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Investments - Private

Brokers’ Rocky Relationship with Private Securities Transactions [Part 1 of 2]

August 6, 2020

by Howard Haykin



Registered reps (i.e., brokers) have had a highly uneven relationship with private securities transactions (PSTs). While required to obtain prior written approval from their brokerage firms before participating in all such transactions, many brokers proceed without providing notification – figuring that no one is likely to find out, anyway. Except that firms and regulators often do find out, which then leads to terminations, fines, and lengthy suspensions.
Take, for example, the broker with Ameriprise Financial Services who was “caught with his hand in the cookie jar.” Though he had no prior violations or complaints during his 30 years on Wall Street, this broker was terminated, fined $8,500, and suspended for 9 months. He opted to leave brokerage and started a fee-based wealth management business.



WHAT WENT DOWN.    It all began in September 2016, when the broker received an email from his friend and CEO of an energy company indicating that the company was seeking to raise $1.2 million in a private offering. Without notifying Ameriprise, the broker forwarded the correspondence (with attachments) to several high net worth clients. As it turned out, the correspondence was deficient, in that it failed to provide a fair and balanced discussion of the risks associated with the investment. For example, the attachments …

  • Failed to prominently disclose the speculative and illiquid nature of the securities;
  • Omitted the assumptions used to derive the stated financial projections; and,
  • Included unsubstantiated claims that the “team can quickly jump-start revenues and enjoy first-year profitability.”


The broker continued to participate in the company’s offering. He scheduled and participated in meetings with his clients and the CEO friend; he exchanged emails with the CEO friend that referenced amounts his clients would invest; and he followed up with clients regarding their investments in the company. In December 2016, the broker personally invested $50,000 in the energy company, while 3 of his clients invested a total of $550,000.



INVESTOR TAKE AWAYS.    In an upcoming Financialish article, we look at ways that private securities transactions can escalate the risks to investors.  



[For further details on this case, click on … FINRA Case #2017056036301.]

[For further details on Private Securities Transactions of an Associated Person, click on … FINRA Rule 3280.]

[For further details on Communications with the Public – Content Standards, click on … FINRA Rule 2210(d).]