004. At the same time, he became an agent for AIG American General Life Insurance Company. In December 2007 he left that position, and in January 2008, he became a registered representative with PKS and an investment adviser representative with Sutterfield. Throughout the events at issue, Vungarala was registered with PKS. He resigned as a registered representative with PKS two weeks before the hearing in this matter. 

Although he denies it, Vungarala was experiencing financial difficulties when he joined PKS. In October 2008, about nine months after Vungarala joined PKS, and about a month before he started working for the Tribe, the State of Michigan entered a tax lien against him for $1,256.53. After he paid the tax amount in full the State released the lien on June 15, 2009. Vungarala has a son with special needs, and he and his family went through a difficult time with the costs of treatments and the time and energy required to care for his son. Vungarala testified that he had withdrawn all the funds from his and his wife's 401(k) accounts to meet these demands. Before the Tribe hired Vungarala, he had been registered with PKS about 11 months, but he had few clients and did not have a large book of business. He testified that he was unable to focus on obtaining new clients because of his son's illness, and that the only clients he had were his church and 401(k) plans for two county governments.

SIDE BAR: It's important to note the dates and events above. In January 2008 Vungarala became registered with PKS. In October 2008, a tax lien was entered against him. Yes, it's a small amount but that does not diminish the "red flag" that waved before PKS as to its employment of a rep who apparently could not afford to pay about $1,000 in state taxes. In more legalese, PKS was "on notice." If someone at the firm had asked Vungarala -- and perhaps they had -- they would have learned about the family's ongoing challenges (both financial and emotional) with their special needs son. That's another blip on the firm's radar screen. When you add the lien and the family stress to the fact that Vungarala allegedly had only three clients (the church and two county governments) someone at PKS should have made an effort to stay on top of Vungarala, to see how he and his family were holding up, and to ensure that the transactions in his clients' accounts fell within acceptable parameters. Not saying that PKS was aware of all the aforementioned factors. Not saying that PKS had not made a special effort to monitor Vungarala. I'm just raising some issues.

1. From at least June 2011 through January 2015, Respondent Gopi Vungarala, through his firm, Respondent PKS, regularly lied to his customer, ST, a Native American tribe, 2 regarding investments he recommended. In addition to serving as ST's PKS registered representative, Vungarala was employed by the tribe as its Treasury Investment Manager and participated in decisions regarding the tribe's investments. Vungarala fraudulently induced the tribe to invest hundreds of millions of dollars in non-traded real estate investment trusts ("REITs") and business development companies ("BDCs"), without revealing he and his firm received commissions on the sales (usually seven percent) or the availability of certain volume discounts. PKS's supervisory failures led it to fail to detect and prevent Vungarala's fraud. 

2. Vungarala knew that ST prohibited its employees, such as himself, from engaging in business activities that could constitute a conflict of interest with the tribe, or that could impair an employee's ability to make impartial decisions on behalf of the tribe. Notwithstanding these prohibitions, and knowing that tribal leaders relied upon his recommendations as Treasury Investment Manager, Vungarala recommended the tribe invest more than $190 million in non-traded REITs and BDCs over the course of three years, generating $11.4 million in commissions for PKS, $9.6 million of which was paid to Vungarala. 

3. In order to induce the tribe to make these purchases, notwithstanding the tribe's prohibitions against conflicts of interests, Vungarala falsely represented to ST that he would not receive any commissions on purchases of the non-traded REITs and BDCs made in the tribe's PKS accounts. 

4. Vungarala also allowed tribal leaders to believe PKS would not receive any commissions on these transactions, either, when he knew or should have known that this was their understanding. 

5. Vungarala was also aware of, but failed to disclose to ST, that the tribe was eligible to receive volume discounts on its non-traded REIT/BDC purchases based upon the fact 3 that multiple trust accounts owned by ST purchased the same offerings through PKS. As a result, the tribe failed to receive more than $3.3 million in volume discounts to which it was eligible. All of these funds, instead, went to PKS and Vungarala in the form of commissions to the detriment of ST. 

6. PKS's supervisory failures prevented it from detecting and halting Vungarala's fraudulent conduct. First, at the time ST became a PKS customer in July 2011, PKS failed to perform an adequate review of Vungarala's dual relationship with ST to determine whether this relationship heightened the risk of fraudulent conduct by Vungarala toward the tribe. Because it failed to conduct an adequate review of the risks inherent to Vungarala's dual relationship with the tribe, PKS likewise failed to establish sufficient procedures to mitigate any such risks. Second, from April 1,2009 through at least October 31, 2014, PKS failed to have adequate systems and procedures in place to supervise the sale of non-traded REITs and BDCs to ensure the proper application of volume discounts. Third, from July 2011 through at least January 15, 2015, PKS failed to take reasonable steps to confirm Vungarala's representations that ST did not want to take advantage of certain volume discounts to which it was eligible. Based upon the foregoing conduct, PKS violated NASD Rule 3010 (a) and (b) (for conduct occurring prior to December 1, 2014), FINRA Rule 3110 (a) and (b) (for conduct occurring on and after December 1, 2014) and FINRA Rule 2010. 

We affirm the Hearing Panel's findings, which are supported by the record and the Hearing Panel's extensive credibility findings. The Hearing Panel found three Tribal employees, who were extensively involved with the Tribe's non-traded REIT and BDC investments, credibly and consistently testified that, among other things, Vungarala falsely informed the Tribe that he would not make money on the Tribe's investments that he recommended, and he never disclosed that he would receive commissions on these investments. In contrast, the Hearing Panel found not credible Vungarala's testimony that he expressly and clearly disclosed that he would receive commissions on the Tribe's investments and that the Tribe rejected volume discounts after Vungarala explained them. Indeed, the Hearing Panel found that Vungarala's testimony "was repeatedly evasive, inconsistent, and misleading," and it was "easy to see how he confused" members of the Tribe in connection with these matters. Vungarala has not demonstrated that substantial evidence in the record exists to overturn the Hearing Panel's credibility determinations, which are corroborated by documents in the record and various actions of the Tribe.

We also reject Vungarala's numerous arguments on appeal. For example, he argues that the Tribe knew (or had to have known) that Vungarala was earning commissions on the Tribe's non-traded REIT and BDC purchases, and was aware that it was eligible for volume discounts, because it is a sophisticated, institutional investor with a multi-step investment process. While at first glance the Tribe appears to be sophisticated, the weight of the evidence shows that the individuals most involved with the Tribe's investment process related to non-traded REITs and BDCs were not sophisticated, relied heavily upon Vungarala for his advice and guidance, and did not know that Vungarala was earning commissions on the Tribe's investments or that it could receive millions of dollars in discounts on its purchases. Further, contrary to Vungarala's assertions, neither a customer's alleged sophistication, nor disclosures in prospectuses and other documents concerning fees, costs, and volume discounts, absolve Vungarala of his fraudulent misrepresentations and omissions. 

Similarly, we reject Vungarala's claim that the commissions he received as the Tribe's registered representative-while also serving as the Tribe's full-time investment manager and advising it to purchase all of the securities at issue-were not material and he had no duty to disclose this information to the Tribe. Vungarala was not merely the Tribe's registered representative (the implications of which the Tribe did not fully understand). Rather, he also served as the Tribe's trusted, full-time employee hired to provide it with objective investment advice. Vungarala's dual role presented conflicts of interests, and a reasonable investor would have considered important Vungarala's receipt of significant commissions in connection with each recommended non-traded REIT or BDC in deciding whether to invest. Under the circumstances, Vungarala had a duty to disclose this information to the Tribe. 

We further reject Vungarala's various claims that the proceedings below were unfair because, among other things, the Tribe did not provide FINRA with all relevant documents and access to all relevant witnesses. It is well-established that FINRA lacks subpoena power over customers such as the Tribe, and FINRA's Department of Enforcement ("Enforcement") acted well within its prosecutorial discretion in bringing a case against Vungarala based upon the evidence it had (including evidence turned over to it by the Tribe). And despite Vungarala's suggestions to the contrary, he has not pointed to any evidence showing that Enforcement failed to produce to him any documents in its possession pursuant to FINRA's rules. 

Finally, we affirm the bars the Hearing Panel imposed on Vungarala for his egregious misconduct. Vungarala intentionally made numerous misrepresentations and omissions of material facts during a several-year period. He profited handsomely from his misconduct, and the Tribe-which trusted Vungarala and depended upon him for objective investment advice- suffered financial harm as a result of its lost volume discounts. Vungarala has taken no responsibility for his actions, and instead believes that he was a better steward of the funds he received in commissions than his employing broker-dealer would have been. Vungarala is unfit to continue in the securities industry, and barring him is necessary to protect the investing public. We also affirm the Hearing Panel's order that Vungarala disgorge the approximately $9.6 million in ill-gotten gains that he received from his misconduct. 

Vungarala knew he would earn lucrative commissions on the Tribe's investments in nontraded REITs and BDCs. He also knew that he was subject to the Tribe's Investment Policy, which required that he disclose any personal financial interest that could be related to the performance of the investment portfolio. Vungarala did not only fail to disclose his commissions; he affirmatively misrepresented to the Tribe that he would not receive any commissions and continued to mislead the Tribe even after he had received the commissions and the Tribe questioned him about who received commissions on its purchases. Under the circumstances, Vungarala must have been aware of the risk that the Tribe would be deceived. 

Although a motive is not necessary to establish scienter, we agree with the NAC that Vungarala had a motive to deceive the Tribe. Vungarala felt underpaid and mistreated by the Tribe and considered himself to be working "pro bono." We find that Vungarala acted intentionally, or at least recklessly, when he misled the Tribe about his commissions.

[V]ungarala violated Exchange Act Section 10(b), Exchange Act Rule 10b-5, and FINRA Rules 2020 and 2010. The NAC also found that Vungarala's violations subject him to a statutory disqualification under Exchange Act Section 3(a)(39). That section provides that a person is subject to a statutory disqualification if he has willfully violated any provision of the Exchange Act. Because we agree with the NAC that Vungarala acted at least recklessly when he made misrepresentations and omissions about his receipt of commissions and the Tribe's eligibility for volume discounts, we find that he acted willfully. 

We find further, as we must under Exchange Act Section 19(e) to sustain FINRA's disciplinary action, that the provisions Vungarala willfully violated-Exchange Act Section 10(b), Exchange Act Rule 10b-5, and FINRA Rules 2020 and 2010-are, and were applied in a manner, consistent with the purposes of the Exchange Act. Section 10(b) is part of the Exchange Act, and Rule 10b-5, which implements Section 10(b), is consistent with the Exchange Act's purpose of protecting investors from fraudulent conduct. FINRA Rule 2020 is consistent with the purposes of the Exchange Act because it protects investors by prohibiting the same conduct as Exchange Act Rule 10b-5. FINRA applied Exchange Act Section 10(b), Exchange Act Rule 10b-5, and Rule 2020 in a manner consistent with the purposes of the Exchange Act because a preponderance of the evidence supports FINRA's findings that Vungarala committed fraud. FINRA Rule 2010 is consistent with the purposes of the Exchange Act because Exchange Act Section 15(b)(6) requires that FINRA's rules "promote just and equitable principles of trade."40 FINRA's application of Rule 2010 to Vungarala's conduct furthered the objective of preventing conduct inconsistent with just and equitable principles of trade.

FINRA's Sanctions Guidelines state that an adjudicator should "strongly consider barring an individual" in response to intentional or reckless misrepresentations or omissions of material fact. We agree with the NAC that a bar is warranted here because Vungarala "engaged in egregious misconduct by repeatedly misleading the Tribe over an extended period, for his own personal gain." Vungarala abused his position of trust as the Tribe's investment manager. His misconduct occurred repeatedly over more than three years. When Tribe members asked direct questions about his commissions and the Tribe's eligibility for volume discounts, Vungarala lied to them and then tried to confuse them with vague answers. As a result of his misconduct, he made over $9.6 million in undisclosed commissions and cost the Tribe at least $3.3 million by forgoing volume discounts for which the Tribe was eligible. As the NAC stated, Vungarala "has demonstrated that he is unfit to continue in the securities industry and the bars from the securities industry are necessary to protect investors from future misconduct at his hands." A bar "will protect the public from [Vungarala's] willingness to place his own financial interests ahead of those of his customer." Under these circumstances, with due regard for the public interest and the protection of investors, a bar is not excessive or oppressive but a necessary remedial measure. 

FINRA's Sanction Guidelines state that a sanction less than a bar should be considered "where mitigating factors predominate." Although Vungarala challenges his liability and argues that imposing a bar is punitive, he does not raise any mitigating factors that suggest a sanction less than a bar should be imposed for the violations we have sustained. 

Instead, Vungarala argues that the imposition of a lifetime bar on a registered representative is an impermissibly punitive penalty. But, as we recently explained, FINRA bars are not penalties where they are imposed "to protect the public."  We adhere to that reasoning here. As discussed above, it is necessary to bar Vungarala to protect the public, and the bar is therefore remedial. We therefore reject Vungarala's argument that the bar FINRA imposed on him is impermissibly punitive.

Vungarala's employment contract and position description gave him responsibility for "perform[ing] all investment transactions" for the Tribe's investment portfolio, "develop[ing] and implement[ing] investment strategies" for the investment portfolio, and "manag[ing], evaluat[ing], and monitor[ing] the investment portfolio." From 2008 through mid-2011, Vungarala traded on behalf of the Tribe through Charles Schwab & Co. At that time, he had authority to invest without seeking prior approval from the Tribe. The Tribe initially paid Vungarala a salary of $99,500, which it subsequently increased to $120,000, with the potential for a 10% bonus if the Tribe's portfolio return exceeded the market return for the fiscal year. At Vungarala's request, the Tribe reimbursed him for the cost of renewing his securities licenses and his errors and omissions insurance. Vungarala testified that, upon being hired, he had no expectation of being paid commissions in connection with recommending the Tribe's investments. 

At some point, Vungarala learned that the Tribe's previous outside financial adviser earned more than $1 million a year. In comparison, Vungarala believed his salary amounted to him working "pro bono." Vungarala also believed that the Tribe treated him poorly because he was not a tribal member, and felt that his office was too small and that his colleagues treated him as an underling.

[V]ungarala obtained $9.6 million in commissions as a result of his misconduct-the Tribe invested $190 million in REITs and BDCs without taking advantage of volume discounts across accounts, PKS earned commissions of $11.4 million, and Vungarala received 85% of those commissions. . . .

causes of action related to PKS's allegation that Vungarala was barred from association with any FINRA member in any capacity, as a result of false and misleading statements made to Saginaw Chippewa Indian Tribe of Michigan. PKS further alleged that, pursuant to the terms of an Independent Contractor Agreement and Security Sales Agreement for Registered Representative, Vungarala is liable for amounts paid and to be paid under an arbitration settlement and FINRA Order Accepting Settlement Offer

PKS: $14,029,656 in compensatory damages plus interest and $2,500 in filing fees

PKS (as Assignee): $6,838,217 in compensatory damages plus interest

• FINRA
• REIT
• Purshe Kaplan
• Vungarala
• Commissions
• Conflict of Interest
• OHO
• NAC
• SEC
• Bar
• BrokeAndBroker
• Bill Singer