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Regulatory Sanctions

Broker Barred for Private Securities Transactions That 'Went South'

May 24, 2019

by Howard Haykin



Between March 2010 and June 2016 (the "Selling Away Period"), a broker with Newbridge Securities recommended that 9 investors – 8 of whom were Firm customers - invest a total of $2.7 million in 5 companies. The broker never notified Newbridge that he planned to participate in these 36 private securities transactions, which ultimately resulted in investor losses of at least $2.3 million.
The broker was barred from the industry for this and other violative conduct.



BEYOND THE FIRM’S CONTROL.    First off, Newbridge Securities did all it could do to prevent these types of investments and resultant losses:

  • During the Selling Away Period, the Firm's WSPs prohibited registered reps from engaging in private securities transactions.
  • The broker annually certified to the Firm that he had reviewed and understood its WSPs between 2010 and 2015.
  • On 4 occasions during the Selling Away Period, the broker affirmed on Annual Compliance Questionnaires (“ACQs”) that he had not participated in private securities transactions (“PSTs”) during the preceding year.
  • At no time did the broker ever notify the Firm that intended to participate in PSTs.



ATTENDANT ISSUES WITH THE PRIVATE SECURITIES.    The broker sold … (i) promissory notes issued by MSLLC and IRLLC; (ii) common stock and promissory notes of BTInc; (iii) common stock and promissory notes of KIInc (a successor of BTInc); and, (iv) common stock of FXInc.


  • Conflict of Interest: The principal of the 5 companies was a friend of the broker’s family.


  • In or about 2010, BTInc employed the broker to perform accounting work.


  • It’s unclear what, if any, due diligence the broker conducted on these firms and their securities offerings.
    • Then again, what sort of due diligence or foresight should one expect from a broker who entered the business in 2001 and, over his first 9 years, worked for 6 different firms?


  • None of the businesses are currently in operation.


  • The broker personally invested in 4 of the companies between 2009 and 2016.



OTHER VIOLATIVE CONDUCT.    From June 2011 through June 2016, the broker used 2 personal email addresses to correspond with 4 customers about their Firm accounts. He also communicated via text message with 1 Firm customer about her Firm account between November 2015 and June 2016. The broker did not provide these communications to the Firm.



CUSTOMER COMPLAINTS MORPH INTO ARBITRATIONS AND HIS TERMINATION.    In September 2016, following the settlement of 2 customer complaints, Newbridge discharged (U5’d) the broker for cause: (i) he possibly engaged in selling away and private securities transactions; and, (ii) he generated little or no production in the last 12 months. Later, in 2017 and 2018, 5 more customer disputes were filed.  Following the termination, FINRA initiated an investigation into the broker’s conduct. 



FINANCIALISH TAKE AWAYS.    In a perfect world, customers would be cognizant, if not leery, about investing in private securities transactions, especially when those securities are sold away from the broker-dealer. Customers would also know enough to size up the level of financial sophistication of their brokers or financial advisors - when gauging the investment recommendation.  WHAT DO THEY KNOW? BASED ON WHAT INFORMATION? WHAT MAKES THIS INVESTMENT MORE FAVORABLE TO OTHERS?



This case was reported in FINRA Disciplinary Actions for May 2019.

For further details, click on...  FINRA AWC #2016050883001.