South Florida Arbitration & Litigation Lawyer Blog
Broker/Dealer and Account Executive Fraud, Misrepresentation and Mismanagement FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
January, 2012:
William Slay Stevens (CRD #2889238, Registered Representative, Montgomery, Alabama) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Stevens consented to the described sanction and to the entry of findings that he made recommendations to a customer that were unsuitable based on the customer’s risk tolerance and investment objectives, and involved an over concentration of liquid net worth in an illiquid investment. The findings stated that Stevens recommended that a customer invest in promissory notes issued by a newly-formed holding company in the process of acquiring his member firm and other affiliates. Based upon Stevens’ recommendation, the customer invested $250,000 in the company’s promissory notes. The findings also stated that Stevens approached the customer about investing in the company’s preferred stock involving a private placement offered pursuant to SEC Regulation D, Rule 506. Based upon Stevens’ recommendation, the customer purchased some shares of each series of the company’s preferred stock in blocks of $65,000, for a total investment of $260,000. The customer’s aggregate investment in the company’s securities at this point was $510,000, which accounted for about a quarter of the customer’s net worth and all of his liquid net worth. The concentration level of his investments in the company compounded the risk of these high-risk investments. The findings also included that Stevens recommended that the customer convert the promissory notes he held into additional shares of the company’s preferred stock. The customer converted the company’s promissory notes into several shares of one of the company’s preferred stocks. According to a disclosure document for alternative investments, the second purchase of the company’s preferred stock represented 57 percent of the customer’s liquid net worth at that point. Shortly thereafter, the company ceased business and defaulted on all dividend payments on its preferred stock. FINRA found that Stevens had no reasonable basis for recommending that the customer invest in a concentrated position of high-risk investments in the company’s securities.
FINRA also found that Stevens failed to disclose numerous material facts to the customer in connection with the sale of the promissory notes. The company’s PPM, which Stevens provided in connection with the sale of the preferred stock, contained material misstatements and omitted to disclose material facts, and was not updated to disclose subsequent material events when they occurred. In particular, Stevens failed to disclose, among other things, that the company was a startup business with no operating history, limited capital and was dependent on raising additional capital. In addition, FINRA determined that Stevens failed to disclose that his firm lost a substantial number of its brokers when the company purchased it. Moreover, FINRA found that the PPM distributed in connection with the sale of the company’s preferred stock did not include any current financial information or a balance sheet for the company. Instead, the PPM included limited pro-forma financial statements that were incomplete and misleading. Furthermore, FINRA found that the PPM was not amended to reflect subsequent material events such as the resignation of the company’s president and ongoing cash flow difficulties. (FINRA Case #2010020829801).