According to FINRA, Russ Kory was assessed a deferred fine of $5,000, suspended for three months, and ordered to disgorge $7,203 in commissions for recommending that customers invest in illiquid limited partnerships without having a reasonable basis to believe those investments were suitable.
The findings revealed that Kory recommended that three different customers invest substantial amounts in the firm's proprietary limited partnerships formed to acquire and develop oil and gas properties. The first customers were a retired married couple whose account was intended, in part, to provide for the long-term care of their disabled adult son. Despite this critical need for liquidity and preservation of capital, Kory recommended they invest $382,000 in one of the illiquid limited partnerships.
The second customer was a senior customer who was widowed, unemployed, living with her daughter, and on a fixed income. Despite these clear indicators that she needed liquid, conservative investments, Kory recommended she invest approximately $25,000 in one of the limited partnerships. The third customer, the senior customer's son-in-law, was nearing retirement with limited investment experience and had preservation of funds for retirement as an investment objective. Kory recommended this customer invest $50,000 in one of the limited partnerships.
None of these recommendations were suitable given the customers' investment profiles. Illiquid limited partnerships in oil and gas properties are speculative investments that tie up capital for extended periods with no guarantee of returns and significant risk of loss. These characteristics make them inappropriate for customers who need liquidity for anticipated expenses (like long-term care for a disabled son), customers on fixed incomes with limited resources, and customers approaching retirement who need to preserve capital.
The fact that these were proprietary limited partnerships—meaning they were offered by Kory's own firm—adds another troubling dimension to the case. Firms and their representatives often have financial incentives to sell proprietary products, as they may earn higher compensation than on other investments. This creates an inherent conflict of interest that makes careful suitability analysis even more critical. Kory received $7,203 in commissions from these unsuitable investments, which he must now disgorge.
The three-month suspension and disgorgement of commissions appropriately address the harm caused by these unsuitable recommendations. Kory placed his own financial interests ahead of his customers' needs by recommending illiquid, speculative investments to customers whose financial situations clearly required liquid, conservative investments.
Investors, particularly those who are retired, have disabled dependents, or are approaching retirement, should be extremely cautious about illiquid investments such as limited partnerships in oil and gas properties. These investments may be suitable for sophisticated investors with substantial liquid assets who can afford to lose their entire investment and tie up capital for extended periods. However, they are almost never suitable for investors who need to preserve capital, generate income, or maintain liquidity for anticipated expenses. When representatives recommend such investments despite clear indications they are unsuitable, they violate their fundamental obligation to put customers' interests first.
