South Florida Arbitration & Litigation Lawyer Blog
Private Placement and Direct Investments, Negligent Supervision of Account Executives FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
January, 2012:
Phillip Peter Borup (CRD #4446376, Registered Principal, Cameron Park, California) submitted an Offer of Settlement in which he was fined $15,000 and suspended from association with any FINRA member in any principal capacity for 18 months. The fine must be paid either immediately upon Borup’s reassociation with a FINRA member firm following his suspension, or prior to the filing of any application or request for relief from any statutory disqualification, whichever is earlier. Without admitting or denying the allegations, Borup consented to the described sanctions and to the entry of findings that he was designated as the OSJ branch manager for two of his member firm’s branches. As the OSJ manager, Borup was the principal of his firm responsible for supervising the business of the associated personnel located in those offices. The findings stated that later on, Borup designated another principal of the firm as the OSJ manager for the branch offices but representatives at the branch offices continued to engage in violative practices adopted while Borup was the OSJ manager of which he was or should have been aware. The findings also stated that when the new OSJ manager raised concerns about the private-placement business in the branch offices, Borup declined to take steps to address those concerns and conform the conduct of that business to all applicable laws, rules and regulations. The findings also included that as the firm’s chief executive, owner and the person who directed the firm’s business, Borup remained responsible for the private-placement business the representatives in the branch offices conducted on the firm’s behalf. These branch offices articipated in transactions involving the sale of several different private placements to investors who invested approximately $1,727,000. The representatives employed a general solicitation to obtain these investors. FINRA found that the firm received selling compensation for each of the private placement transactions. As the firm’s owner and CEO, Borup benefitted financially from the firm’s receipt of selling compensation. FINRA also found that the general solicitation caused the transactions to be ineligible for the Rule 506 exemption and, therefore, the transactions constituted the sale of unregistered securities in contravention of Section 5 of the Securities Act of 1933. Borup was the firm principal responsible for the offer and sale of the private-placement securities and by permitting these transactions to occur in contravention of the registration provisions of the Securities Act of 1933, he engaged in conduct that was inconsistent with high standards of commercial honor and just and equitable principles of trade. In addition, FINRA determined that Borup was responsible, directly or indirectly, for the supervision of firm personnel in the branch offices and the business activities in which they engaged on the firm’s behalf. Borup appointed another firm principal, as OSJ manager, although the principal did not have supervisory experience and was unfamiliar with the laws, rules and regulations applicable to the private-placement business; Borup did not undertake to provide the principal with opportunities to develop the knowledge needed to supervise the private-placement business effectively, nor did he revise, or instruct the principal to revise, the firm’s systems and procedures for supervising that business although he knew, or should have known, that they were inadequate.
Moreover, FINRA found that Borup failed to supervise in a manner reasonably designed to prevent the sale of unregistered securities by firm registered representatives in the branch offices who offered and sold securities purportedly exempt from registration. Furthermore, FINRA found that Borup was responsible, directly or indirectly, for the supervision of firm personnel in the branch offices and the business activities in which they engaged on the firm’s behalf, including the supervision of their use and distribution of sales literature on the firm’s behalf. The representatives provided potential investors with various written materials in addition to the issuers’ confidential PPMs. The findings also stated that Borup was aware that the firm’s representatives were providing potential investors with these various written materials. With the exception of a brochure, the sales literature materials included projections for which neither the items of sales literature nor the PPM(s) provided a basis. The items of sales literature presented rates of return and investment performance in a manner that implied past performance would recur, failed to reflect the uncertainty of rates of return and yield, and allowed the rates of return and investment performance to constitute predictions and/or projections of investment performance. The items of sales literature also included statements and claims that were incomplete and oversimplified, unwarranted or exaggerated. The findings also included that by permitting the branches to distribute sales literature, Borup did not establish and maintain a system to supervise the activities of the firm’s associated personnel that was reasonably designed to achieve compliance. In addition to the failure to supervise in a manner reasonably designed to achieve compliance with the content standards applicable to sales literature, Borup also failed to maintain a record of what was reviewed and/or approved for representatives to disseminate, and did not take steps to ensure that the registered representatives disseminated only sales literature the firm approved. FINRA found that Borup authorized and permitted registered representatives of the firm’s branch offices to provide cash compensation in the form of referral fee payments to non-registered individuals who provided information about persons to whom the representatives intended to offer and sell private placements. The firm’s registered representatives paid approximately $159,650 to non-registered individuals for these referrals.
The suspension is in effect from December 5, 2011, through June 4, 2013. (FINRA Case #2008014385101).