South Florida Arbitration & Litigation Lawyer Blog
Zero Coupon Bond Fraud, Mismanagement and Negligent Supervision FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
December, 2010:
Fox Financial Management Corporation (CRD® #134277, Carrollton, Texas) and James Edward Rooney Jr. (CRD #1857754, Registered Principal, Carrollton, Texas) submitted an Offer of Settlement in which the firm was censured and fined $40,000, and Rooney was fined $20,000 and suspended from association with any FINRA member in any principal capacity for 15 business days. Without admitting or denying the allegations, the firm and Rooney consented to the described sanctions and to the entry of findings that the firm, acting through Rooney, 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.
The findings stated that the firm, acting through Rooney, 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. The findings also stated that the firm, acting through Rooney, 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. The findings also included that the firm, acting through Rooney, 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.
FINRA found that 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. FINRA also found that 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, FINRA determined that 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.
The suspension is in effect from December 6, 2010, through December 24, 2010. (FINRA Case #2008011592201).