Lichtenstein willfully failed to timely disclose material facts on his Form U4. 

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.

When the new OSJ manager raised concerns about the private-placement business in the branch offices, Borup declined to take steps to address those concerns and conform the conduct of that business to all applicable laws, rules and regulations.As the firm’s chief executive, owner and the person who directed the firm’s business, Borup remained responsible for the private-placement business the representatives in the branch offices conducted on the firm’s behalf.

The branch offices participated in transactions involving the sale of several different private placements to investors who invested approximately $1,727,000. The representatives employed a general solicitation to obtain these investors.The firm received selling compensation for each of the private placement transactions. As the firm’s owner and CEO, Borup benefitted financially from the firm’s receipt of selling compensation. The general solicitation caused the transactions to be ineligible for the Rule 506 exemption and, therefore, the transactions constituted the sale of unregistered securities in contravention of Section 5 of theSecurities Act of 1933. Borup was the firm principal responsible for the offer and sale of the private-placement securities and by permitting these transactions to occur in contravention of the registration provisions of the Securities Act of 1933, he engaged in conduct that was inconsistent with high standards of commercial honor and just and equitable principlesof trade. In addition, 

Borup was responsible, directly or indirectly,for the supervision of firm personnel in the branch offices and the business activities in which they engaged on the firm’s behalf. Borup appointed another firm principal, as OSJ manager, although the principal did not have supervisory experience and was unfamiliar with the laws, rules and regulations applicable to the private-placement business; Borup did not undertake to provide the principal with opportunities to develop the knowledgeneeded to supervise the private-placement business effectively, nor did he revise, or instruct the principal to revise, the firm’s systems and procedures for supervising thatbusiness although he knew, or should have known, that they were inadequate. Moreover, Borup failed to supervise in a manner reasonably designed to prevent the sale of unregistered securities by firm registered representatives in the branch offices who offered and sold securities purportedly exempt from registration.

Borup was responsible, directly or indirectly, for the supervision of firm personnel in the branch offices and the business activities in which they engaged on the firm’s behalf, including the supervision of their use and distribution of sales literature on the firm’s behalf. The representatives provided potential investors with various written materials in addition to the issuers’ confidential PPMs. Borup was aware that the firm’s representatives were providing potential investors with these various written materials. With the exception of a brochure, the sales literature materials included projections for which neither the items of sales literature nor the PPM(s) provided a basis. The items of sales literature presented rates of return and investment performance in a manner that implied past performance would recur, failed to reflect the uncertainty of rates of return and yield, and allowed the rates of return and investment performance toconstitute predictions and/or projections of investment performance. The items of sales literature also included statements and claims that were incomplete and oversimplified,unwarranted or exaggerated. By permitting the branches to distribute sales literature, Borup did not establish and maintain a system to supervise the activities of the firm’s associated personnel that was reasonably designed to achievecompliance. In addition to the failure to supervise in a manner reasonably designed to achieve compliance with the content standards applicable to sales literature, Borup also failed to maintain a record of what was reviewed and/or approved for representatives to disseminate, and did not take steps to ensure that the registered representatives disseminated only sales literature the firm approved. 

Borup authorized and permitted registered representatives of the firm’s branch offices to provide cash compensation in the form of referral fee payments to non-registered individuals who provided information about persons to whom the representatives intended to offer and sell private placements. The firm’s registered representatives paid approximately $159,650 to non-registered individuals for these referrals.

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.