Principal Securities Named in Midwest Lawsuit
Published On: May 8, 2024

Des Moines brokerage firm Principal Securities found itself embroiled in yet another lawsuit and FINRA arbitration, this time stemming from allegations of churning of variable annuities by a former registered representative. The plaintiff, The Legacy of Angels Foundation, sued Principal Securities in December 2022 for several counts including negligence, gross negligence, breach of fiduciary duty, and fraud. The Foundation was set up in 2008 as a 501(c)(3) private giving foundation designed to fund research for a cure for Krabbe disease and Cystic Fibrosis.

According to the initial complaint, a former representative, along with his direct supervisors at Principal Securities, assisted the plaintiffs in setting up the Foundation and recommended the money be invested in annuities and life insurance. In 2017, the defendants advised the plaintiffs on the handling of three life insurance policies associated with the Foundation.

The first policy, worth $3 million was sold that same year based on the explicit recommendations of the defendants. The complaint alleges that Principal representatives committed negligence and fraud when advising the plaintiffs on this sale. The defendants reportedly had in their possession, and withheld, vital information regarding the health of the policy holder from the beneficiaries at the time. It wasn’t until after the sale, that the plaintiffs were made aware of the information, at which point they terminated the professional relationship with the defendants.

Allegations of Concealment and Negligence in Multi-Million Dollar Trust Mismanagement Case

Unbeknownst to the plaintiffs, Principal allegedly had a buyer for the $3 million policy ready to complete the transaction the day the Foundation finalized the agreement to sell. This information was not outlined in the official resolution signed by the Foundation. In fact, the plaintiffs did not learn of this buyer until 2020, well after the sale of the policy and the death of the policy holder.

The suit also alleges that the defendants were negligent in the handling of two trusts, totaling $10 and $30 million respectively. Reportedly, Principal advised the plaintiffs, who were not savvy investors, to sign an Investment Advise Direction Letter for the trusts without explaining the nature of the document. As outlined in the initial complaint, the plaintiffs were led to believe they were simply signing a standard document to ensure all paperwork related to the trusts was accounted for. However, by signing the document, the plaintiffs allowed Principal to sell both policies for $4.75 million and $14.25 million, less than half of the face value amount.

The case is still ongoing, with the status listed as “Dormant” in the Minnesota Court Records. In a recent SEC filing, Principal Securities reported their estimable losses of the case being between $3 million and $5 million. With the civil suit still in litigation, it is safe to assume that the FINRA arbitration case is in a similar state. No information regarding the FINRA case has been made available to the public as of April 2024.

Principal Securities Under Legal Scrutiny for Past Misconduct and Ongoing Supervision Concerns

Principal Securities isn’t new to legal trouble due to the shady dealings of a former registered representative. John Krohn, a former Iowa-based broker-dealer was hit with three investor complaints for offering investments not approved by Principal Securities. This practice, known as selling away, made Krohn almost $8 million of personal securities purchases without the firm’s knowledge.

For their part, Principal Securities was sued by the three victims of Krohn in FINRA arbitration, citing failure to supervise and negligence. The claimant’s argued that while Krohn was an independent contractor representative, he was registered with Principal Securities, Inc.  This relationship between Krohn and the firm meant they had an obligation to properly supervise his operations. Such supervision never took place. Eventually, Principal Securities settled the investors’ claims for $4 million.

Failures in supervision and outright negligence are a recurring theme among the lawsuits brought against the firm. As plaintiff’s attorney Andrew Stoltmann explained to InvestmentNews.com in relation to the Minnesota case, “the model for supervising brokers has some flaws, and that allows dishonest, enterprising brokers to expose those flaws.” He goes on to emphasize that Principal and firms like them prioritize new business over effectively supervising their brokers and financial advisors. Sadly, it is the clients of these shady broker dealers that end up suffering from brokerage firms choosing profits over integrity.

While both the Iowa and Minnesota cases involve former representatives of Principal Securities, it’s naïve to assume the firm has resolved the issues that allowed such behavior to occur.  Indeed, these cases are only the most recent examples of legal trouble for the firm. In 2019, the SEC slapped Principal Securities with a cease-and-desist order for recommending higher cost mutual funds to clients and failing to disclose their conflict of interest related to the associated fees their representatives earned. They were ordered to pay disgorgement of $1.55 million and prejudgment interest of $212,211.88 for the violations.

The attorneys at Stoltmann Law Offices, P.C. have successfully arbitrated against Principal Securities, Inc. in the past, and many other brokerage firms like them. If you are a client of a Principal Securities representative and received advice that conflicted with your best interest resulting in losses, you may have a claim. Call Stoltmann Law Offices, P.C. at 312-332-4200 for a no-obligation, initial consultation with an experience securities arbitration attorney.

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