South Florida Arbitration & Litigation Lawyer Blog
FINRA Arbitration Attorney, Russell L. Forkey, Esq. Failure of Firm to Perform and/or to Negligently Perform Due Diligence Regarding Private Placements Offered to Customers.
August, 2011:
Leroy Henry Paris II (CRD #1130854, Registered Principal, Jackson, Mississippi) submitted a Letter of Acceptance, Waiver and Consent in which he was fined $10,000 and suspended from association with any FINRA member in any principal capacity for six months. Without admitting or denying the findings, Paris consented to the described sanctions and to the entry of findings that as his member firm’s president, CEO and registered principal, he 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. The findings stated that 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. The findings also stated that unlike earlier offerings, there were serious red flags that Paris could not identify without adequate due diligence. The findings also included that in his firm’s 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. FINRA found that Paris did not travel to the issuer’s headquarters to conduct due diligence and did not seek or request any financial information other than what was contained in the PPM. FINRA also found that 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, FINRA determined that 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, FINRA found that 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. Furthermore, FINRA found that Paris, acting on his firm’s behalf, failed to maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulations with respect to the offerings.
The suspension is in effect from July 18, 2011, through January 17, 2012. (FINRA Case #2009019070102