South Florida Arbitration & Litigation Lawyer Blog
Private Placement Fraud and Misrepresentation FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
February, 2012:
Finance 500, Inc. (CRD® #12981, Irvine, California), Paul John Savage (CRD #1722830, Registered Principal, Coto De Caza, California) and Thomas John Harm (CRD #2093335, Registered Representative, Ladera Ranch, California), submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured and fined $50,000. Savage was fined $10,000 and suspended from association with any FINRA® member in any principal capacity for 10 business days. Harm was fined $10,000 and suspended from association with any FINRA member in any capacity for one month. Without admitting or denying the findings, the firm, Savage and Harm consented to the described sanctions and to the entry of findings that the firm, through Harm, sold roughly 8.5 billion shares of unregistered securities, on a customer’s behalf, that were neither registered with the Securities and Exchange Commission (SEC) nor exempt from registration; the firm and Harm, therefore, participated in unregistered distributions of securities. Approximately one month after opening an account, the customer began bringing to the firm large blocks of stock of little known companies whose shares traded over the counter (OTCTM) and were quoted on Pink OTC Markets’ electronic quotation and trading system. All of the companies had recently issued shares in private offerings pursuant to Rule 504 of Regulation D. The customer immediately sold the shares after they had been deposited. Thereafter, the customer typically deposited another block of shares from the same issuer and the shares would again be immediately sold. During the succeeding 15 months, this pattern was repeated multiple times with the shares of several companies. The net liquidation proceeds amounted to approximately $1.2 million.
The findings stated that the firm failed to have an adequate supervisory system and procedures designed to detect and prevent participation in an unregistered distribution of securities. In particular, it did not have any written procedures addressing the acceptance of securities in either certificate or electronic form and the corresponding sales of those securities. In practice, the firm relied primarily on its clearing firm and transfer agents to determine whether the securities were free-trading. Upon receipt of a large block of an unregistered low price stock, the firm’s due diligence was essentially limited to assembling documents that its clearing firm required to process the transaction. To the extent that any additional investigation was undertaken, none was documented. The findings also stated that among other things, the firm failed to inquire about the length of time the securities had been held; how, when, and under what circumstances the securities had been acquired; the relationship, if any, between the customer and the issuer; and/or how much stock was owned by or under the customer’s control. The findings also included that because Harm believed that his firm’s clearing firm required legal opinions to process transactions involving certificates that represented shares worth more than $100,000 or more than one million shares, the company, at Harm’s request, provided opinion letters addressing most of its certificated deposits; neither Harm nor anyone else at the firm questioned why the unrelated and geographically disparate issuers had the same counsel. FINRA found that Savage, Harm’s direct supervisor who was responsible for approving his new accounts and reviewing his trades, never questioned or investigated any of the customer’s transactions. Certain "red flags" should have prompted him to investigate a possible illegal distribution of unregistered securities and/or a plan or scheme to evade the registration provisions of the Securities Act. Savage’s suspension was in effect from January 17, 2012, through January 30, 2012. Harm’s suspension was in effect from January 3, 2012, through February 2, 2012. (FINRA Case #2008013079801)