FINRA

NASD RULES 2110, 3040 - CHRISTOPHER KLINE PARTICIPATED IN VARIABLE LIFE INSURANCE POLICY AND VARIABLE ANNUITY POLICY TRANSACTIONS BY INTRODUCING CUSTOMERS FOR THE PURPOSE OF MAKING TAX-ADVANTAGED OR ASSET PROTECTION-TYPE INVESTMENTS; ATTENDING AND PARTICIPATING IN MEETINGS REGARDING TAX PLANNING AND ASSET PROTECTION STRATEGIES AND THE INVESTMENTS AT ISSUE; FACILITATING PAPERWORK FOR THE INVESTMENTS; AND RECEIVING COMPENSATION FROM THE TRANSACTIONS WITHOUT NOTIFYING HIS MEMBER FIRM OF HIS PROPOSED ROLES IN THE TRANSACTIONS OR THE SELLING COMPENSATION HE MIGHT RECEIVE FROM THE TRANSACTIONS.

Decision & Order of Offer of Settlement

Civil and Administrative Penalty(ies)/Fine(s)

$77,523.67

Suspension

ANY CAPACITY

NINE MONTHS

7/2/2012

4/1/2013

WITHOUT ADMITTING OR DENYING THE ALLEGATIONS, KLINE CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE, HE IS FINED $77,523.67, WHICH INCLUDES DISGORGEMENT OF FINANCIAL BENEFITS OF $67,523.67, AND SUSPENDED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY FOR NINE MONTHS. THE FINE IS DUE AND PAYABLE EITHER IMMEDIATELY UPON REASSOCIATION WITH A MEMBER FIRM FOLLOWING THE SUSPENSION OR PRIOR TO ANY REQUEST FOR RELIEF FROM ANY STATUTORY DISQUALIFICATION RESULTING FROM THIS OR ANY OTHER EVENT OR PROCEEDING, WHICHEVER IS EARLIER. THE SUSPENSION IS IN EFFECT FROM JULY 2, 2012 THROUGH APRIL 1, 2013.

IN 2005 I WAS APPROACHED BY A VERY WEALTHY FAMILY WHO DESIRED TO BRING ABOUT INCOME TAX SAVINGS AND PROTECTION OF THEIR FINANCIAL AND REAL ESTATE ASSETS. AFTER DISCUSSING THEIR SITUATION WITH THEM, I DID NOT FEEL THAT I COULD SERVE THEM ADEQUATELY. THEREFORE I REFERRED THEM TO A LAW FIRM WHO SPECIALIZED IN SERVING HIGH NET WORTH INDIVIDUALS AND FAMILY OFFICES WITH SIMILAR GOALS. THE LAW FIRM RECOMMENDED THE USE OF VARIOUS LEGAL PLANNING TOOLS INCLUDING THE IMPLEMENTATION OF A TAX AVOIDANCE AND ASSET PROTECTION STRATEGY. OFFSHORE TAX PLANNING, WHILE COMPLEX, IS NOT ILLEGAL. OFTEN, THIS TYPE OF TAX PLANNING IS LUMPED IN WITH ILLEGAL TAX EVASION IN THE GENERAL MEDIA. NO ONE EVADED ANY TAXES IN CONNECTION WITH THESE TRANSACTIONS. THERE ARE SPECIFIC IRS FORMS FOR PEOPLE TO REPORT THEIR OFFSHORE ACTIVITIES, INCLUDING TAXABLE DISTRIBUTIONS FROM OFFSHORE SOURCES, AS PRESIDENTIAL CANDIDATE MITT ROMNEY CAN CERTAINLY ATTEST. THE LAW FIRM RECOMMENDED THE USE OF A FOREIGN JURISDICTION LIFE INSURANCE POLICY. WHILE THE FOREIGN LIFE INSURANCE CARRIER WAS NOT A US COMPANY, THE LIFE INSURANCE POLICY COMPLIED WITH THE INTERNAL REVENUE CODES REQUIREMENTS FOR LIFE INSURANCE, WHICH MEANT US INCOME TAX BENEFITS THAT LIFE INSURANCE OR ANNUITY POLICIES NATURALLY HELD REMAINED INTACT FOR A FOREIGN POLICY. THESE WERE MAJOR TAX AND ESTATE PLANNING BENEFITS THAT THE CLIENTS WERE COUNSELED ON BY THE LAW FIRM. THE LAW FIRM RECOMMENDED THAT THE FAMILY ESTABLISH AN OFFSHORE (FOREIGN) LLC TO OWN THE LIFE INSURANCE OR ANNUITY POLICY. THE FAMILY DEALT DIRECTLY WITH THE LAW FIRM AND THEY MADE TRIPS TO A FOREIGN LOCATION, THE BAHAMAS, TO ESTABLISH THEIR OFFSHORE PRESENCE. THE FAMILY, UNDER THE DIRECTION OF THE LAW FIRM AND THEIR ACCOUNTING FIRM, FILED THE NECESSARY TAX FORMS EACH YEAR TO VERIFY THEIR OFFSHORE HOLDINGS. ALL RECOMMENDATIONS FOR THE USE OF ANY OFFSHORE LIFE INSURANCE OR ANNUITY POLICIES CAME FROM THE LAW FIRM. FINRA ASSERTS THAT THE FOREIGN LIFE INSURANCE CONTRACT OR THE FOREIGN ANNUITY CONTRACT ARE SECURITIES AND HAS ACCUSED ME OF "SELLING AWAY". I BELIEVE THAT FINRA'S POSITION IS INACCURATE AND MISGUIDED AND THAT THESE VERY ESOTERIC INSURANCE PRODUCTS AND TRANSACTIONS ARE NOT SUBJECT TO FEDERAL SECURITIES LAW. ESSENTIALLY, FINRA IS SEEKING TO ASSERT A VIOLATION OF US SECURITIES LAWS AND JURISDICTION OVER A FOREIGN INSURANCE PRODUCT ISSUED BY A FOREIGN INSURANCE CARRIER AND SOLD TO A FOREIGN COMPANY OR TRUST. SOME OF THE LARGEST INSURANCE CARRIERS IN THE WORLD, INCLUDING AIG AND PRUDENTIAL, WHICH DOMINATE THE MARKET FOR THESE PRODUCTS THROUGH THEIR OFFSHORE CAPTIVE CARRIERS, WOULD LIKELY BE SHOCKED TO FIND OUT THAT THESE PRODUCTS ARE NOW BEING TREATED AS SECURITIES AND THAT THEY ARE SUBJECT TO FEDERAL SECURITIES LAWS AND SEC AND FINRA JURISDICTION.

UNSUITABILITY, MISREPRESENTATION AND OMMISSIONS, BREACH OF FIDUCIARY DUTY AND VIOLATION OF NASD/FINRA CONDUCT RULES IN THE PURCHASE AND SALE OF CMO'S.

$379,000.00

$125,000.00

IN ORDER TO AVOID LENGTHY LITIGATION AND ARBITRATION COSTS, MR. KLINE SETTLED THIS MATTER WHILE DENYING ALL ALLEGATIONS OF WRONGDOING ASSERTED BY CLAIMANTS.

FINRA

SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934, SEC RULE 10B-5, NASD RULES 2110, 2120, 2310(A) - CHRISTOPHER DEAN KLINE, IN CONNECTION WITH THE PURCHASE OR SALE OF COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS), DIRECTLY OR INDIRECTLY, BY THE USE OF MEANS OR INSTRUMENTALITIES OF INTERSTATE COMMERCE (INCLUDING BY TELEPHONE), OR OF THE MAILS, KNOWINGLY OR RECKLESSLY EMPLOYED DEVICES, SCHEMES OR ARTIFICES TO DEFRAUD; MADE UNTRUE STATEMENTS OF A MATERIAL FACT OR OMITTED TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS MADE, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING, CONCERNING CMO INVESTMENTS; OR ENGAGED IN ACTS, PRACTICES OR COURSES OF BUSINESS WHICH OPERATED, OR WOULD OPERATE, AS A FRAUD OR DECEIT UPON ITS CUSTOMERS. KLINE EFFECTED TRANSACTIONS IN, OR INDUCED THE PURCHASE OR SALE OF, SECURITIES BY MEANS OF MANIPULATIVE, DECEPTIVE OR OTHER FRAUDULENT DEVICE OR CONTRIVANCE. KLINE KNOWINGLY, WILLFULLY OR RECKLESSLY MADE MISREPRESENTATIONS OF MATERIAL FACTS, AND OMITTED TO DISCLOSE MATERIAL FACTS IN CONNECTION WITH OFFERS AND SALES OF CMO INVESTMENTS TO CUSTOMERS. KLINE MADE MATERIAL MISREPRESENTATIONS AND OMITTED TO DISCLOSE MATERIAL INFORMATION AT LEAST NEGLIGENTLY, AND IN SO DOING, VIOLATED HIS OBLIGATION TO OBSERVE HIGH STANDARDS OF COMMERCIAL HONOR AND JUST AND EQUITABLE PRINCIPLES OF TRADE. A MEMBER FIRM, ACTING THROUGH KLINE, RECOMMENDED HIGH-RISK CMO INVESTMENTS TO ELDERLY AND/OR RETIRED CUSTOMERS WITHOUT A REASONABLE BASIS FOR BELIEVING THAT THE INVESTMENTS WERE SUITABLE BASED ON THE CUSTOMERS' DISCLOSED AGE, INVESTMENT EXPERIENCE, INVESTMENT OBJECTIVES, FINANCIAL SITUATION AND/OR RISK TOLERANCE. KLINE WILLFULLY VIOLATED SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934, SEC RULE 10B-5, AND NASD RULES 2110 AND 2120.

Decision

Bar (Permanent)

All Capacities

Indefinite

4/16/2015

Monetary Penalty other than Fines

$28,657.93

Restitution

$1,620,100.00

prejudgment interest

EXTENDED HEARING PANEL DECISION RENDERED MAY 31, 2012 WHEREIN KLINE IS BARRED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY, ORDERED TO PAY $1,179,500 IN RESTITUTION, JOINTLY AND SEVERALLY TO CUSTOMERS AND ORDERED TO PAY COSTS OF $27,047.55, JOINTLY AND SEVERALLY. ON JUNE 12, 2012, KLINE APPEALED TO THE NATIONAL ADJUDICATORY COUNCIL (NAC). NAC DECISION RENDERED APRIL 16, 2015 WHEREIN THE FINDINGS MADE AND THE SANCTIONS IMPOSED BY THE HEARING PANEL ARE AFFIRMED THEREFORE, KLINE WAS BARRED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY AND REQUIRED TO PAY, JOINTLY AND SEVERALLY, $1,620,100, PLUS PREJUDGMENT INTEREST, IN RESTITUTION TO HIS CUSTOMERS. KLINE WAS ALSO, REQUIRED TO PAY, JOINTLY AND SEVERALLY, COSTS TOTALING $28,657.93. THE SANCTIONS WERE IMPOSED BY THE NAC FOLLOWING APPEAL OF AN OFFICE OF HEARING OFFICERS DECISION. THE SANCTIONS WERE BASED ON FINDINGS THAT IN CONNECTION WITH THE PURCHASE OR SALE OF COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS), KLINE'S MEMBER FIRM, ACTING THROUGH KLINE, FRAUDULENTLY MADE MATERIAL MISREPRESENTATIONS OF FACT AND OMITTED MATERIAL FACTS THAT MISLED EIGHT SENIOR AND RETIRED CUSTOMERS CONCERNING THE RISKS ASSOCIATED WITH CMOS, IN WILLFUL VIOLATION OF SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 10B-5. THE FINDINGS STATED THAT THE FIRM, AGAIN ACTING THROUGH KLINE, RECOMMENDED THAT THE SAME EIGHT CUSTOMERS PURCHASE HIGH-RISK CMOS WITHOUT REASONABLY BELIEVING THAT THE SECURITIES, INCLUDING THOSE PURCHASED ON MARGIN, WERE SUITABLE FOR THESE CUSTOMERS BASED ON THEIR DISCLOSED AGE, INVESTMENT OBJECTIVES, FINANCIAL BACKGROUND, AND RISK TOLERANCE. EACH MONTH FOR TWO YEARS, A REGISTERED REPRESENTATIVE WITH ANOTHER MEMBER FIRM, WHO WAS RETAINED BY THE FIRM AS A CONSULTANT, PURCHASED THROUGH HIS MEMBER FIRM LARGE BLOCKS OF CMOS - PRIMARILY INVERSE FLOATERS AND SOME INTEREST-ONLY SECURITIES - WHICH HE THEN SOLD, AFTER CHARGING MARK-UPS, TO THE FIRM. IN TURN, THE FIRM SOLD THE CMOS IT PURCHASED FROM THE CONSULTANT TO ITS CUSTOMERS, AFTER CHARGING CUSTOMERS ADDITIONAL MARK-UPS. IN TOTAL, THE FIRM PURCHASED $63,547,632 IN CMOS THAT IT THEN SOLD TO ITS CUSTOMERS, EARNING THE FIRM MARK-UPS TOTALING $1,906,322. THE FIRM ALLOCATED CMOS TO THE ACCOUNTS OF ITS CUSTOMERS BASED ON THEIR RELATIVE "BUYING POWER," I.E., THE AVAILABLE CASH OR MARGIN THAT THEY HAD TO PURCHASE THE BONDS. THESE CMOS, HOWEVER, WERE NOT HELD IN CUSTOMER ACCOUNTS FOR LONG. TO CREATE BUYING POWER, THE FIRM EACH MONTH ALSO SOLD LARGE BLOCKS OF CMOS FROM CUSTOMER ACCOUNTS. IN TOTAL, FOR TWO YEARS, THE FIRM SOLD $62,348,009 IN CMOS FROM CUSTOMER ACCOUNTS, EARNING THE FIRM ADDITIONAL MARK-DOWNS TOTALING $266,252. THE BAR IS IN EFFECT AS OF APRIL 16, 2015. ON MAY 15, 2015, KLINE APPEALED TO THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE BAR REMAINS IN EFFECT PENDING THE APPEAL. ON AUGUST 5, 2015, THE SEC ISSUED AN ORDER GRANTING KLINE'S REQUEST TO WITHDRAW HIS APPLICATION FOR REVIEW. THE DECISION WAS FINAL ON OCTOBER 5, 2015.

KLINE DENIES THE ALLEGATIONS ASSERTED BY FINRA AND ITS AGENTS. KLINE DISTRIBUTED CMO DISCLOSURE BOOKLETS REQUIRED BY FINRA (NASD) AND DISCLOSED THE KNOWN CHARACTERISTICS AND RISKS OF CMOS FULLY. ADDITIONALLY, KLINE ORALLY AND IN WRITING DISCLOSED THE RISKS ASSOCIATED WITH CMOS BEYOND THE REQUIREMENTS OF FINRA (NASD) AND THOSE DISCLOSURES WERE SIGNED BY ALL THE CLIENTS THAT CHOSE TO INVEST IN CMOS PRIOR TO THE EXECUTION OF A SINGLE CMO TRADE IN THEIR ACCOUNTS. MOREOVER, FINRA FAILS TO DISCLOSE IN ITS STATEMENT THAT IT WAS FULLY AWARE OF KLINE'S CMO ACTIVITIES SINCE 2002 AND TOOK NO ACTION UNTIL THESE PRODUCTS BECAME A POLITICAL HOT-POTATO. AS NOTED IN NASD NOTICE TO MEMBERS 93-73: "PRINCIPAL PAYMENTS ON CMOS ARISE FROM BOTH THE REGULAR AMORTIZATION OF THE UNDERLYING MORTGAGES AND FROM PREPAYMENTS OF THOSE MORTGAGES DUE TO SALES OR REFINANCING. AS RECENT HISTORY SHOWS, WHEN INTEREST RATES DECLINE SUBSTANTIALLY, MANY HOMEOWNERS CHOOSE TO REFINANCE THEIR MORTGAGES. THIS ACTIVITY CAN RESULT IN CMOS PAYING OFF PRINCIPAL MORE RAPIDLY THAN HAD BEEN ANTICIPATED. THUS, A CMO INVESTOR MAY BE FACED WITH INVESTING HIS OR HER PRINCIPAL AT A CURRENT LOWER RATE. IN A RISING INTEREST RATE ENVIRONMENT, HOMEOWNERS MAY NOT REFINANCE OR SELL THEIR HOUSES AS QUICKLY: THUS, CMO INVESTORS MAY HAVE TO HOLD THEIR INVESTMENT FOR A LONGER TIME PERIOD. WHILE PRINCIPAL PAYMENTS MAY BE QUITE PREDICTABLE FOR CERTAIN TRANCHES OF A GIVEN CMO, OTHER TRANCHES OF THE SAME ISSUE MAY BE SIGNIFICANTLY LESS PREDICTABLE." WITH REGARD TO INVERSE FLOATERS, THE NOTICE TO MEMBERS FURTHER STATES: "AT WORST, RISING RATES WILL LOWER INTEREST PAYMENTS AND EXTEND RETURN OF PRINCIPAL BEYOND THE AVERAGE LIFE." ALL OF THESE RISKS WERE DISCLOSED TO THE CLIENTS BEFORE A SINGLE DOLLAR WAS INVESTED. LASTLY, WE NOTE THAT FINRA SLYLY FOCUSES ONLY ON A PERIOD OF TIME THAT CAN EASILY BE DESCRIBED AS ONE OF THE MOST TURBULENT RISING INTEREST RATE CYCLES IN FIFTY YEARS AND EXCLUDES THE PERIOD OF TIME IMMEDIATELY PRIOR AND IMMEDIATELY AFTER; REASONABLE PEOPLE MIGHT QUESTION THE FAIRNESS OF SUCH A SKEWED APPROACH.

UNSUITABILITY, NEGLIGENT MISREPRESENTATION, FRAUD

$500,000.00

$217,000.00

CLIENT INVESTED IN THE APEX HEDGE FUND THAT GAVE EVERY APPEARANCE OF LEGITIMACY AND SUCCESS, BUT LATER WAS DISCOVERED TO BE FRAUDULENT, HOODWINKING FIRMS, REPRESENTATIVES, AND CLIENTS, ALIKE. CLAIMANTS ARE SEEKING RECOVERY FROM EVERY POSSIBLE SOURCE, SO AN ARBITRATION IS FILED IN HOPES OF ACHIEVING RECOVERY, DESPITE THE COMPLETE INNOCENCE OF THE FIRM AND REPRESENTATIVE.

UNSUITABILITY, MISREPRESENTATION, STATE AND FEDERAL LAW VIOLATIONS, BREACH OF FIDUCIARY DUTY, DECEPTIVE TRADE PRACTICES, NEGLIGENCE.

$1,700,000.00

$675,000.00

CLIENT INVESTED IN THE APEX HEDGE FUND THAT GAVE EVERY APPEARANCE OF LEGITIMACY AND SUCCESS, BUT LATER WAS DISCOVERED TO BE FRAUDULENT, HOODWINKING FIRMS, REPRESENTATIVES, AND CLIENTS, ALIKE. CLAIMANTS ARE SEEKING RECOVERY FROM EVERY POSSIBLE SOURCE, SO AN ARBITRATION IS FILED IN HOPES OF ACHIEVING RECOVERY, DESPITE THE COMPLETE INNOCENCE OF THE FIRM AND REPRESENTATIVE. ALL PARTIES ENTERED INTO A COMPREHENSIVE SETTLEMENT TO DISMISS THE MATTER IN ITS ENTIRETY WITH PREJUDICE.

CUSTOMER ALLEGES THAT MR. KLINE ENGAGED IN AN UNSUITABLE PATTERN OF TRADING THE THE ACCOUNTS.

$2,000,000.00

CUSTOMER HAS HAD POSITIVE RETURNS ON THE INVESTMENTS DURING THE TIME THE ACCOUNTS WHERE UNDER REP.

[THIRD PARTY], CPA FILED A COMPLAINT WITH THE CFP BOARD ON BEHALF OF [CUSTOMER] ALLEGING THAT [CUSTOMER'S] PORTFOLIO LOST APPROXIMATELY $100,000 DURING MR. KLINE'S MANAGEMENT OF THE PORTFOLIO. THE ALLEGED LOSS RESULTED FROM A HIGH VOLUME OF TRADING AND FROM THE COMPLEXITY OF THE TRADES. ALSO ALLEGES THAT THE 1099'S RECEIVED FROM THE CLEARING FIRM WHERE INCORRECT.

THE ALLEGATION OF $100,000 LOSS IF FALSE, IN FACT THE PORTFOLIO HAD A NET GAIN OF $981. MANY OF THE ASSETS THAT WERE TRANSFERED IN WHEN I BECAME HER REGISTERED REP WHERE STILL HELD DO TO HER WISHES. I DENY THAT THERE WAS EXCESSING TRADING. I CAN NOT ATTEST TO THE 1099 ISSUE.

ALLEGATIONS THAT DISTRIBUTIONS FROM THE CLIENTS' ACCOUNT CAME FROM PRINCIPAL AND NOT INTEREST AS ORIGINALLY TOLD TOTHEM BY THE REP. ALSO CLIENTS ALLEGE THAT THE REP DID NOT ADDRESS AN ISSUE OF ACCOUNT VALUATION DISCREPANCY BETWEEN DEC 2003 AND MARCH 2004. ALLEGATIONS PERTAIN TO REP'S REGISTRATIONS WITH SEVERAL BROKER DEALERS.

$62,000.00