BROWSE BY TOPIC
- Bad Brokers
- Compliance Concepts
- Investor Protection
- Investments - Unsuitable
- Investments - Strategies
- Wall Street News
- Investments - Private
- Rules & Regulations
- Bad Advisors
- Boiler Rooms
- Terminations/Cost Cutting
- General News
- Donald Trump & Co.
- Regulatory Sanctions
- Big Banks
Stories of Interest
- Sarah ten Siethoff is New Associate Director of SEC Investment Management Rulemaking Office
- Catherine Keating Appointed CEO of BNY Mellon Wealth Management
- Credit Suisse to Pay $47Mn to Resolve DOJ Asia Probe
- SEC Chair Clayton Goes 'Hat in Hand' Before Congress on 2019 Budget Request
- SEC's Opening Remarks to the Elder Justice Coordinating Council
- Massachusetts Jury Convicts CA Attorney of Securities Fraud
- Deutsche Bank Says 3 Senior Investment Bankers to Leave Firm
- World’s Biggest Hedge Fund Reportedly ‘Bearish On Financial Assets’
- SEC Fines Constant Contact, Popular Email Marketer, for Overstating Subscriber Numbers
- SocGen Agrees to Pay $1.3 Billion to End Libya, Libor Probes
- Cryptocurrency Exchange Bitfinex Briefly Halts Trading After Cyber Attack
- SEC Names Valerie Szczepanik Senior Advisor for Digital Assets and Innovation
- SEC Modernizes Delivery of Fund Reports, Seeks Public Feedback on Improving Fund Disclosure
- NYSE Says SEC Plan to Limit Exchange Rebates Would Hurt Investors
- Deutsche Bank faces another challenge with Fed stress test
- Former JPMorgan Broker Files racial discrimination suit against company
- $3.3Mn Winning Bid for Lunch with Warren Buffett
- Julie Erhardt is SEC's New Acting Chief Risk Officer
- Chyhe Becker is SEC's New Acting Chief Economist, Acting Director of Economic and Risk Analysis Division
- Getting a Handle on Virtual Currencies - FINRA
We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.
Stay Informed with the latest fanancialish news.
NEWSLETTERS & ALERTS
Co-President Sanctioned Over Sales of Parent Company’s Bonds
by Howard Haykin
THE SCENARIO. In May 2010, Consulting Services Support Corporation ("CSSC") initiated a bond offering in order to raise sorely-needed funds for it and its subsidiaries, including a broker-dealer subsidiary (CSSC Brokerage Services, the broker-dealer, or “B/D”). The offering, which raised $2.45 million instead of the hoped-for $5 million, had a 5-year term and an 8% interest rate that would be paid on a biannual basis. Initially made available to shareholders and affiliates of CSSC, the offering was later expanded and offered to a number of B/D customers.
From 2010 through 2015, CSSC encountered significant financial problems and, in 2014, CSSC issued "bridge loan" notes to garner additional funds to cover operational losses. The offering raised approximately $1.1 million, which was not enough. Faced with continued losses and, in a further attempt to cope with its persistent financial deterioration, CSSC issued yet another bridge loan note offering in 2015, which managed to raise just $130,000. None of the 2015 offering documents disclosed that, at the time, CSSC owed $260,000 in principal and interest to investors in the 2010 bond offering and $375,000 in the 2014 bridge loan offering.
NOTE: The above scenario came from FINRA AWC #2015043646501, in which FINRA charged CSSC Brokerage Services and Eric Smith (the parent company’s chairman, CEO and majority owner) with having “defrauded investors by offering and selling securities through a bridge loan offering designed to keep their floundering parent company afloat after more than 3 years of failed deals, significant business losses and mounting debts that the parent company could not pay.”
“The complaint alleges that the owner, who is … the individual that controlled the [broker-dealer] and its affiliates, knew of the parent company’s precarious financial condition, yet misrepresented and failed to disclose material information to potential and actual investors in the bridge loan offering.”
"In connection with the bridge loan offering, the [broker-dealer] and its owner made misrepresentations and omissions of material facts to prospective investors.”
CSSC Brokerage Services’ license was terminated in August 2018.
WHAT WENT WRONG WITH THE B/D’s CO-PRESIDENT. As noted above, the Co-President of CSSC Brokerage Services agreed to settle FINRA charges that, while serving as co-president of his member firm, he failed to reasonably supervise registered reps selling 2 private offerings issued by the B/D’s parent company. In self-defense, the Co-President stated that he “was not directly responsible for day to day compliance. His position as co-president makes him responsible indirectly.” Maybe so, but here’s how FINRA saw it.
From November 2012 through March 2015 ("Relevant Period"), one of the B/D’s registered reps sold CSSC’s 2010 and 2014 offerings to 7 of his B/D customers without having a reasonable basis to believe that these offerings were investments that were suitable for them. This registered rep …
- did not perform reasonable due diligence on either of the offerings.
- did not have an understanding of the potential risks and rewards associated with the offerings, the financial condition of the Parent Company at the time he recommended the offerings to his customers, or the illiquid nature of these investments.
- failed to consider the investment objectives, risk tolerance, liquidity needs and other profile information of his customers that was essential to determining that the offerings were suitable for them at the time that he made those recommendations.
- failed to consider the size of investment in the offerings for 2 of his customers, and yet recommended that they invest a significant percentage (an “undue concentration”) of their respective stated net worth in the risky and illiquid offerings.
According to FINRA, ... the Co-President was responsible during that Relevant Period for implementing supervisory systems to ensure supervision of the conduct, including the sales practices, of the B/D’s registered reps. Moreover, inasmuch as he also served on the Board of Directors of the Parent Company from 2009 through 2013, he was: (i) acutely aware of the private offerings conducted by the Parent; (ii) was familiar with the unique risks associated with the 2010 Bonds and the 2014 Loan Program; and, (iii) knew that the B/D’s registered reps were soliciting customers to invest in these offerings.
The Co-President was also aware that B/D registered reps - and in particular the one cited registered rep - were recommending and selling the offerings even though neither he nor anyone else at the B/D supervised these sales activities or transactions.
- he assumed, without confirming, that B/D compliance personnel were supervising the cited registered rep’s solicitations. This was not the case.
- he did nothing to determine whether the cited registered rep performed any due diligence on the offerings prior to selling them to his customers, or had a proper understanding of the structure and potential risks of those investments.
- he did not perform any review of customer account profile information, investment objectives, risk tolerances, liquidity needs or other related information with respect to the cited registered rep’s customers to assess the suitability of the recommendations that those customers invest in the offerings.
- he did not conduct any review to determine whether and to what extent the cited registered rep’s customers had become unsuitably over-concentrated in these illiquid investments.
This case was reported in FINRA Disciplinary Actions for August 2018.
For details the case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2016049789602.