South Florida Arbitration & Litigation Lawyer Blog
Private Placement and Direct Investment Fraud and Misrepresentation FINRA Arbitration and Litigation Lawyer, Russell L. Forkey, Esq.
February, 2012:
Synergy Investment Group, LLC (CRD #46035, Charlotte, North Carolina), Thurman Ray Crawford (CRD #56786, Registered Principal, Beaumont, Texas), and Jeffrey Dean Jones (CRD #4188324, Registered Principal, Concord, North Carolina) submitted an Offer of settlement in which the firm was censured and fined $20,000. Crawford was fined $10,000 and suspended from association with any FINRA member in any capacity for 60 days. Jones was fined $10,000 and suspended from association with any FINRA member in any principal capacity for three months. The level of sanctions takes into account $148,750 in restitution payments the firm and Crawford each made to the customers. The firm and Crawford have provided proof of restitution to FINRA. Without admitting or denying the allegations, the firm, Crawford and Jones consented to the described sanctions and to the entry of findings that the firm, through Jones, its director of compliance, failed to conduct reasonable due diligence regarding securities an entity issued. The findings stated that in order to obtain the firm’s approval for his intended sales of an offering, Crawford made negligent misrepresentations and/or omissions of material fact in connection with the sale of private placements to customers. The findings also stated that contemporaneously with the firm’s attempt to complete due diligence of a private placement as a new product, Crawford was negotiating with the firm for employment and omitted to disclose to anyone at the firm about the private placement delays in payment. The findings also included that Crawford knew, or should have known, that his firm had requested the private placement memorandum (PPM) for the offering in order to determine whether to approve his employment by the firm and his sale of the offering.
FINRA found that Crawford knew, or should have known, that the PPM for the offering made the misrepresentation that the issuer’s affiliates never defaulted in the payment of their obligations on debt securities, and all payments on the securities were made when due and omitted to disclose the private placement’s late payments to the firm. Neither Crawford nor the firm took any steps to correct the misrepresentation. Crawford did not initiate post-sale conversations with customers to inform them of the defaults and late payments. FINRA also found that as an investor in an offering, Crawford knew, or should have known, of the offering default, because he held un-matured notes of that offering. In addition, FINRA determined that Crawford’s former firm notified him of its receipt of a letter stating that the issuer was experiencing temporary liquidity issues with some of its clients and asked whether he would like the letter forwarded to his customers who had invested in the private placement. Crawford declined the firm’s offer to inform the customers of the issuer’s late payments, stating that he would rather speak with the customers himself; but he did not initiate any discussions with the customers regarding the late payment, and documentation indicating he did does not exist. Moreover, FINRA found that Crawford emphasized to customers that the private placement had an even higher interest rate than a previous private placement and reminded them of the reliability of the payments they had received on the previous private placement, but failed to disclose his knowledge that the issuer had defaulted on previous placements, and further, declined to personally invest in the latest private placement. Furthermore, FINRA found that the firm earned sales concessions from the issuer on the sale of the private placements of approximately $38,250; Crawford earned net commissions of approximately $26,252.50 on the sales he made of the private placement.
The findings also stated that the firm’s written supervisory procedures (WSPs) regarding due diligence for private placements were inadequate because they limited the firm’s review of a new product to information the issuer provided, did not require the firm to obtain information from sources other than the issuer, the procedures failed to ensure that a reasonable inquiry of the issuer and its management team was conducted, and the procedures did not ensure that the offerings would be properly supervised after approved for sale. Consequently, the firm failed to establish WSPs reasonably designed to prevent fraud and unsuitable recommendations in the sale of private placements. The findings also included that although the WSPs were inadequate, the firm and Jones did not even follow the procedures that existed. The procedures for approval of a new product required that a checklist be completed and that the approved checklist be retained in the new product file. The new product review also required that the firm determine if the product was beneficial to customers, which customers would be targeted, documentation of the features and risks of the new product, and determination of whether written disclosures or educational information should be provided to potential customers. The procedures required that all of these steps be completed prior to the offering of the new product to customers.
FINRA found that the firm, through Jones, failed to follow the written procedures with regards to the approval of the private placement. In an effort to expedite Crawford’s hiring, Jones approved the selling agreement 34 minutes after reading the PPM despite the fact that the issuer had not provided the requested due diligence checklist. FINRA also found that if the firm had established, implemented and enforced reasonable supervisory procedures for due diligence on private placements, it would have discovered that the issuer had missed payments on other offerings and that a state had charged the issuer’s chief executive officer (CEO) with fraud and barred him from the insurance industry. In addition, FINRA determined that reasonable due diligence after approval of the selling agreement would have apprised the firm of defaults on other offerings and the significant red flags contained in third-party due diligence reports. The firm failed to establish, maintain, and enforce a supervisory system and WSPs reasonably designed to achieve compliance with all applicable regulatory requirements with respect to the privateplacements.
Crawford’s suspension is in effect from January 3, 2012, through March 2, 2012.
Jones’ suspension is in effect from January 3, 2012, through April 2, 2012. (FINRA Case #2009018817101).