South Florida Arbitration & Litigation Lawyer Blog
Private Placement and Regulation D Fraud, Misrepresentation and Negligent Supervision FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
December, 2011:
Internet Securities (CRD #102800, Oakland, California) and Michael Wayne Beardsley (CRD #2546470, Registered Principal, Oakland, California) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $12,500 and required to retain an outside consultant to review and prepare a report concerning the adequacy of the firm’s supervisory, and compliance policies and procedures, and supervisory controls; the report shall make specific recommendations addressing any inadequacies the consultant identifies, and the firm shall act on those recommendations. FINRA imposed a lower fine after it considered the firm’s size, including, among other things, the firm’s revenues and financial resources. Beardsley was suspended from association with any FINRA member in any principal capacity for one year. In light of Beardsley’s financial status, no monetary sanction has been imposed.
Without admitting or denying the findings, the firm and Beardsley consented to the described sanctions and to the entry of findings that Beardsley was a registered representative’s direct supervisor who was responsible for reviewing and approving the representative’s securities transactions, but failed to exercise reasonable supervision over the representative’s recommendations of exchange-traded funds (ETFs) in customers’ accounts, thereby allowing the representative to conduct numerous unsuitable transactions. The findings stated that as the firm’s chief compliance officer (CCO), Beardsley was responsible for ensuring that the firm filed all necessary Uniform Applications for Securities Industry Registration or Transfer (Forms U4), Uniform Termination Notices for Securities Industry Registration (Forms U5) and Rule 3070 reports. The findings also stated that the firm and Beardsley failed to timely amend Beardsley’s Form U4 to disclose the settlement of an arbitration against him, the firm and the registered representative; the firm failed to timely amend a registered representative’s Form U5 to disclose settlement of the arbitration; and the firm and Beardsley failed to timely report the settlement to FINRA’s 3070 system. The findings also included that the firm and Beardsley failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules as they pertain to private placements. The firm and Beardsley failed to conduct investigations of offerings for suitability but relied on information the registered representative who proposed selling the offering provided; never reviewed issuers’ financials, nor attempted to obtain information about the issuers from any third parties; failed to maintain documentation of their investigations; allowed a registered representative to draft selling agreements with offerings which allowed the issuer to make direct payment to an entity the representative, not the firm, owned,; failed to implement supervisory procedures to ensure compliance with SEC Exchange Act Rule 15c2-4(b); and failed to implement supervisory procedures to prevent general solicitation of investments in connection with offerings made pursuant to Regulation D.
FINRA found that the firm’s written procedures required Beardsley to obtain and review, on at least an annual basis, a written statement from each registered representative about his or her outside business activities; despite the fact that several registered representatives were actively engaged in outside business activities, Beardsley failed to obtain any such written statements. FINRA also found that for almost a three-year period, Beardsley did not request any duplicate statements of outside securities accounts firm employees held; he neither requested nor obtained any written notifications from firm employees concerning their actual or anticipated outside securities activities. In addition, FINRA determined that the firm and Beardsley failed to implement an adequate system of supervisory control policies and procedures regarding testing supervisory procedures for compliance, erroneous criteria for identifying and supervising producing managers, including Beardsley, review and monitoring transmittal of funds or securities, customer changes of address, customer changes of investment objectives, and concomitant documentation for its limited size and resources exception in FINRA Rule 3012. Moreover, FINRA found that the firm and Beardsley completed an annual certification in which Beardsley certified that he had reviewed a report evidencing the firm’s processes for establishing, maintaining and reviewing policies and procedures reasonably designed to achieve compliance with applicable FINRA rules, Municipal Securities and Rulemaking Board (MSRB) rules and federal securities laws and regulations; modifying such policies and procedures as business, regulatory and legislative changes and events dictate; and testing the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with FINRA rules, MSRB rules and federal securities laws and regulations. In fact, the report did not evidence any processes for testing the effectiveness of such policies, and no such testing was done.
Furthermore, FINRA found that Beardsley, on the firm’s behalf, executed an engagement letter committing the firm to serve as a placement agent for an issuer of limited partnership units. The letter, which a registered representative of the firm drafted, falsely represented that the firm was not a registered broker-dealer. The findings also stated that the firm and Beardsley failed to enforce the firm’s Customer Identification Program (CIP) in that they completely failed to verify four customers’ identities. The findings also included that the firm and Beardsley failed to conduct a test of the firm’s anti-money laundering (AML) compliance program for a calendar year. FINRA found that the firm conducted a securities business while failing to maintain its required minimum net capital.
The suspension is in effect from November 7, 2011, through November 6, 2012. (FINRA Case 2009020930302).