Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
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 2010
Fox Financial Management Corporation and James Edward Rooney Jr. (Principal)
OS/2008011592201/December 2010

Acting through Rooney, Fox Financial

  • sold zero-coupon bonds to customers and negligently omitted material facts concerning the fund’s manager, who the State of Texas had charged with forgery of a financial instrument, and was sentenced to five years deferred adjudication and had been the subject of a Temporary Order of Prohibition for selling unregistered securities by the State of Illinois;
  • sold zero-coupon bonds to customers that were secured by interests in life insurance policies, and limited liability companies, which Rooney controlled and were affiliated with the firm, issued the bonds, and negligently omitted material facts to customers relevant to the criminal records of the bonds’ manager and owning companies.
  • participated in private placement offerings of zero-coupon bonds limited liability companies issued, and each of the offerings claimed an exemption from registration under the Securities Act of 1933; however, the offerings were not separate and distinct, and were, therefore, subject to integration, and to the securities registration requirements of public offerings.
  • sold zero-coupon bonds, failed to establish a proper escrow account by using a limited liability company not chartered as a bank as the escrow agent, and falsely represented that customer funds would not be commingled.

Rooney failed to detect that customer funds had been commingled because he had neglected to obtain copies of the escrow account statements and to maintain such statements among the firm’s records.

The firm’s test of its system of supervisory controls was flawed because it failed to include a review of its private placement business, and Rooney stated in his annual certification of compliance that the firm had established and maintained policies and procedures reasonably designed to ensure compliance with FINRA rules. In addition,the firm failed to evidence its supervision over Rooney, in that Rooney was the only principal who had signed Subscription Agreements indicating approval of the customer’s investment in an offering.

Fox Financial Management Corporation: Censured; Fined $40,000

James Edward Rooney Jr. (Principal): Fined $20,000; Suspended 15 business days in Principal capacity only

Tags:  escrow    zero coupon    private placement    forgery         |    In: Cases of Note : FINRA
Premier Group, Inc.
AWC/2008011618101/December 2010

The Firm acted as the sole placement agent for contingent offerings and failed to ensure proper control of investors’ funds by sending them directly to the issuer, and also neglected to promptly transmit customers’ checks.

Further, the firm failed to

  • meet the minimum contingency by a contingent offering’s termination date,
  • break escrow for a contingent offering until after the termination date,
  • amend the offering and offer each investor rescission or reconfirmation to continue with the offering, thereby willfully violating SEC Rule 17a-3(a)(2) and NASD Rule 2110,
  • book liabilities associated with its expense sharing agreement,
  • enter into an adequate expense sharing agreement with its affiliate, and
  • properly accrue liabilities, so it operated in net capital deficiency.
Premier Group, Inc. : Censured; Fined $12,500
Tags:  Escrow    Contingency Offering     |    In: Cases of Note : FINRA
October 2010
Commonwealth Church Finance, Inc. dba Charter Financial Services
AWC/2008011619001/October 2010

Commonweatlh commenced bond offerings on a “best efforts” basis including a minimum contingency, in which escrow was broken without disclosing in the offering memoranda the possible use of loan proceeds to close the offerings.

In order to raise sufficient funds for one of the offerings, the issuer obtained a loan from a bank prior to closing the offering, and while the firm was not involved with obtaining the loan, it was aware that the loan had been obtained and the escrow account had been broken prior to the sale of the required minimum.  To meet the required minium of the other offering, the issuer obtained a loan that the escrow agent considered in part as satisfying the offering contingency, and the funds were then used to retire the earlier bond issue as represented in the offering memorandum.

The Firm allowed the representations in the offering memorandums that investor funds would not be released until the contingency amounts were met to be rendered false and misleading. The Firm used unwarranted, exaggerated and oversimplified statements in connection with sales literature, including an oral presentation and a brochure, and failed to provide a sound basis to evaluate the bonds or risks involved.

Commonwealth Church Finance, Inc. dba Charter Financial Services : Censured; Fined $40,000
Tags:  Best Efforts Offering    Minimum Contingency    Escrow     |    In: Cases of Note : FINRA
June 2010
EDI Financial, Inc.
AWC/2009016266601/June 2010
EDI Financial acted as the sole placement agent for contingency offerings, and entered into agreements with an independent attorney to act as the independent administrator for the offerings rather than contracting directly with a bank to act as the firm’s escrow agent. The title of the first offering escrow account, which the attorney opened, did not change even after the offering had been closed and the new offering was instituted, and the firm never broke escrow before meeting the contingency for both offerings. The firm established a bank account to hold funds related to the offerings separately, and the account was administered by an independent party. The Firm failed to timely deposit customers’ check into the escrow account after receipt.
EDI Financial, Inc.: Censured; Fined $10,000
Tags:  Contingency Offering    Escrow     |    In: Cases of Note : FINRA
Bill Singer's Comment
As Wall Street appears to be recovering (somewhat), we will likely see a pick-up in contingency / Best Efforts offerings.  Given that it's been a long, dry-spell for many Compliance Officers in terms of monitoring their member firm's offerings, it might be a good idea to brush up on the requirements to maintain independent, bank-housed escrow accounts; and to timely disburse payments into those accounts.
Enforcement Actions