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NEWSLETTERS & ALERTS
Undisclosed Private Securities Transactions - FINRA Reports New Sanctions
by Howard Haykin
October 2017 was another big month for FINRA sanctions against individuals who were caught engaging in undisclosed Private Securities Transactions (“PSTs”) and Outside Business Activities (“OBAs”) – 13 cases, in all, including a supervisor who failed to fulfill his obligations. In each case, the brokers engaged in these extra-curricular activities without bothering to inform, or gain approval from, their broker-dealers.
Refer below for brief case studies pertaining to PSTs. Click here for October FINRA Case pertaining to OBAs.
FINRA Rule 3280. Private Securities Transactions of an Associated Person.
"Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3210, transactions among immediate family members (as defined in FINRA Rule 5130), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.
No person associated with a member shall participate in any manner in a private securities transaction (PST) except in accordance with the requirements of this Rule. Prior to participating in any PST, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.
In the case of a PST in which an associated person has received or may receive selling compensation, a member which has received notice shall advise the associated person in writing stating whether the member: (i) approves the person's participation in the proposed transaction; or, (ii) disapproves the person's participation in the proposed transaction. If the member approves a person's participation in a transaction, the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member. If the member disapproves a person's participation, the person shall not participate in the transaction in any manner, directly or indirectly.
CASE STUDIES FOR OCTOBER 2017
1. Howard Lawrence Hull III (AWC #2014038992501) agreed to a $20K fine and a 3-month suspension as a principal.
Background. Hull, a resident of Costa Mesa, CA, has 19 years’ experience with 3 firms. Hull was a part-owner of HLH Securities, where he served as the firm’s VP, CCO, and FinOp, and was the sole registered principal responsible for all areas of the firm’s supervision, including its WSPs and maintenance of the firm’s books and records.
FINRA Findings. Hull was responsible for supervising PSTs by registered reps (“RR’s”) of HLH Securities. While he permitted 2 RRs to participate in PSTs, he never required the RR’s to provide him with documents and other information pertaining to those PSTs. As a result, Hull failed to supervise and failed to record on the firm’s books the 21 PSTs that the RR’s participated in during the relevant period.
Hull was also cited with failing to: (i) review outside business activities that he had approved; and, (ii) prohibit RR’s from using personal email accounts to conduct firm business.
2. Jeffrey Delone (AWC #2016049564501) agreed to a $10K fine and a 6-month suspension.
Background. Delone, a resident of Media, PA, has 28 years’ experience with 4 firms. – including 10 years (2007-2017) with FSC Securities. He holds the Series 6, 22, and 62 Licenses, and has no prior disciplinary disclosures.
FINRA Findings. At various times from June 2010 through September 2013, Delone participated in private securities transactions in connection with a learning center franchise of which he was a part owner. Specifically, Delone recommended and facilitated investments totaling $310,000 in the franchise by 6 investors, 3 of whom were FSC customers. Delone did not notify FSC of his participation in these transactions or obtain the Firm's approval to do so.
3. Patrick Hudson (AWC #2015046351701) agreed to a $10K fine and a 6-month suspension.
Background. Hudson, a resident of Baltimore, MD, has 24 years’ experience with 3 firms – including 13 years (2002-2015) with RBC Capital Markets. RBC U5’d Hudson, noting that he “borrowed money from several clients and made investments in multiple outside businesses without firm knowledge or approval.” He holds a Series 7 License, and had no prior disciplinary history.
FINRA Findings. Before and during the Relevant Period, Hudson was actively engaged in an outside real estate business in and around Baltimore, MD. With various business partners, Hudson invested in real estate projects for the purpose of generating capital gains or rental income. Some of his business partners and real estate investors later became his customers at RBC.
As part of this outside real estate business, between July 2011 and October 2014, Hudson entered into a series of promissory notes away from the Firm totaling $490,000. The promissory notes are securities. In each case, the lender was a customer of RBC at the time and Hudson, either singly or in combination with a real estate investment company owned by Hudson and for which he acted as sole managing member, was the borrower or guarantor of the borrower. The purpose of these notes was to provide a vehicle for the individuals to invest in certain local real estate projects in which Hudson was a participant. Hudson did not seek or obtain written approval from RBC for any of the note transactions.
Hudson was also cited with having failed to provide prior written notice to the firm regarding multiple outside business activities, among other things.
4. Gabriel Hynes (AWC #2016051410501) agreed to a $10K fine and a 3-month suspension.
Background. Hynes, a resident of St. Augustine, FL, has 18 years’ experience with 2 firm – including 16 years with NYLife Securities. NYLife permitted him to resign “after the company became aware he violated company policy by failing to disclose: (a) multiple outside business activities and private securities transactions; (b) a brokerage account with an outside broker-dealer; (c) a federal tax lien.” Hynes had no prior disciplinary history.
FINRA Findings. From 2008 through May 2014, Hynes purchased securities issued by 4 privately-held companies through private offerings costing a total of $90,000. The transactions were conducted outside the scope of his employment with NYLife. Hynes failed to give NYLife any notice of these transactions.
Hynes was also cited with having opened an outside brokerage account at another member firm in January 2014 and maintaining the account throughout his association with NYLife. Hynes deposited into the account the securities he had purchased through the private offerings conducted away from NYLife. He failed to notify the other member firm that he was associated with NYLife and failed to notify NYLife that he had opened an account at another member firm.
5. John Kostic Jr. (AWC #2015045360601) agreed to pay a $10K fine, serve a 7-month suspension, and pay over $38K in disgorgement of financial benefits received.
Background. Kostic, a resident of Newport Beach, CA, has 23 years’ experience with 9 firms – including 3 years with Richfield Orion International (2012-2013) and Finance 500, Inc. (2013-2015). He holds Series 6 and 7 Licenses, and had no prior disciplinary history.
FINRA Findings. From December 2012 through October 2013, while associated with FINRA member firms, Kostic participated in approximately 11 PSTs with a company without providing written notice to, or obtaining written permission from, his member firms.
From December 2012 to January 2013, he invested $22,000 in the company.
Between May 2013 and October 2013, he introduced 9 investors, 4 of whom were Finance 500 customers, to the company. With Kostic's assistance, these investors invested $470,000 in the company. Kostic received $42,000 from the company for his participation in these transactions.
6. Fan Kam Yip (AWC #2016051683901) agreed to serve a 6-month suspension and to pay over $5K in restitution to a customer; no fine was assessed.
Background. Yip, a resident of Bellevue, WA, has 12 years’ experience with 2 firms – including 8 years (2008-2016) with Raymond James Financial Services. Raymond James U5’d Yip for “activity related to a client-initiated litigation involving an investment sold away from the Firm.” He holds Series 7, 24, and 26 (IC/VC Principal) Licenses, and had no prior disciplinary disclosures.
FINRA Findings. In June 2013, Yip participated in a PST without informing his firm – by soliciting a firm customer to invest in a weight management start-up company. Yip facilitated the customer's investment in the company by conducting research, conducting site visits of potential storefront locations, and helping to complete the required paperwork for the investment. Ultimately, the customer invested $50,000 in a subordinated convertible promissory note with a 2-year maturity date – for which Yip received a $3,000 finder's fee.
As a result of Yip's actions, the Firm terminated Yip's employment and partially reimbursed the customer for her losses. Yip agreed to indemnify his former co-branch manager for the Firm's payment to the customer.
Yip was also cited for “lying” on his 2014 and 2015 Annual Compliance Questionnaires (ACQs).
7. John Williams Jr. (AWC #2013037675101) agreed to pay a $10K fine, serve a 3-month suspension, and pay over $13K in disgorgement.
Background. Williams, a resident of Jackson, MS, had 21 years’ experience with 5 firms – including 14 years (1999-2013) with LPL Financial, and 4 years (2013-2017) with Cambridge Investment Research. Williams holds Series 7 and 24 Licenses, and had not prior disciplinary disclosures.
FINRA Findings. Between February and March 2009, Williams referred 3 LPL Financial customers to a company that is not a broker-dealer (the "Company”) to obtain non-recourse loans secured by the customers' securities.
► Williams facilitated the transactions by recommending that the customers pledge securities as collateral for the loans.
► The pledged securities were transferred to the Company.
► Williams also assisted the customers with completing and submitting the transaction documents to the Company.
► When the securities were pledged as collateral for these non-recourse loans, the Company could not obtain repayment from the customers beyond the pledged collateral.
► The customers pledged securities valued at approximately $700,000 for non-recourse loans totaling approximately $500,000.
► The customers ultimately realized gains from the transactions. However, they were exposed to the risk of suffering losses in the amount of $200,000.
For his efforts, Williams received nearly $13,000 in referral fees. Williams did not provide written notice to or receive approval from LPL to participate in any of these PSTs.
Williams was also cited for “lying” on his 2010 Annual Compliance Questionnaire (ACQ).
These cases were reported in FINRA Disciplinary Actions for October 2017.
For details on any of these cases, go to ... FINRA Disciplinary Actions Online, and refer to the Respective AWC #.