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Regulatory Sanctions

Brokers Persist in Selling ‘Unapproved Products’, But are Blind to Enormous Risks

March 4, 2019

by Howard Haykin


Reason Number One for prohibiting brokers from participating in undisclosed private securities transactions is that brokers tend to focus on big commission payouts while paying little heed to due diligence or the risk of being duped by unscrupulous issuers.



WHAT WENT WRONG.    Between 2013 and 2017, a broker with Quest Capital Strategies sold nearly $11 million in promissory notes issued by Woodbridge Group of Companies to 58 investors, 30 of whom were Firm investors. He did so without providing notice to, nor seeking approval from, his member firm prior to participating in the private securities transactions. For his efforts, the broker earned $261,000 in commissions.


Woodbridge Group of Companies, a high-end real estate developer, promised investors safe returns on short-term notes, which were to be secured by valuable real estate in some of the priciest markets in the country - from the Holmby Hills area of Los Angeles to Aspen, Colorado. Yet, on December 4, 2017, Woodbridge filed a voluntary Chapter 11 bankruptcy petition amid the departure of its chief executive and a year-long federal investigation into potential securities fraud.


In its lawsuit, the SEC charged Woodbridge with using real estate to draw investors into its $1.2 billion Ponzi scheme, with cash coming in from new investors to pay older investors. Legal and real estate professionals are presently liquidating the more than 130 properties in Woodbridge’s portfolio. If things go according to plan, investors could get between 45% and 76 % of what they’re owed. Additional monies may be recovered from other sources: (i) pending lawsuits against the ex-CEO of Woodbridge, Robert Shapiro, and the numerous brokers who sold the promissory notes; and, (ii) possible claw backs against investors who improperly benefitted from company distributions.


By virtue of the foregoing, the broker violated NASD Rule 3040 and FINRA Rule 3280Private Securities Transactions of an Associated Person.



FINANCIALISH TAKE AWAYS.    The Quest broker in this case, in addition to being barred from the industry by FINRA, is at risk of having his $261,000 in commissions disgorged by the SEC. He also faces at least 7 pending customer disputes that collectively seek collection of at least $1.8 million in alleged damages. There are no winners in this case.


If only the broker had complied with Quest policies and procedures - but that would have been the unpopular and ‘unprofitable’ road to take. Perhaps it's time for FINRA to take stronger measures against brokers who violate member firms' PST policies. In other words, some "Message Cases." 



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

For further details, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2018057197801.