Articles Posted in FINRA Enforcement Actions – 2022

The below referenced FINRA Enforcement Action provides examples of what would constitute a negligent misrepresentations and omissions in any offering.  In this particular circumstance, it related to the offering of notes of the parent company of WestPark Capital.

WestPark Capital, Inc. (CRD #39914, Los Angeles, California) and Richard Alyn Rappaport (CRD #1885122, Los Angeles, California) November 22, 2021 – An AWC was issued in which the firm was censured, fined $250,000, ordered to offer rescission to customers who invested in notes of the firm’s parent company and have not yet been repaid the full amount of their outstanding principal investment that totaled $1,777,316, required to review and revise, as necessary, its policies, procedures, processes, controls and systems concerning FINRA Rule 3170, and required to extend the time during which it will comply with the requirements of FINRA Rule 3170 for an additional six months. Rappaport was fined $30,000, suspended from associating with any FINRA member in all capacities for four months and suspended from associating with any FINRA in any principal capacity for 15 months. The suspensions are to run concurrently.  Without admitting or denying the findings, the firm and Rappaport consented to the sanctions and to the entry of findings that they made negligent misrepresentations and omissions of material facts in offering documents provided to customers in connection with the sale of promissory notes issued by the firm’s parent company. The findings stated that the offering documents failed to disclose that the parent company had defaulted on a $1 million line of credit and had defaulted on successive forbearance agreements with a bank, or that the bank had sued the parent company and Rappaport. Similarly, the offering documents failed to disclose that the parent company had net operating losses each year from 2012 through 2016. In addition, the firm sent prospective investors a misleading historical analysis document, created by Rappaport, that claimed to show investors what they would have received as a return on the notes if the notes had been purchased in 2006 and held through 2010. In fact, the return displayed did not explain that the calculation was based upon hypothetical returns from distinct investments and not any actual return from the notes. The firm, through Rappaport and other firm representatives, also represented to prospective investors that they would be entitled to share in pro-rata distributions of equity and profits from the firm. In fact, the noteholders were entitled to share in pro-rata distributions of equity and profits from the parent company, not the firm, which at times had higher profits and greater equity producing opportunities than the parent company. Moreover, the firm, through Rappaport and other firm representatives, failed to disclose material conflicts of interest. The firm and Rappaport failed to disclose to prospective investors that Rappaport had sole discretion as to whether the parent company’s subsidiaries would make distributions to the parent. By virtue of the foregoing, the firm acted in contravention of Sections 17(a)(2) and (3) of the Securities Act of 1933. The findings also stated that the firm and Rappaport failed to supervise the parent company offerings. The firm, acting through Rappaport, failed to take reasonable steps to ensure that firm representatives who solicited investments in the notes understood the terms of the notes. The firm and Rappaport did not provide reasonable training to registered representatives about the notes and did not respond reasonably to questions from customers that raised red flags that customers lacked accurate information about the notes. The findings also included that the firm violated FINRA Rule 3170 (the “Taping Rule”). The firm’s recording system allowed representatives, at their discretion, to end recording at any time, including before a call was complete.  The firm became aware that a representative who sold the parent company offerings terminated at least three recordings before the calls were completed, including a recording of a call with a noteholder, yet the firm did not take any action to ensure that the representative at issue, or other firm representatives, recorded future calls in their entirety. In addition, the firm’s special written procedures concerning the Taping Rule were not reasonably designed. The special written procedures for supervisory review of calls provided no meaningful guidance regarding the review process, frequency of review, or methods of escalating information identified during review. The firm also failed to enforce the provision in its special written procedures requiring the firm to test its taping system to ensure that recordings were properly made and retained. As a result, the firm failed to detect that recordings were deleted prematurely.  The suspension in all capacities is in effect from December 20, 2021, through April19, 2022, and the suspension in any principal capacity is in effect from December 20, 2021, through March 19, 2023. (FINRA Case #2017054381603)

The below FINRA Enforcement Action provides a summary of certain issues that broker/dealers must take into consideration when involved in a contingency or best efforts offering.

Newbridge Securities Corporation (CRD #104065, Boca Raton, Florida) and Bruce Howard Jordan (CRD #1223556, Boca Raton, Florida):

Recently, FINRA announced that a Letter of Acceptance, Waiver and Consent (AWC) was issued in which the Newbridge Securities Corporation was censured and fined $30,000 and Mr. Jordan was fined $5,000 and suspended from association with any FINRA member in any principal capacity for one month.

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