Acting through Bozora, his firm failed to maintain subscription agreements for investors in the entity’s private placement who invested through the firm. 

Bozora participated in the offer and sale of limited partnership units of an entity he co-founded. Among other things, Bozora provided information about the entity to other broker-dealers for the purpose of facilitating the offer and sale of the entity by those firms; and, in connection with this activity, he distributed, or caused the distribution of, a PPM that contained material misrepresentations and omitted to disclose material facts regarding the entity’s operations and financial condition. The PPM failed to disclose the foreclosure by a company, the company’s default on its obligations to the entity and the subsequent foreclosure by the entity on the properties that secured those obligations. Bozora knew, or should have known, that his entity was using new investor proceeds in part to pay the monthly interest obligations to the entity’s current investors and preferred note holders and not for new investments as represented in the entity’s offering documents. Bozora failed to disclose this material information to those who invested in the entity.Bozora knew, or should have known, that his entity lacked sufficient revenue from operations to pay its monthly distributions to existing investors, and was funding such payments at least in part with capital raised from new investors. Because new investor funds were being applied to pay earlier investors, Bozora did not have a reasonable basis for believing that the recommendation to invest in the entity’s preferred notes was suitable for any customer.

In addition, Bozora failed to establish and maintain a supervisory system, and to establish, maintain and enforce WSPs reasonably designed to cause the firm to conduct due diligence for new offerings. Moreover,Bozora failed to supervise the activity of its registered representatives selling his entity’s preferred notes. Furthermore, Bozora failed to document ongoing due diligence of his entity and also failed to establish, maintain and enforce procedures regarding the firm’s due diligence review.

Through Arceci, the Firm designated an individual to conduct the marketing review for the offering. The individual created a summary page by cutting and pasting language directly from the private placement memorandum (PPM), including a statement about the unblemished payment history of the offering’s affiliates. The individual then completed, signed and dated the requisite 18-question review checklist.

Through Arceci, the Firm designated an associated person of the firm to conduct the due-diligence review of the offering. The person had not heard of the issuer prior to receiving the PPM and the other individual’s summary report, so he used the summary report and the PPM to conduct the due diligence review, including his assessment of the risks of the offering, and completed, signed and dated the requisite 14-question due diligence review checklist. Acting through Arceci, the Firm approved the offering for sale based on the PPM, the checklists and the summary report. 

Acting through Arceci, the Firm failed to adequately supervise its due-diligence review,in that it failed to obtain or review financial statements for the issuer which would have informed it in more detail of the liquidity issues of the offering’s affiliates; failed to research background information on the offering’s officers, which would have informed it that the chief executive officer (CEO) had been barred from the insurance industry by a state and later charged with fraud; and failed to use the services of third-party due-diligence providers that conducted due diligence research and drafted reports that would have identified material risks of the later offerings. The firm’s due diligence review, completed in less than three days, was based solely on the self-serving representations the issuer made in the PPM.

Acting through Arceci, the Firm ignored red flags and failed to adequately supervise the sale of the offering after learning about liquidity issues, and failed to suspend sales based on a PPM containing false statements.No one at the firm conducted an investigation or due diligence to determine whether customers who invested were in danger of incurring loss of principal and interest given that affiliates had delayed making payments to note holders.

Also the firm continued to leave its customers in the dark regarding the issuer’s financial problems and to sell the offering using a PPM that contained a material misrepresentation, without disclosing missed payments on securities, and failed to provide customers with copies of correspondence from the issuer describing problems with making payments on previously issued notes. The firm’s decision to continue selling the offering constitutes a failure to observe high standards of commercial honor and just and equitable principles of trade.