Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2011
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
December 2011
Eric Lawrence Bloom (Principal)
AWC/2009016157801/December 2011
Bloom made materialmisrepresentations and omissions of fact and unwarranted, exaggerated and misleadingstatements to investors in connection with the sale of private placement offerings

Bloom misrepresented in an offeringís subscription agreement thatthe use of proceeds for the offering was initial funding of the companyís ventures in technology risk management solutions and business development of services. The proceeds were actually used to purchase shares of a stock from an individual. Bloom did not disclose the stock purchasing agreement between the company and the individual that predated the offering and failed to disclose the conflicts of interest and control relationships that existed among the company and his member firmís outside counsel. Bloom failed to disclose that the firmís outside counsel, who prepared all the offering documents,had created the company to operate out of his residential address and that the outside counselís relatives actually owned and operated the company

In another offering, Bloom misrepresented the offering in the PPM as an investment in membership interests of a company but did not disclose to investors that there was a promissory note between his firmís CEO and the companyís owner, and that $400,000 was due pursuant to the note. Bloom failed to disclose to investors that $400,000 of investorsífunds had already been paid to satisfy the note and that $352,200 of investor funds from the offering had already been paid by check to pay back the promissory notes from the offering. Until a supplement to the offering memorandum, Bloom failed to disclose to investors the profit distribution from the offering and further failed to disclose the conflicts of interest and control relationships among the offering company, the company thatcontrolled the offering company, and the firmís outside counsel and counselís family. 

For two other offerings, Bloom failed to disclose to investors in the subscription agreements of both companies the significant regulatory history ofthe controlling partners of the offerings who had been charged by FINRA in a market manipulation scheme in connection with alleges sales of over $3.5 million of stock to firm customers

Bloomís firmís counsel prepared the offering documents in consultation with Bloom. Bloom relied to his detriment on the counselís advice about which facts needed to be disclosed and which could be omitted in the offering documents. Bloom was the principal at the firm responsible for supervising all aspects of the firmís business, including ensuring compliance with FINRAís rules regarding communications with the public. Bloomís firm acted as the sole placement agent for an additional private placement, and the offering memorandum was not fair and balanced regarding the potential investment returns of the partnership. The offering memorandumutilized past performance of the Average of Top 25 S&P 500 Fund as compared to the anticipated returns of investing in the offering. 

Bloomís firm participated in best efforts, minimum-maximum offerings conducted by companies, andinstead of having investors deposit their funds into a bank escrow account as required by SEC Rule 15c2-4, the offering documents set forth that an escrow account with a transferagent would be established for investor funds during the contingency period, causing thefirm to violate Section 15(c) of the Securities Exchange Act of 1934 and SEC Rule 15c2-4.
Eric Lawrence Bloom (Principal): Barred
Hernan Charry Jr. aka Herman Charry (Principal)
AWC/2010022715607/December 2011
Charry failed to enforce his firmís WSPs regarding the handling of PPM, subscription documents and investor funds for private placement offerings his firm sold, and he failed to effectively supervise the associated personsí handling of such documents
Charry did not prevent the associated persons from sending subscription documents directly to the private placement issuer, which precluded the firm from conducting adequate oversight or review of the transactions and from retaining transaction-related documents.   
Charry failed to review private placement transactions for suitability and typically did not review or approve private placement transactions effected by the associated persons he supervised. He failed to enforce the firmís WSPs and failed to effectively supervise the associated personsí use of non-firm email for securities business. Charry was aware of, and did not prevent, the associated persons from using personal email accounts to conduct securities business. The use of non-firm email accounts prevented the firmís compliance staff from reviewing the associated personsí customer communications, and the firm was unable to retain securities-related communications. 
When Charry resigned from the firm, he left the keys for the office and the key for filing cabinets containing firm customersí non-public personal information with the officeís landlord, who was not affiliated with Charryís firm. This failed to safeguard the customersí non-public personal information and, in addition, made such information available to a non-affiliated third party without providing customers with the appropriate notice, thereby causing the firm to violate Rules 10 and 30 of SEC Regulation S-P. 
Hernan Charry Jr. aka Herman Charry (Principal): Fined $10,000; Suspended 20 business days
Tags:  WSPs    Supervision    Private Placement    Regulation S-P     |    In: Cases of Note : FINRA
Institutional Capital Management, Inc. and Daniel Lee Ritz Jr.(Principal)
AWC/2010022679801/December 2011
The Firm permitted registered persons assigned to a branch office to utilize outside email accounts to conduct firm business, even though the firm did not have a system or procedure in place to capture, preserve and monitor those emails. As a result, the firm failed to preserve all firm-related email communications of registered persons assigned to that branch as required. 

The firm failed to perform any supervisory review of email communications of registered persons assigned to that branch, and that Ritz permitted a firm registered representative to engage in investment advisory activity through the representativeís state-registered investment advisor (RIA) and failed to supervise that activity. Ritz was the principal responsible for supervising the representative, but failed to supervise any facet of his investment advisory business and was generally unaware of what it entailed. As a result of Ritzí lack of supervision, the representative was able to engage in extensive selling-away misconduct without the firmís detection, raising more than $5 million from investors through sales of promissory notes without the firmís knowledge. The firm failed to obtain all required information for some customers who purchased securities through the firm in private placement offerings. 

Institutional Capital Management, Inc.: Fined $65,000

Daniel Lee Ritz Jr.: In light of financial status, no fine; Suspended in Principal capacity only for 4 months
Tags:  Private Placement    Email    Supervision    Promissory Notes     |    In: Cases of Note : FINRA
Internet Securities and Michael Wayne Beardsley (Principal)
AWC/2009020930302/December 2011
Beardsley was a registered representativeís direct supervisor who was responsible for reviewing and approving the representativeís securities transactions, but failed to exercise reasonable supervision over the representativeís recommendations of exchange-traded funds (ETFs) in customersí accounts, thereby allowing the representative to conduct numerous unsuitable transactions. 

As the firmís chief compliance officer (CCO), Beardsley was responsible for ensuring that the firm filed all necessary Uniform Applications for Securities Industry Registration or Transfer (Forms U4), Uniform Termination Notices for Securities Industry Registration (Forms U5) and Rule 3070 reports. The Firm and Beardsley failed to timely amend Beardsleyís Form U4 to disclose the settlement of an arbitration against him, the firm and the registered representative; the firm failed to timely amend a registered representativeís Form U5 to disclose settlement of the arbitration; and the firm and Beardsley failed to timely report the settlement to FINRAís 3070 system

The Firm and Beardsley failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules as they pertain to private placements. The firm and Beardsley failed to conduct investigations of offerings for suitability but relied on information the registered representative who proposed selling the offering provided; never reviewed issuersí financials, nor attempted to obtain information about the issuers from any third parties; failed to maintain documentation of their investigations; allowed a registered representative to draft selling agreements with offerings which allowed the issuer to make direct payment to an entity the representative, not the firm, owned,; failed to implement supervisory procedures to ensure compliance with SEC Exchange Act Rule 15c2-4(b); and failed to implement supervisory procedures to prevent general solicitation of investments in connection with offerings made pursuant to Regulation D. 

The Firmís written procedures required Beardsley to obtain and review, on at least an annual basis, a written statement from each registered representative about his or her outside business activities; despite the fact that several registered representatives were actively engaged in outside business activities, Beardsley failed to obtain any such written statements. 

For almost a three-year period, Beardsley did not request any duplicate statements of outside securities accounts firm employees held; he neither requested nor obtained any written notifications from firm employees concerning their actual or anticipated outside securities activities. In addition, the Firm and Beardsley failed to implement an adequate system of supervisory control policies and procedures regarding testing supervisory procedures for compliance, erroneous criteria for identifying and supervising producing managers, including Beardsley, review and monitoring transmittal of funds or securities, customer changes of address, customer changes of investment objectives, and concomitant documentation for its limited size and resources exception in FINRA Rule 3012. Moreover,he firm and Beardsley completed an annual certification in which Beardsley certified that he had reviewed a report evidencing the firmís processes for establishing, maintaining and reviewing policies and procedures reasonably designed to achieve compliance with applicable FINRA rules, Municipal Securities and Rulemaking Board (MSRB) rules and federal securities laws and regulations; modifying such policies and procedures as business, regulatory and legislative changes and events dictate; and testing the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with FINRA rules, MSRB rules and federal securities laws and regulations. In fact, the report did not evidence any processes for testing the effectiveness of such policies, and no such testing was done.

Furthermore, on the firmís behalf, Beardsley executed an engagement letter committing the firm to serve as a placement agent for an issuer of limited partnership units. The letter, which a registered representative of the firm drafted, falsely represented that the firm was not a registered broker-dealer. 

The Firm and Beardsley failed to enforce the firmís Customer Identification Program (CIP) in that they completely failed to verify four customersí identities. The Firm and Beardsley failed to conduct a test of the firmís anti-money laundering (AML) compliance program for a calendar year. FINRA found that the firm conducted a securities business while failing to maintain its required minimum net capital.

Internet Securities: Censured; Fined $12,500; Required to retain an outside consultant to review and prepare a report concerning the adequacy of the firmís supervisory, and compliance policies and procedures, and supervisory controls; the report shall make specific recommendations addressing any inadequacies the consultant identifies, and the firm shall act on those recommendations. FINRA imposed a lower fine after it considered the firmís size, including, among other things, the firmís revenues and financial resources. 

Michael Beardsley: No fine in light of financial status: Suspended 1 year in Principal capacity only
Tags:  ETF    Private Placement    Suitability    Annual Compliance Certification    Away Accounts    AML    CIP     |    In: Cases of Note : FINRA
Jeffrey Alan Smith (Principal)
AWC/2010022715605/December 2011
Smith  failed to enforce his member firmís WSPs and failed to effectively supervise the activities of the firmís associated persons over whom he had supervisory responsibility to ensure that they were complying with FINRA rules and federal securities laws and regulations. 

Smith failed to 
  • enforce the firmís WSPs regarding the handling of PPM, subscription documents, and investor funds for private placement offerings sold by the firm; 
  • effectively supervise the associated personsí handling of such documents so that he did not prevent the associated persons from sending subscription documents directly to the private placement issuer, precluding the firm from conducting adequate oversight or review of the transactions and from retaining transaction-related documents; 
  • review the firmís private placement sales for suitability, and typically did not review or approve private placement transactions effected by the associated persons he supervised; and
  • enforce the firmís WSPs and failed to effectively supervise their use of non-firm email for securities business. 
Smith was aware of, and did not prevent, the associated persons from using personal email accounts to conduct securities business. The use of non-firm email accounts prevented the firmís compliance staff from reviewing the associated personsí customer communications, and the firm was unable to retain securities-related communications.
Jeffrey Alan Smith (Principal): In light of financial status, no fine; Suspended in Principal capacity only for 20 business days
Tags:  WSPs    Private Placement    Email     |    In: Cases of Note : FINRA
Kenneth William Gneuhs (Principal)
AWC/2010022715606/December 2011
Gneuhs failed to enforce his member firmís WSPs and failed to effectively supervise the activities of firm associated persons over whom he had supervisory responsibility. 

Gneuhs failed to enforce the firmís WSPs regarding the handling of PPM, subscription documents and investor funds for private placement offerings his firm sold, and failed to effectively supervise the associated personsí handling of such documents. Gneuhs did not prevent the associated persons from sending subscription documents directly to the private placement issuer, which precluded the firm from conducting adequate oversight or review of the transactions and from retaining transaction-related documents. Gneuhs failed to review the firmís private placement sales for suitability, and typically did not review or approve private placement transactions effected by the associated persons he supervised. 
Gneuhs failed to enforce the firmís WSPs and failed to effectively supervise the associated personsí use of non-firm email for securities business. Gneuhs was aware of, and did not prevent, the associated persons from using personal email accounts to conduct securities business. The use of non-firm email accounts prevented the firmís compliance staff from reviewing the associated personsí customer communications, and the firm was unable to retain securities-related communications. 
Kenneth William Gneuhs (Principal): In light of Gneuhs' financial status, no fine; Suspended in Principal capacity only for 20 business days.
Tags:  WSPs    Supervision    Private Placement    Email     |    In: Cases of Note : FINRA
William Alexis Cronin Jr.(Principal)
AWC/2011025885801/December 2011
Cronin participated in private securities transactions without prior written notice to, and prior written approval from, his member firm. The findings stated that Cronin sold approximately $1,712,500 in notes and debentures to investors, most of whom were his firmís customers at the time. The notes and debentures, which were securities, were sold through private placements. Cronin received approximately $171,000 in commissions from these investments. 

Cronin borrowed $10,000 from one of his customers at his firm. Cronin executed a promissory note stating that the loan was to be paid in full by a certain date, but failed to repay the loan according to the terms of the note. Cronin eventually repaid the loan with interest, but only after the customer filed an action against him. 

Cronin borrowed $5,000 from another customer through a loan that was not reduced to writing, and had no repayment terms; Cronin repaid the loan. 

Cronin did not disclose either of the loans to his firm, which prohibited loans from customers without prior firm approval. 
William Alexis Cronin Jr.(Principal): Fined $181,000 (included $171,000 disgorgement of commissions); Suspended 2 years
Tags:  Private Placement    Promissory Notes    Borrowed     |    In: Cases of Note : FINRA
November 2011
Brookstone Securities, Inc.,David William Locy (Principal),Mark Mather Mercier (Principal), and Antony Lee Turbeville (Principal)
OS/2009017275301/November 2011

While associated with the firm, registered representatives made misrepresentations or omissions of material fact to purchasers of unsecured bridge notes and warrants to purchase common stock of a successor company.

The registered representatives:

  • guaranteed customers that they would receive back their principal investment plus returns, failed to inform investors of any risks associated with the investments and did not discuss the risks outlined in the private placement memorandum (PPM) that could result in them losing their entire investment. The registered representatives had no reasonable basis for the guarantees given the description of the placement agentís limited role in the PPM; and
  • provided unwarranted price predictions to customers regarding the future price of common stock for which the warrants would be exchangeable and guaranteed the payment at maturity of promissory notes, which led customers to believe that funds raised by the sale of the anticipated private placement would be held in escrow for redemption of the promissory notes.

The Firm, acting through a registered representative, made misrepresentations and/or omissions of material fact to customers in connection with the sale of the private placement of firm units consisting of Class B common stock and warrants to purchase Class A common stock; the PPM stated that the investment was speculative, involving a high degree of risk and was only suitable for persons who could risk losing their entire investment. The representative represented to customers that he would invest their funds in another private placement and in direct contradiction, invested the funds in the firm private placement.

The Representative recommended and effected the sale of these securities without having a reasonable basis to believe that the transactions were suitable given the customersí financial circumstances and conditions, and their investment objectives. The representative recommended customers use margin in their accounts, which was unsuitable given their risk tolerance and investment objectives, and he exercised discretion without prior written authorization in customersí accounts.

Acting through Locy, its chief operating officer (COO) and president, the Firm failed to reasonably supervise the registered representative and failed to follow up on ďred flagsĒ that should have alerted him to the need to investigate the representativeís sales practices and determine whether trading restrictions, heightened supervision or discipline were warranted. Moreover, despite numerous red flags, the firm took no steps to contact customers or place the representative on heightened supervision, although it later placed limits only on the representativeís use of margin. The firm eventually suspended his trading authority after additional large margin calls, and Locy failed to ensure that the representative was making accurate representations and suitable recommendations.

Turbeville, the firmís chief executive officer (CEO), and Locy delegated responsibility to Mercier, the firmís chief compliance officer (CCO), to conduct due diligence on a company and were aware of red flags regarding its offering but did not take steps to investigate. 

Acting through Turbeville, Locy and Mercier, the Firm failed to establish, maintain and enforce supervisory procedures reasonably designed to prevent violations of NASD Rule 2310 regarding suitability; under the firmís written supervisory procedures (WSPs), Mercier was responsible for ensuring the offering complied with due diligence requirements but performed only a superficial review and failed to complete the steps required by the WSPs; Locy never evaluated the companyís financial situation and was unsure if a certified public accountant (CPA) audited the financials, and no one visited the companyís facility. Neither Turbeville nor Locy took any steps to ensure Mercier had completed the due diligence process. Turbeville and Locy created the firmís deficient supervisory system; the firmís procedures were inadequate to prevent and detect unsuitable recommendations resulting from excessive trading, excessive use of margin and over-concentration; principals did not review trades or correspondence; and the firmís new account application process was flawed because a reviewing principal was unable to obtain an accurate picture of customersí financial status, investment objectives and investment history when reviewing a transaction for suitability. The firmís procedures failed to identify specific reports that its compliance department was to review and did not provide guidance on the actions or analysis that should occur in response to the reports; Turbeville and Locy knew, or should have known, of the compliance departmentís limited reviews, but neither of them took steps to address the inadequate system.

Brookstone Securities, Inc.: Censured; Fine $200,000

David William Locy (Principal): Fined $10,000; Suspended from 3 months in Principal capacity only

Mark Mather Mercier (Principal): Fined $5,000; Suspended from 3 months in Principal capacity only

Antony Lee Turbeville (Principal): Fined $10,000; Suspended from 3 months in Principal capacity only

Tags:  Private Placement    Suitability    Supervision    Due Diligence     |    In: Cases of Note : FINRA
October 2011
Capital Financial Services, Inc.
AWC/2009019125903/October 2011

The Firm failed to have reasonable grounds to believe that private placements offered by two entities pursuant to Regulation D were suitable for any customer.

The Firm began selling the offerings for one entity after its representatives visited the issuerís offices to review records and meet with the issuersí executives; the firm also received numerous third-party due diligence reports for these offerings but never obtained financial information about the entity and its offerings from independent sources, such as audited financial statements.

Despite the issuerís assurances, the problems with its Regulation D offerings continued; the issuer repeatedly stated to the firmís representatives that the interest and principal payments would occur within a few weeks, and the issuer made some interest payments but failed to pay substantial amounts of interest and principal owed to its investors, and these unfulfilled promises continued until the SEC filed its civil action and the issuerís operations ceased.

In addition to ongoing delays in making payments to its investors, the firm received other red flags relating to the entityís problems but continued to allow its brokers to sell the offering to their customers; in total, the firmís brokers sold $11,759,798.01 of the offering to customers.

Despite the fact that the firm received numerous third-party due diligence reports for the other entitiesí offering, it never obtained financial information about the issuer and its offerings from independent sources, such as audited financial statements, and although it received a specific fee related to due diligence purportedly performed in connection with each offering, the firm performed little due diligence beyond reviewing the private placement memoranda (PPM) for the issuerís offerings. The firmís representatives did not travel to the entityís headquarters to conduct any due diligence for these offerings in person and did not see or request any financial information for the entity other than that contained in the PPM.

The Firm obtained a third-party due diligence report for one of the offerings after having sold these offerings for several months already; this report identified a number of red flags with respect to the offerings. Moreover, the firm should have been particularly careful to scrutinize each of the issuerís offerings given the purported high rates of return but did not take the necessary steps, through obtaining financial information or otherwise, to ensure that these rates of return were legitimate, and not payable from the proceeds of later offerings, in the manner of a Ponzi scheme. Furthermore, the firm also did not follow up on the red flags documented in the third-party due diligence report; even with notice of these red flags, the firm continued to sell the offerings without conducting any meaningful due diligence.

The Firm failed to have reasonable grounds for approving the sale and allowing the continued sale of the offerings; even though the firm was aware of numerous red flags and negative information that should have alerted it to potential risks, the firm allowed its brokers to continue selling these private placements.The firm did not conduct meaningful due diligence for the offerings prior to approving them for sale to its customers; without adequate due diligence, the firm could not identify and understand the inherent risks of these offerings.The Firm failed to enforce reasonable supervisory procedures to detect or address potential red flags and negative information as it related to these private placements; the firm therefore failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations.

Capital Financial Services, Inc.: Censured; Ordered to pay $200,000 restitution to investors
Tags:  Private Placement    Suitability    Due Diligence     |    In: Cases of Note : FINRA
Bill Singer's Comment
Folks, if this case doesn't make it abundantly clear, if you're going to traffick in the sale of private placements, you gotta go to the car lot and kick the tires.  The days of pushing the paper and getting the non-refundable due dilly fee are over.
August 2011
Leroy Henry Paris II (Principal)
AWC/2009019070102/August 2011

As his member firmís president, CEO and registered principal, Paris had overall supervisory responsibilities for the firm, including reviewing and performing due diligence for private placements and for reviewing and approving new products, including the assignment of a new product to a business unit.

Paris signed a sales agreement for a private placement offering and failed to perform due diligence beyond reviewing the private placement memorandum (PPM), and while he had received third-party due diligence reports regarding earlier private placements, he did not seek or obtain a report for the latest offering and did not conduct any continuing due diligence or follow-up because of the limited time between offerings, the similarity of the deals and representations from the issuer that no additional due diligence was necessary. Unlike earlier offerings, there were serious red flags that Paris could not identify without adequate due diligence.

In his firmís sale of several offerings by another issuer, Paris failed to perform due diligence even though his firm received a specific fee related to due diligence purportedly performed in connection with each offering. Paris did not travel to the issuerís headquarters to conduct due diligence and did not seek or request any financial information other than what was contained in the PPM. Once he had concluded that his firm could sell the offerings, Paris did not conduct any continuing due diligence or follow-up, and due to limited time between the offerings, the similarity of the deals and representations from the issuer that no material changes had occurred, he concluded that no additional due diligence was necessary. In addition, Paris did not believe it necessary to pay for due diligence reports for the new offerings because they would say the same thing as previous reports but they did identify numerous red flags. Moreover, Paris should have scrutinized each of the offerings given the high rates of return to ensure they were legitimate and not payable from proceeds of later offerings, as in a Ponzi scheme.

Acting on his firmís behalf, Paris failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations with respect to the offerings.

Leroy Henry Paris II (Principal): Fined $10,000; Suspended 6 months in Principal capacity only
Tags:  Due Diligence    Private Placement     |    In: Cases of Note : FINRA
Timothy D. Camarillo
OS/2010023612301/August 2011

Camarillo entered into a contract with a company to sell its private placements, and sold approximately $370,000 of these private securities to his customers, receiving over $13,000 in commissions, without providing notice to, or receiving approval from, his member firm.

Camarilloís firmís written procedures, which he attested to reading and understanding, instructed employees to provide notice to the firmís compliance department and to seek the firmís written approval prior to engaging in any securities transactions not executed through the firm. The company provided Camarillo with sales literature, and without submitting the brochure to his firm for approval, he distributed the brochure to his customers; the brochure contained several unwarranted, exaggerated and misleading statements, omitted material facts and ignored risk while guaranteeing success.

Camarillo did not have a reasonable basis to recommend that his customers purchase the securities, had no experience selling these types of products and did not conduct proper due diligence. Camarillo did not sufficiently understand the products offered through the company or how the investments were managed; all of Camarilloís customers who invested in the products informed Camarillo that they were seeking preservation of capital and viewed the investments as a retirement investment. Camarillo did not investigate the claims made in the sales literature that the returns were guaranteed, he had no basis to recommend the investment to customers seeking preservation of capital, and his recommendations to invest in the company were unsuitable.

Camarilloís customers lost tens of thousands of dollars by relying on his recommendation, because even after partial reimbursement from the companyís court-ordered receivership, Camarilloís customers only recouped 69 percent of their investment. Moreover, the products, as marketed, were securities, the sale of which required Camarillo to possess a Series 7 license; at the time he sold the securities, Camarillo held only a Series 6 license.

Timothy D. Camarillo : Fined $10,000; Suspended 4 months; Ordered to pay $13,000 restitution to customer
Tags:  Private Placement    Due Diligence    Unregistered RRs     |    In: Cases of Note : FINRA
July 2011
Brookstone Securities, Inc. and David William Locy (Principal)
AWC/2009019837303/July 2011

Acting through Locy, Brookstone Securities did not have WSPs addressing due diligence requirements for third-party placements.

Acting through Locy, Brookstone failed to conduct an adequate due diligence of a third-party private placement offering before Locy approved the offering of shares to customers. Locyís due diligence efforts did not include any investigation into an equity fund, despite acknowledging that he knew very little about it or the third-party placement and could not get any solid information about the fund, including pending litigation or financial statements. Locy knew nothing about the fund that was not contained in a PPM the issuer prepared, but accepted that the firm representatives forming the offering had conducted due diligence and relied on their opinion of the fund. Locy acknowledged the representatives had limited, if any, experience forming a private placement.

The firm's representatives sold or participated in sales of shares to customers without notifying Locy or anyone else at the firm, which caused those sales to not be recorded on the firmís books and records.

Brookstone Securities, Inc. and David William Locy: Censured; Fined $25,000 jointly/severally

Tags:  Due Diligence    Private Placement     |    In: Cases of Note : FINRA
Bill Singer's Comment
FINRA sort of spells it out for you: You are not discharging you due dilly obligations if you merely rely upon the PPM and/or accept one of your registered rep's opinion about the deal (which was an offering that the subject RR put together).
Dane Raymond Henry
AWC/2009018021801/July 2011

Henry added information to an earlier copy of a private placement investor questionnaire that had previously been signed by a customer. The questionnaire itself had been completed by the customer while Henry was registered with a prior member firm and was later replaced at that prior firm by a different version; Henry maintained a copy of the earlier signed copy.

In response to an inquiry made by Henryís new firmís CCO regarding the source of a particular stock in the customerís account, Henry utilized the earlier copy of the previously signed questionnaire from the customer that Henry had in his files and made alterations to the document by adding on the updated requested information sought by the CCO. Henry presented that altered document to the CCO without disclosing that he had made the alterations and by making the alterations to the questionnaire, he caused the document and, consequently, the firmís records to be inaccurate.

Dane Raymond Henry: Fined $5,000; Suspended 30 business days
Tags:  Private Placement    Signature     |    In: Cases of Note : FINRA
Bill Singer's Comment
So wrong on so many levels -- Henry is a lucky fellow, the suspension could have been far worse.
Garden State Securities, Inc. and Kevin John DeRosa (Principal)
AWC/2009018819201/July 2011

The Firm failed to ensure that it established, maintained and enforced a supervisory system and written supervisory procedures (WSPs) reasonably designed to achieve compliance with the rules and regulations concerning private offering solicitations.

The firmís procedures were deficient in that they failed to specify, among other things, who at the firm was responsible for performing due diligence, what activities by firm personnel were required to satisfy the due diligence requirement, how due diligence was to be documented, who at the firm was responsible for reviewing and approving the due diligence that was performed and authorizing the sale of the securities, and who was to perform ongoing supervision of the private offerings once customer solicitations commenced. As a result of the firmís deficient supervisory system and WSPs, the firm failed to conduct adequate due diligence on private placement offerings. The Firm's WSPs required due diligence to be conducted on every private placement it offered, and required that such review had to be documented; the firm failed to enforce those provisions with respect to an offering. Had the firm conducted adequate due diligence, it reasonably should have known that the company had defaulted on its earlier notes offerings and that there was a misrepresentation in the private placement memorandum (PPM) with respect to principal and interest payments to investors in the earlier offerings. The Firm failed to take reasonable steps to ensure that it timely learned of the missed payments on the earlier notes offerings and disclosed them to prospective investors in the notes. Due to the firmís lack of due diligence, DeRosa sold notes issued to customers, and in connection with those sales, the firm and DeRosa mischaracterized and/or negligently omitted certain material facts provided to investors. DeRosa sold $833,000 of the notes to customers and generated approximately $37,485 in gross commissions from the sales of the notes. Through DeRosa and another registered representative, the Firm solicited customers to invest in another companyís stock but failed to conduct adequate due diligence.

The owner of an investment banking firm represented that the customersí funds would be wired to a client trust account at a bank and then forwarded to an escrow account, which a third party would control, before being invested; the firm did not take any steps to verify this claim before wiring the customer funds to the account. No one at the firm verified the existence of the client trust and escrow accounts, and, after the funds were wired, no one requested or received a bank account statement to verify the receipt and location of the funds; the firm failed to question why the wire instructions failed to reference the client trust account in the bank account title section on the form, but instead referenced the investment banking firm. Instead of directing the customersí money into the escrow account, the owner of the investment banking firm kept the funds in bank accounts he controlled and used the funds for his own benefit.

In addition, in connection with his sales of the companyís stock, DeRosa disseminated to prospective investors a presentation he had received from the owner of the investment banking company, which summarized the offering. Moreover, the presentation constituted sales literature but did not comply with the content standards applicable to communications with the public and sales literature. Furthermore, the presentation failed to provide a fair and balanced treatment of risks and potential benefits, contained unwarranted or exaggerated claims, contained predictions of performance and failed to prominently disclose the firmís name, failed to reflect any relationship between the firm and the non-FINRA member entities involved in the offering, and failed to reflect which product or services the firm was offering.

Garden State Securities, Inc.: Censured; Ordered to pay jointly and severally with DeRosa, $300,000 in restitution to investors. FINRA did not impose a fine against the firm after it considered, among other things, the firmís revenues and financial resources

Kevin John DeRosa (Principal):  Fined $25,000; Ordered to pay jointly and severally with Garden State $300,000 in restitution to investors; Suspendedfrom association with any FINRA member in any capacity for 20 business days, and Suspended from association with any FINRA member in any Principal capacity only for 2 months.

Tags:  Escrow    Due Diligence    Private Placement     |    In: Cases of Note : FINRA
National Securities Corporation and Matthew G. Portes (Principal)
AWC/2009019068201/July 2011

National Securities failed to have reasonable grounds to believe that certain private placements offered pursuant to Regulation D were suitable for customers. Acting through Portes, as the firmís Director of Alternative Investments/Director of Syndications, National failed to adequately enforce its supervisory procedures to conduct adequate due diligence as it relates to an offering. Portes and the firm became aware of multiple red flags regarding an offering, including liquidity concerns, missed interest payments and defaults, that should have put them on notice of possible problems, but the firm continued to sell the offering to customers. Acting through Portes, the Firm failed to enforce its supervisory procedures to conduct adequate due diligence relating to other offerings.

Portes reviewed the PPMs for these offerings and diligence reports others prepared, but the review was cursory.The due diligence reports noted significant risks and specifically provided that its conclusions were conditioned upon recommendations regarding guidelines, changes in the PPMs and heightened financial disclosure of affiliated party advances, but the firm did not investigate, follow up on or discuss any of these potential conflicts or risks with either the issuer or any third party. In addition, acting through Portes, the Firm failed to enforce reasonable supervisory procedures to detect or address potential ďred flagsĒ as related to these offerings; and the firm, acting through Portes, failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations.

National Securities Corporation: Censured; Odered to pay a total of $175,000 in restitution to investors.

Matthew G. Portes  (Principal): Fned $10,000; Suspended from association with any FINRA member in any principal capacity only for 6 months.

Tags:  Due Diligence    Suitability        Private Placement     |    In: Cases of Note : FINRA
Bill Singer's Comment
FINRA is starting to make a point about Due Diligence of private placements -- you need to inquire and if you're on notice of problems (potential or otherwise), you better start to inquire.  There's no more wiggle room when it comes to these red-flag situations.
June 2011
Eric Lichtenstein (Principal)
AWC/2009018339703/June 2011

Lichtenstein intentionally provided false testimony during a FINRA on-the-record interview regarding his knowledge of, and participation in, private securities transactions involving solicitation and sale of private placements within the branch for which he was employed as the branch manager. 

Lichtenstein participated in the sale of private securities in the total amount of $234,303.68 to customers without his member firmís prior written approval.

Lichtenstein failed to reasonably supervise a branch office for which he acted as a branch manager. In response to a request to sell private placements at the branch, which Lichtensteinís firm had specifically denied, stating that no one at the branch had approval to sell any private placements and Lichtenstein was aware of this prohibition, he learned of other private placements being sold by a branch registered representative and failed to inform the firmís compliance department of the sales.

Because Lichtenstein was responsible for the review of electronic mail at the branch, he knew, or should have known through email review, of red flags indicating the sale of additional private placements but did not conduct additional investigation and did not inform the firmís compliance department of the red flags.

Eric Lichtenstein (Principal): Barred
Tags:  Email    Private Placement     |    In: Private Securities Transactions
May 2011
Brewer Financial Services, LLC , Adam Gary Erickson (Principal) and Steven John Brewer
AWC/2010023252701/May 2011

Acting through Erickson and Brewer, the Firm:

  • sold the private placement offerings of a company formed exclusively to acquire and provide growth to its parent company and a limited liability company for which Brewer was a director, without disclosing to the investors material facts that:
    • the parent company had defaulted on a $2.5 million loan,
    • had reported an operating loss of $1,622,912 for one calendar year and an approximate operating loss of $4.5 million for another calendar year, and
    • had defaulted on interest payments to note-holders.
  • continued to sell the limited liability companyís private placement offering to new investors, knowing that it had defaulted on its interest payments to existing investors and without disclosing that material fact to new investors.

The firm sold the private placement offerings to non-accredited investors without providing them with the financial statements required under Securities and Exchange Commission (SEC) Rule 506, resulting in the loss of exemption from the registration requirements of Section 5 of the Securities Act of 1933. Because no registration statement was in effect for the offerings and the registration exemption was ineffective, the firm sold these securities in contravention of Section 5 of the Securities Act of 1933.

Acting through Erickson, the Firm conducted inadequate due diligence related to its sale of the offerings in that it failed to ensure the issuers had retained a custodian to handle certain investorsí qualified funds prior to accepting investment of Individual Retirement Account (IRA) funds into the offerings.

Ating through Erickson and Brewer, the Firm offered to sell and sold the companyís private placement offering by distributing to the public a private placement memorandum (PPM) containing unbalanced, unjustified, unwarranted or otherwise misleading statements; among other things, the PPM implied that the parent company was not experiencing financial difficulty and failed to disclose that it reported a significant loss one year. In addition, the investors in the companyís notes were not provided with financial statements for either the company or the parent company. Moreover, the PPM was misleading in that it failed to state clearly how offering proceeds would be used, lacked clarity regarding the relationship between the issuer and its affiliates, and failed to provide the basis for claims made regarding the performance expectations of the issuer or its affiliates.

Furthermore, the firm failed to establish adequate written supervisory procedures related to its sales of private placement offerings, in that the firmís procedures failed to require that financial statements be provided to investors when private placement offerings are sold to non-accredited investors, pursuant to SEC Rule 506.

The Firm allowed Brewer to be actively engaged in managing the firmís securities business without being registered as a principal and a representative although Brewer signed and submitted an attestation to FINRA stating he would not be actively engaged in the management of the firmís securities business until he completed registration as a representative and principal. Among other things, Brewer reviewed and revised the firmís recruitment brochure, approved offer letters to prospective firm registered representatives, dictated the structure of new representativesí compensation, including the level of commissions and loan repayment terms, and instructed firm personnel to send private placement offering documents to prospective investors.

The firm maintained the registrations for individuals who were not active in the firmís investment banking or securities business or were no longer functioning as registered representatives.

The Firm conducted a securities business on a number of days even though it had negative net capital on each of those dates. The firmís net capital deficiencies were caused by its failure to classify contributions from the parent company as liabilities after the firm returned the contributions to the parent company within a one-year period of having received them, and improperly treating its assets as allowable even though all of its assets had been encumbered as security for a loan agreement the parent company executed. Moreover, the Firm had inaccurate general ledgers, trial balances and net capital computations, and filed inaccurate Financial and Operational Uniform Single

Brewer Financial Services, LLC: Expelled

Adam Gary Erickson (Principal) and Steven John Brewer: Barred

Tags:  Private Placement    Due Diligence    Unregistered Principal    Parking    Net Capital     |    In: Cases of Note : FINRA
Christian Genitrini
AWC/2010022859701/May 2011

Genitrini advertised guaranteed returns on investments of up to 20 percent per year on a website belonging to a company he wholly owned. Genitrini claimed that his company was a full-service investment firm and would, among other claims, provide high-yield investment opportunities. The website declared that the company invested nationwide and all industries were considered, but did not disclose the nature of the investment product or the risks of investment.

Genitriniís ads appeared on other websites guaranteeing returns, and his companyís contemplated private placement documents provided no assurance that by following its current investment strategy, it would be successful or profitable, although the subscription agreement also stated that the investments the company carried might be volatile and present operational risks.

Genitriniís Internet ads constituted communications with the public; were not based on principles of fair dealing and good faith; were not fair and balanced; did not disclose risks associated with the investment; guaranteed promising returns that were exaggerated, unwarranted or misleading; and the predictions of performance were also exaggerated or unwarranted.

Genitriniís private offering of securities, which involved promissory notes his company issued according to the private placement memorandum, was not made pursuant to an effective registration statement filed with the SEC; the offering was intended to be made pursuant to the exemption from registration in Section 4(2) of Rule 506 of Regulation D of the Securities Act of 1933, which prohibits offers or sales of securities by any form of general solicitation or general advertising. Genitriniís use of the Internet and his companyís website violated Section 5 of the Securities Act of 1933, and guaranteeing returns in the offer of securities over the Internet violated Section 17(a)(1) of the Securities Act of 1933.

In addition, Genitrini falsely described his work with his company on his member firmís outside business activity disclosure form and also failed to disclose that he maintained a website for the company; Genitrini told his firm, in writing, that his business and website were for tax-planning services.

Christian Genitrini : Fined $15, 000; Suspended 2 years; Required to requalify by exam for Series 7 and Series 63 before becoming re-associated with a member firm after the expiration of the suspension term. NOTE: The fine shall be paid in installments beginning 90 days after Genitriniís reassociation with a FINRA member firm following his suspension, or prior to the filing of any application or request for relief from any statutory disqualification, whichever is earlier.
Tags:  Website    Internet    Private Placement     |    In: Cases of Note : FINRA
Newbridge Securities Corporation
AWC/2009016159401/May 2011

The Firm failed to establish, maintain and enforce a supervisory system and written procedures relating to private offerings the firm sold to its customers. The firmís supervisory system and written procedures for private offerings were deficient; they did not identify due diligence steps to be taken for private offerings. The firm approved for sale, and sold, various private offerings by an entity that raised approximately $2.2 billion from over 20,000 investors through several Regulation D offerings.

The entity made all interest and principal payments on these Regulation D offerings until it began experiencing liquidity problems and stopped making payments on some of its earlier offerings; nevertheless, the entity proceeded with another offering. The firmís due diligence for the offering consisted merely of reviewing the PPM and investor subscription documents, without seeking or obtaining financial documents or information from the issuer regarding the offering, nor did the firm obtain any due diligence report for the offering or visit the issuerís facilities or meet with its key personnel. The firm approved for sale, and sold, a total of $258,597.16 to its customers for interests in another entityís private offering. In addition, the firm failed to conduct due diligence for these offerings; among other things, it did not obtain offering documentation beyond the investor subscription documents. Moreover, the firm sold additional unregistered offerings to its customers and failed to conduct adequate due diligence for each of these other offerings.

Newbridge Securities Corporation : Censured; Fined $25,000
Bill Singer's Comment
There's no more sleepwalking through Due Dilly.  You got to visit the car lot and kick the tires.
Puritan Securities, Inc. nka First Union Securities, Inc. and Nathan Perry Lapkin (Principal)
AWC/2009017339801/May 2011

Acting through Lapkin, the Firm failed to enforce its heightened supervisory procedures for a representative placed on heightened supervision based on his prior disciplinary history. Lapkin was responsible for implementing the heightened supervision plan, which required review of the representativeís correspondence on a daily basis, review of all of the representativeís transactions prior to execution, quarterly reviews with the representative of his business, and quarterly review of the representativeís journal of all conversations that resulted in any business. Lapkin did not perform any of the required steps and the firm failed to take any steps to ensure that he followed the plan. The firm, acting through Lapkin, allowed a representative to continue using a website, which is deemed an advertisement pursuant to NASD Rule 2210, that promoted investments to be made through the firm, even though it violated the content standards of the rule. The website failed to provide a sound basis for evaluating the investment products being promoted, and contained exaggerated, incomplete and oversimplified statements comparing alternative investments to traditional investment products. Also,  the website further made unsubstantiated claims by identifying investments as ďpremierĒ alternative investments and stating that alternative investments can help dampen volatility and provide protection in down markets without providing a credible basis for these claims. In addition, the website also compared alternative investments to publicly traded investments, but failed to disclose all of the material differences between the investments, including the risks associated with the alternative investments.

Acting through Lapkin, the Firm allowed its representatives to sell shares of a fund through a flawed PPM that failed to disclose that the fundís manager had been terminated from his member firm because, according to his Uniform Termination Notice for Securities Industry Registration (Form U5), he had misreported, falsely input and reported late into the firmís internal booking systems for bond transactions, and that the fund manager had misreported numerous nondeliverable forward transactions, causing false profits on his profit and loss statements. Lapkin was aware of the content of the fund managerís Form U5 and knew that the PPM was silent about it. This omission was material because, as disclosed in the PPM, the fundís trading decisions relied primarily on the fund managerís knowledge, judgment and experience.

Puritan Securities, Inc. nka First Union Securities, Inc.: Censured, Fined $10,000 (A lower fine was imposed after considering, among other things, the firmís revenues and financial resources.)

Nathan Perry Lapkin: Fined $10,000; Suspended in Principal capacity only for 15 business days.

 

Tags:  Supervision    Private Placement    Website     |    In: U4, U5, RE-3, Rule 3070
Bill Singer's Comment
Interesting and well-presented case. Shows how an individual has increased regulatory exposure when he/she is on "notice" of circumstances that otherwise might not be known.
Robin Fran Bush (Principal)
AWC/2009016159402/May 2011

As her member firmís CCO, Bush was responsible for creating, maintaining and updating her firmís Written Supervisory Procedures (WSPs) and for conducting due diligence for private offerings. Bushís firm approved for sale, and sold, various private offerings, and for one offering, Bushís due diligence consisted of reviewing the PPM and investor subscription documents, but she did not seek or obtain financial documents or information from the issuer regarding the offering, did not obtain any due diligence report, did not visit the issuerís facilities or meet with its key personnel. Bush did not take steps to ensure, or otherwise verify, that other firm principals were conducting any due diligence of the offeringís issuer.

The firm and Bush obtained a third-party due diligence report after firm customers had already invested in the offering. In regards to a third private offering that her firm approved for sale and sold, Bush conducted due diligence after the product had been sold to customers -- and her due diligence consisted of obtaining investor subscription documents without obtaining PPMs for the offerings, did not obtain any due diligence report from an independent third party and did not meet with any executives to understand the nature of the offerings.

Bushís firm sold additional, different unregistered offering to customers, and Bush, acting in her capacity as CCO and the designed principal for private offerings, failed to conduct due diligence for each of these other offerings.

Moreover, the firmís supervisory system and the firmís written procedures for private offerings Bush drafted and maintained were deficient because the procedures Bush drafted and maintained did not identify, in any detail, specific due diligence steps to be taken for private offerings or identify specific documents to be obtained for private offerings the firm was contemplating selling. Furthermore, the firmís written procedures for private offering due diligence were conclusory, non-specific and lacking in the requisite minimum detail regarding steps to be taken and firm personnel responsible for such steps.

Robin Fran Bush (Principal): Fined $15,000; Suspended 6 months in Principal capacity only
Tags:  Due Diligence    Private Placement    WSP     |    In: Cases of Note : FINRA
Bill Singer's Comment

FINRA has certainly been on a tear when it comes to private placements, and has not been shy about going after supervisors for their lapses. Note FINRA's suggestion that you need to go and physically kick the tires on a deal.

Robin Fran Bush (Principal)
AWC/2009016159402/May 2011

As her member firmís CCO, Bush was responsible for creating, maintaining and updating her firmís Written Supervisory Procedures (WSPs) and for conducting due diligence for private offerings. Bushís firm approved for sale, and sold, various private offerings, and for one offering, Bushís due diligence consisted of reviewing the PPM and investor subscription documents, but she did not seek or obtain financial documents or information from the issuer regarding the offering, did not obtain any due diligence report, did not visit the issuerís facilities or meet with its key personnel. Bush did not take steps to ensure, or otherwise verify, that other firm principals were conducting any due diligence of the offeringís issuer.

The firm and Bush obtained a third-party due diligence report after firm customers had already invested in the offering. In regards to a third private offering that her firm approved for sale and sold, Bush conducted due diligence after the product had been sold to customers -- and her due diligence consisted of obtaining investor subscription documents without obtaining PPMs for the offerings, did not obtain any due diligence report from an independent third party and did not meet with any executives to understand the nature of the offerings.

Bushís firm sold additional, different unregistered offering to customers, and Bush, acting in her capacity as CCO and the designed principal for private offerings, failed to conduct due diligence for each of these other offerings.

Moreover, the firmís supervisory system and the firmís written procedures for private offerings Bush drafted and maintained were deficient because the procedures Bush drafted and maintained did not identify, in any detail, specific due diligence steps to be taken for private offerings or identify specific documents to be obtained for private offerings the firm was contemplating selling. Furthermore, the firmís written procedures for private offering due diligence were conclusory, non-specific and lacking in the requisite minimum detail regarding steps to be taken and firm personnel responsible for such steps.

Robin Fran Bush (Principal): Fined $15,000; Suspended 6 months in Principal capacity only
Tags:  Due Diligence    Private Placement    WSP     |    In: Cases of Note : FINRA
Bill Singer's Comment

FINRA has certainly been on a tear when it comes to private placements, and has not been shy about going after supervisors for their lapses. Note FINRA's suggestion that you need to go and physically kick the tires on a deal.

April 2011
Earnest Flowers III
OS/2009016956601/April 2011

In connection with the sale of investments in a film production company, Flowers made fraudulent misrepresentations and omitted to disclose material information. Flowers collected at least $92,000 from investors, falsely representing that he would use their funds to finance a film production business and promising exorbitant, guaranteed returns. Instead of investing the funds, Flowers misused $30,498 to repay other investors and pay for personal expenses without the investorsí knowledge, consent or authorization.

Flowers made recommendations to a customer to invest in private placement offerings that were unsuitable in light of the customerís financial situation, investment objective and financial needs.

Flowers attempted to settle away customersí complaints without his member firmís knowledge or consent.

Flowers signed an attestation form for a firm acknowledging that email communications with the public must be sent through the firmís email address and copied to the compliance department, but Flowers communicated with customers via unapproved, outside email accounts without his member firmsí knowledge or consent, and as a result of his outside communications, his member firms were unable to review his emails to firm customers. In addition, Flowers engaged in private securities transactions without providing prior written notice to, and receiving prior written approval from, his member firms.

Earnest Flowers III : Barred
Bill Singer's Comment
A succinct, well-presented case. Kudos to FINRA on this one.
John Milton Rose
AWC/2010022089101/April 2011
In an attempt to keep customers from filing a complaint against him with his member firm, Rose made a $500 payment to the customers without his firmís authorization or permission. Rose serviced the joint account of these customers who invested in private placements, and when the investments did not perform to their expectations, they sought reimbursement from Rose.
John Milton Rose : Fiend $5,000; Suspended 10 business days
Tags:  Private Placement     |    In: Cases of Note : FINRA
Workman Securities Corporation
AWC/2009018818401/April 2011

The Firm failed to:

  • have reasonable grounds to believe that a private placement an entity offered pursuant to Regulation D was suitable for any customer, after it received red flags that the entity had financial issues and was not timely making interest payments, but continued to sell the offering to customers;
  • enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and NASD and FINRA rules in connection with the sale of private placements;
  • conduct adequate due diligence of the private placements or confirm that its representatives were doing their own due diligence;
  • conduct adequate due diligence of private placements other entities offered; and
  • enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and NASD and FINRA rules in connection with the sale of the private placements the entities offered pursuant to Regulation D.

The Firm reviewed cursory private placement memoranda (PPMs) for the offerings but failed to investigate red flags or analyze third-party sources of information or take affirmative steps to ensure the information in the offering documents was accurate.

The Firm failed to preserve electronic communications in a non-rewritable, non-erasable or ďWORMĒ format that complied with books and records requirements, and the firm used third-party software for storing and retaining electronic communications that did not comply with the requirements of SEC Rule 17a-4(f). Although the Firm was informed that its electronic storage medium was non-compliant but did not take adequate remedial action to retain email properly.

Workman Securities Corporation : Censured; Ordered to pay $700,000 as partial restitution to investors; Ordered to certify in writing to FINRA that it has established and implemented a system and procedures reasonably designed to achieve compliance with recordkeeping requirements related to electronic communications, and provide a written report to FINRA describing the policies, procedures and controls it has established and implemented related to the integrity of the retention and retrieval process for electronic communications, and the supervisory system it has implemented to oversee the preservation of electronic communications.
Bill Singer's Comment
In 2011 we see a continuation of FINRA's enforcement focus on private placements, with an emphasis on members' responses to "red flags" and the sincerity of the firm's due diligence efforts.  The day's of taking a piece of a private placement and sleepwalking through your obligations to your clients is a vestige of the past.  There's no easy money in Reg D. You have to do your homework and put your money where your mouth is.
March 2011
Craig Harold Schwarten
AWC/2008012927502/March 2011

Schwarten made an unsuitable recommendation to a customer, in light of the customerís financial situation and needs, for the purchase of a private placement offering. Schwarten recommended that the customer take equity out of her home through a refinanced mortgage and use $100,000 of the proceeds to purchase the private placement offering.

Schwarten failed to appear for a FINRA on-the-record interview.

Craig Harold Schwarten : Barred
Tags:  Mortgage    Private Placement     |    In: Cases of Note : FINRA
Donna Marlene DiMaggio
AWC/2009018193801/March 2011

In connection with customersí purchases of a private placement offering, DiMaggio falsely represented to each of the customers that she had personally invested funds with the issuer. Based on DiMaggioís representation and recommendation, each of the customers invested $60,000 in the offering.

DiMaggio settled and/or attempted to settle potential customer complaints regarding undisclosed fees, failing to add a living benefit rider to a variable annuity and making unsuitable investment recommendations, without her member firmís knowledge or approval.

DiMaggio exchanged business-related emails with customers using an unapproved email account, thereby causing her firm to violate its recordkeeping requirements. (FINRA Case #)

Donna Marlene DiMaggio : Barred
Tags:  Private Placement    Email     |    In: Cases of Note : FINRA
Puritan Securities Inc. aka First Union Securities, Inc.
AWC/2008012927503/March 2011

The Firm entered into an agreement with an entity to sell a private placement for which the firmís brokers sold $1,415,940 of the private placement interests to customers, and the firm failed to create and maintain a reasonable supervisory system to detect and prevent sales practice violations in these transactions. The firm did not collect financial and other relevant information for the customers who purchased the private placement, and did not review these transactions to determine if the recommendations for the purchases were suitable for these customers.

Also, the firm failed to implement a supervisory system reasonably designed to review and retain electronic correspondence. The firm did not establish an email retention system that captured all of its brokersí emails. The firmís brokers were allowed to use email addresses using external domains, and the firm did not have the capability to review, capture and retain these emails.

Puritan Securities Inc. aka First Union Securities, Inc.: Censured; Fined $10,000 (in light of the firm's revenues and financial resources, a "lower fine" was imposed)
Tags:  Private Placement    Suitability    Due Diligence    Electronic Communications    Email     |    In: Cases of Note : FINRA
Bill Singer's Comment
As I've noted over the years, permitting registered persons to use email addresses that are off the firm's platform poses significant supervisory issues.  Here, brokers were permitted to use external domains but the firm did not have the ability to review, capture, and retain the subject communications. That's going to be a problem for FINRA.
Vincent Michael Bruno (Principal)
AWC/2009018771701/March 2011

As his member firmís Chief Compliance Officer, Bruno failed to ensure that his firm established, maintained and enforced a supervisory system and WSPs reasonably designed to achieve compliance with the rules and regulations in connection with private offering solicitations. Acting through Bruno, his firm maintained a deficient supervisory system and WSPs with respect to private offering solicitations in that those procedures did not specify who at the firm was responsible for performing due diligence, what activities firm personnel were required to satisfy the due diligence requirement, how due diligence was to be documented, who at the firm was responsible for reviewing and approving the due diligence that was performed and for authorizing the sale of the securities, and who was to perform ongoing supervision of the private offerings once customer solicitations commenced.

As a result of its deficient WSPs, the firm failed to conduct adequate due diligence on private placement offerings, and Bruno failed to take any other steps to otherwise ensure that it was conducted.

Vincent Michael Bruno (Principal): Fined $10,000; Suspended 1 month in Principal capacity only.
Tags:  Private Placement    CCO    Due Diligence    WSPs     |    In: Cases of Note : FINRA
February 2011
Bobb Arthur Meckenstock (Principal)
OS/2008011612602/February 2011

Meckenstock failed to reasonably supervise a registered representative at his member firm in that the registered representative participated in sales of stock that were outside the course or scope of the registered representativeís employment with the firm. Meckenstock participated in certain sales of the stock himself, and failed to record the sales on the firmís books and records as required by NASD Rule 3040(c).

Meckenstock failed to submit a written request to participate in the sale of stock, failed to receive written approval to participate in the transactions and failed to provide written approval to the registered representative to participate in the sales.

Meckenstock failed to conduct sufficient due diligence on the offering, failed to investigate the nature of the individual with the issuer, failed to investigate his relationship with the issuer, failed to question him about any additional sales he may have made to firm customers, and failed to investigate compensation that the registered representative was promised or received from the sale of the interests in the company.

Meckenstock failed to adequately supervise the resale of stock through a registered investment adviser (IA) the representative owned, and failed to review the IAís books and records, which would have disclosed the representativeís sale of his shares of the stock to public customers.

Meckenstock reviewed a private placement memorandum and offering for his firm and approved it as a suitable investment, but failed to ensure that the issuer had established an escrow account, thereby failing to adequately supervise the sale of the offering and causing his firm to violate Securities Exchange Act Rule 15c2-4. In addition, Meckenstock failed to evidence his supervisory review and approval of customersí purchases of interests in numerous offerings.

Bobb Arthur Meckenstock (Principal): Fined $10,000; Suspended 30 days in Principal capacity only
Tags:  Supervision    Due Diligence    Escrow    Private Placement     |    In: Cases of Note : FINRA
Bill Singer's Comment
A classic private placement cascade effect that flows into everything that it touches -- failure to supervise, due dilly, escrow, outside activities, and on and on.
Francis Thomas Duffy (Principal)
AWC/2008013287601/February 2011
Duffy failed to fully accrue a $325,000 settlement of a customer arbitration claim against the firm as a liability on his member firmís ledgers and other records. Duffy only accrued as liabilities amounts when due under a payment schedule to the settlement agreement, and had not booked $125,000 of the settlement that had not been paid as a liability, which caused his firmís records to be inaccurate. As a result of failing to properly and accurately track assets, liabilities and expenses, the firm, while conducting a securities business, and acting through Duffy, failed to maintain its minimum net capital requirement. The deficiencies were primarily attributable to Duffy incorrectly viewing funds from private placements deposited in an escrow account of a separate but related company, as good capital to his firm before the funds were actually legally and physically available to the firm; and while Duffy was aware of past delays in the firmís ability to access funds deposited in escrow, he did not take into account the possibility of delays when estimating the firmís net capital position, and during that time period, was only performing a month-end formal computation of new capital after requisite capital was actually infused.
Francis Thomas Duffy (Principal): Fined $10,000; Suspended 10 business days in FINOP capacity only
Tags:  Escrow    Net Capital    Private Placement     |    In: Cases of Note : FINRA
Louis A. Wright (Principal}
AWC/2007010986202/February 2011

Wright engaged in private securities transactions when he participated in the sale of private placements related to telephone equipment and leasing agreements offered through various businesses connected to a company. Wright received no selling compensation, agreed to provide restitution of $1,617,485 to the customers by entering into purchase agreements with each customer and has commenced payment.

Wrightís member firm suspended him for 10 business days and placed him on heightened supervision for one year.

Louis A. Wright (Principal}: No Fine in light of financial status; Suspended 1 year
Tags:  Private Placement     |    In: Cases of Note : FINRA
January 2011
Cambridge Legacy Securities, L.L.C. and Tommy Edward Fincher (Principal)
AWC/2009020319001/January 2011

Cambridge failed to have reasonable grounds to believe that a private placement offered pursuant to Regulation D was suitable for any customer.

Acting through Fincher, its Chief Compliance Officer and registered principal, the Firm failed to

  • conduct adequate due diligence of the private placement offering before allowing its brokers to sell the security,
  • maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations, and
  • enforce reasonable supervisory procedures to detect or address potential red flags as it related to the offering.

Fincher was the principal responsible for conducting due diligence on the offering and approved the security as a new product available for firm brokers to sell to their customers; he allowed the firmís brokers to continue selling the security despite its ongoing failure to make overdue interest and principal payments. The Firm failed to have reasonable grounds for allowing the continued sale of the security even though the firm, through Fincher, was aware of numerous red flags concerning liquidity problems, delinquencies and defaults, but allowed its brokers to continue selling the security.

Cambridge Legacy Securities, L.L.C.:Censured; Ordered to pay $218,400 in restitution to customers. If the firm fails to provide FINRA with proof of restitution, it shall immediately be suspended from FINRA membership until such proof has been provided.

Tommy Edward Fincher: Fined $5,000; Suspended 6 months in Principal capacity only.

Tags:  Private Placement    Suitability     |    In: Cases of Note : FINRA
Bill Singer's Comment
Among the notable warnings from FINRA to start off 2011 is its concern that supervisors may not be connecting the dots when confronted with so-called "red flags." In this case, we see a private placement that is emanating trouble in terms of failed payments and other indicia of potential problems. Clearly, if your firm is going to go down the Reg D road, you're goint to have to keep your eyes and ears open to a far greater extent than was required in years past.
Marilyn Louise Yamanaka
AWC/2009016709018/January 2011

Yamanaka participated in the sales of Universal Lease Programs (ULPs) totaling $408,273.39 to members of the public without providing her member firm with written notice about the sales, and failed to obtain her firmís written approval. Yamanaka received approximately $43,760 in commissions from her sales of the ULPs.

Yamanaka submitted documentation related to the ULPs to her firm and was told that the ULPs were not approved for sale. Yamanaka signed declarations in which she confirmed she had discussed the firmís regulatory requirements with her supervisory principal; in these declarations, Yamanaka stated she had not offered or sold securities except those her firm offered and approved, had not engaged in any outside business activity which involved private securities transactions or private placements of securities, unless the firm approved them in advance, and informed her firm of all outside business activities for which she directly or indirectly received compensation. FINRA found that all of these statements were false.

Marilyn Louise Yamanaka: Fined $5,000 (apparently that number was derived from a consideration of Yamanaka's financial status and could be higher under other circumstances); Suspended 8 months.
Enforcement Actions
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